Nufarm Limited (NUF) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Nufarm 2023 full year results. [Operator Instructions] I would now like to hand the conference over to Mr. Greg Hunt, CEO. Please go ahead.

Thank you, Rachel. And good morning, everyone. Welcome and thanks for joining us today. I'm joined on today's call by our CFO, Paul Townsend. And also joining us are Rico Christensen and Brent Zacharias, who will take this opportunity to provide an update on our growth platforms and the progress towards our 2026 aspirations. And before we get underway, I'd just like to draw your attention to the disclaimer on Page 3 and in particular the section on forward-looking statements. So to the result. Nufarm has delivered what we think is a strong result despite a more difficult market environment in the second half of the year. The resilience of our result is testament to the hard work of our teams and the strategic repositioning that we have taken over recent years. We [ continue to hit ] milestones in line with our 2026 aspirations, and we've delivered on the majority of the short-term targets that we outlined back at the end of '22 and reaffirmed at the half year. Whilst we didn't achieve our modest earnings growth on 2022, EBITDA of $438 million, in the context of market conditions and relative to many of our peers, is a very strong result. We've delivered on the inventory reduction that we spoke to you about at the first half. And our balance sheet is strong, with gearing in the target range of 1.5x to 2x. We completed the review of our capital structure, which resulted in the covenant-light $800 million ABL facility to stand alongside the USD 350 million notes that we established at attractive rates in January of 2022. You will have seen from our peer results that the market environment in the second half was more difficult than the prior period. Despite the more difficult trading environment, we grew EBITDA in our North American crop protection business and incurred only a modest fall in EBITDA in our European business, absorbing EUR 25 million sales impact of regulatory outs during the year. Whilst below the prior year, we believe that our APAC business has also delivered a solid full year result in the context of significant pricing pressure on foundational products. And I'll have more to say about APAC later in this presentation. In today's result, you'll also see a step change in the contribution of our various seed technology platforms. This has been driven by continuing strong growth in our core seeds platforms as well as further commercialization of our IP in bioenergy and omega-3. We significantly expanded omega-3 production at the farm gate with new omega-3 hybrids, and we're aiming to deliver revenues of AUD 50 million to AUD 70 million from omega-3 oil sales in financial year '24. We secured first energy cane revenues. And whilst we did not harvest the volumes of carinata plant due to the drought in Argentina, we are now well placed to diversify our plantings in 2024, and we are on track to meet our financial year '26 aspirations. You'll also see the first license revenues in our bioenergy platform, enabling the investment and resources to scale up these operations quickly. As you'll see on Slide 4, group EBITDA fell 2% year-on-year but increased 4% year-on-year in the second half, with growth in seeds more than offsetting a decline in crop protection. Net profit after tax was negatively impacted by higher interest expense which resulted from higher average net debt and higher interest rates compared with the prior corresponding period. Our balance sheet is strong. We finished the period with net debt at 1.9x underlying EBITDA, which is within our target range of 1.5x to 2x. Whilst net working capital increased through the period, we have reduced inventory as we indicated that we would at the first half. And we expect working capital to further reduce through financial year '24, which Paul will speak about later in his remarks. We declared a $0.05 per share unfranked final dividend, bringing total dividends declared for the full year in line with prior year. We are continuing to reposition the company, with technology and innovation playing a central role in driving the future of our business. In crop protection, we are delivering new products which are diversifying our revenue at higher margins, including expansion of our biologicals portfolio; and Rico will take you through some of the detail in his remarks. Our technology partnerships and our distribution agreements continue to provide opportunities for growth whilst at the same time reducing volatility [ in our ] performance. In our base seeds business, new hybrid seed varieties in canola, sorghum and sunflower delivered volume and margin expansion. In omega-3, we gained further farm and downstream customer adoption. This is a very important aspect of building the capability to deliver on our growth aspirations. Importantly, we are also leveraging our existing crop protection and seeds market presence to accelerate that growth. During the second half, Norway approved the use of our proprietary omega-3 for use in fish food formulations. This approval was another key milestone because Norway is the center of salmon production for Europe and this approval opens a material new market for our omega-3 products. Momentum for omega-3 also continues to build in the higher-value human nutrition segments. In our bioenergy platform, we achieved several important milestones during financial year '23, including receiving the first licensing revenues under our agreements with bp, GranBio and commercial customers. The first shipment of carinata was delivered under the 10-year supply agreement with our partner bp in January of this year, and we'll rapidly scale up acreage to support demand from the biofuel sector. In summary, 2023 has been a year in which Nufarm delivered a very credible result in challenging conditions and continued to hit important growth milestones. And I'm pleased to say that we remain on track to meet our financial year '26 revenue aspirations. Turning now to the operating segments. The results across the business demonstrate the value of our geographic and our segment diversity. As results across the industry demonstrate, the second half was very challenging for crop protection. Despite this, we continued the growth in our North American business and reported another very solid result in Europe. Following a record result in financial year '21 and '22, our [ APAC ] business delivered a solid full year result in the context of challenging industry environment. Our result in seed technologies was standout with strong growth in our core seeds business and an increased contribution from our omega-3 and bioenergy growth platforms. Turning now to each segment. North America delivered a very solid EBITDA result driven by strong execution from our team and the continued support of our channel customers despite the market conditions that I've previously mentioned. While sales revenue fell 14% year-on-year, we maintained EBIT flat on a year-on-year basis in U.S. dollar terms; and successfully managed a period of channel inventory, destocking and price reduction. [ Deploy ] and product availability improved across the region following easing of COVID-related supply constraints, particularly the reopening of China in December of 2022. The improved availability of product and higher interest rates contributed to customers' demand moving to more just in time, depleting channel stocks. Glyphosate sales in particular were slower as customers waited for prices to decline. The improved mix and lower levels of market support mitigated the impact on EBITDA. We extended distribution agreements with Sumitomo in Canada and our T&O segment, securing our position in important market segments. We continued to invest in our supply chain and manufacturing facilities, maintaining our position as a reliable and efficient supplier to our channel partners. As we enter the first half of fiscal year '24, channel stocks are lower. And we are anticipating a return to more normal supply-and-demand dynamics in the second half of the year. As previously indicated, we expect continued margin pressure in the first half of financial year '24. And finally, we are undertaking further investment in our Chicago Heights facility to expand capacity and to deliver improved efficiencies. Turning now to Europe, where revenues declined by 8%, and EBITDA by 6%, year-on-year in euro terms. This is a very good result considering the impacts of the drought in Spain across the first half and the EUR 25 million impact to revenue from product deregistrations. These impacts were partly mitigated by new product introductions, organic growth and improved gross margin. Earnings continued to be impacted by manufacturing interruptions at our U.K. site, with under-recoveries of EUR 20 million for the period. This site is a globally significant operation for Nufarm where we manufacture high-margin specialty phenoxy herbicides. In addition to the CapEx program that we announced in February of '22 to address HSE and reliability issues, we are planning a further investment to expand phenoxy capacity at Wyke; and Paul will expand on this in his comments. Product deregistrations are expected to have an immaterial impact over the '24 to '26 period. And glyphosate renewal in the -- in Europe is expected before year-end, with immaterial impact to Nufarm from a likely phaseout in Germany. In financial year '24, we expect growth in revenue supported by new product introductions and organic growth in key countries. In APAC, EBIT declined 35% year-on-year in Australian dollar terms. Whilst we recognize that some of you may be surprised by the size of the decline, we consider this to be a result which vindicates the decisions that we made several years ago to restructure this business. Let me explain a little more. More than half of the earnings from this region come from our legacy ANZ business, where we hold strong market share, have a significant investment in manufacturing and retain modest exposure to active ingredient price cycles given [ the open nature ] of these economies and our proximity to China. In '23, we navigated a period of significant decline in AI prices. While volumes remained solid, margins were impacted by the decline in prices. Just as we benefited from the increase in AI prices in financial year '21 and '22, we were impacted on the downside in '23, particularly in the second half. When we look at EBIT through the cycle, we are achieving earnings that are consistent with the target of $50 million to $60 million of EBIT that we set when we commenced our transformation program for this business after the 2018, 2019 drought. We are continuing to make good progress in diversifying the APAC earnings base to improve returns. New products launched in Australia and continued growth in our Indonesian business are building earnings resilience. Discipline on working capital management, particularly in managing inventory holdings of lower-margin foundational products, is helping to improve returns. We are also reinvesting in our manufacturing facilities. With global 2,4-D prices currently at historic low point, a modest investment to our -- to upgrade our 2,4-D facility here in Victoria will bolster our competitive position by reducing our manufacturing costs. We will temporarily suspend 2,4-D acid production for the first half of financial year '24 whilst we complete this upgrade. We have sufficient inventory on hand to meet domestic demand. And while we expect first half margins to continue to be impacted by the current global pricing, the benefits of the upgrade will flow through from the second half of the financial year. Looking further ahead, we expect to see a normalization in margins on foundational products over the course of financial year '24. And the continued diversification of our portfolio, including Indonesia [ and Asia ], will deliver growth in '25 and '26. [indiscernible] seed technologies performed exceptionally well in '23, delivering sales growth of 33% and achieving EBITDA growth of 67%. This marks 3 years of strong double-digit revenue and earnings growth for the segment. The 2023 financial year performance [indiscernible] the strength of our base seeds portfolio, where we delivered revenue expansion in all crops, in particular hybrid canola. Every second acre in Australia is planted the [ new seed ] varieties, and these are varieties that we believe will perform well in other markets. Sorghum continued its strong growth trajectory, with global sales up 30%, led by our South American expansion. Our sunflower business also grew strongly, with higher sales in markets like South America more than offsetting some reductions in Europe due to the Ukraine conflict. We continued to accelerate in our high-growth omega-3 and bioenergy platforms. Omega-3 achieved several important milestones during the period, including the planting of our first hybrids, expansion of our certified grower base and farm contracting in line with our oil supply target and Norway approval for Aquaterra in fish feed formulation. The movement into highly constrained fish oil markets combined with expanded supply and increased downstream market adoption has positioned Aquaterra very well for growth into '24 and beyond. Our bioenergy platform also achieved some key milestones which will support expansion and growth over coming years. These included first carinata deliveries under the bp contract, the first commercial harvest and contract grower expansion in the U.S. and development-phase validation in both Europe and Australia. Severe drought conditions in Argentina reduced year-over-year carinata plantings, but despite those conditions, the introduction of new hybrids generated very positive feedback from growers to add sufficient moisture to plant crops. We expect that weather conditions in any specific region will become less of a factor in our performance as we scale and diversify production in our portfolio. Next-generation energy cane hybrids were also launched during the year, and our customer base was expanded. We generated licensing revenue for the year, and the largest was received from our offtake and market development agreement with bp. The largest was tied to our offtake -- sorry, and market development with bp. Under the agreement, bp is making milestone-related license payments to Nuseed that assist in underwriting the costs of expanding and developing the Nuseed carinata platform, as we seek to scale up production to support our growth trajectory. Similarly, licensing revenues achieved in our energy cane business support scale-up of resources and R&D capabilities. As we continue to expand our IP, we expect licensing revenues to be an ongoing feature of our results. In financial year '23, the seed technologies segment increased the size of its organization by more than 75 FTEs, primarily directed at carinata and omega-3 expansion. The organization expansion was focused in areas right across the value chain, including carbon modeling, sustainability verification, sales, agronomy and downstream marketing. I'll now hand over to Paul to take you through the financial details.

Thanks, Greg. And good morning. Now on Slide 13. I'm very pleased with the focused efforts of our team in achieving [Audio Gap] as a result, in challenging industry conditions, underlying EBITDA fell 2% year-over-year. Underlying gross profit margin increased 170 basis points due to the higher relative contribution from seed technologies and improved sales mix in crop protection. As expected, underlying net financing costs increased 55% due to base rate increases and higher average debt levels through the period. Average net working capital-sales was 42%, and I'll discuss this in more detail on subsequent pages. We finished the period with net debt of $850 million; and leverage of 1.9x, which is within our target range of 1.5x to 2x. Balance sheet is strong and we are well funded to pursue our growth objectives. [ In line with our ] dividend policy, we declared a $0.05 per share unfranked final dividend, bringing total dividends declared for the year $0.10 per shares, in line with the financial year '22 dividend. Slide 14. This chart shows our net working capital and cash flow movements. Net working capital was temporarily impacted by abnormally lower payables as we transitioned to a lower inventory position. Operating cash flow reflects seasonally lower earnings in the second half of financial year '23 and the consequential unwinding of net working capital in the second half of '23 through lower receivables balances. As previously communicated, operating cash flow is highly correlated with movements in net working capital, and this year is even more impacted by industry destocking. Inventory reduced through the period as expected and is well positioned as we enter the first half of financial year '24. We expect a less-pronounced seasonal build through the first half of '24 compared to prior periods. And net working capital is expected to normalize and further reduce in the second half of '24 as we move to a steadier cadence of sales and reordering. As a consequence, operating cash flow generation is expected to be strong in financial year '24. And overall when looking through the cycle, we anticipate a reduction of net working capital for the full year FY '24. Turning to Slide 15. As the chart on this page shows, the net working capital movement for the year was primarily influenced by a reduction in payables as we transitioned to a lower inventory position. We expect payables to normalize as we return to a steadier cadence of sales and reordering. As forecast at the half, we reduced inventory by $324 million during the period; and inventory was $138 million lower than financial year '22. Receivables increased modestly on a year-on-year basis, reflecting the timing of sales and collections and the unusually low FY '22 [indiscernible] position. Average net working-to-sales averaged 42% for the financial year '24 -- for the financial year '23 and is expected to be back within our target range of 35% to 40% by the end of FY '24 due to the anticipated net working capital reduction in the second half of financial year '24. Turning to Slide 16. Our CapEx spend is focused on supporting our growth ambitions. Coupled with the focus on net working capital management, ensuring that we optimize and rationalize our CapEx spend is a key priority of management to enable improved returns. In terms of CapEx spend for the full year, there are essentially 3 elements, being: investment CapEx; intangible spend; and property, plant and equipment. The intangible [ or ] product investment includes both an element of stay-in-business and growth spend. For crop protection, this includes spend associated with maintaining and defending product registrations, new products and product enhancements. For seed technologies, the spend is associated with new hybrids, registrations in new markets and other regulatory investment. The property, plant and equipment CapEx spend includes a number of safety and environment initiatives, together with asset integrity investment to improve the overall reliability and efficiency of our manufacturing facilities. Further investments expanding the capacity in Wyke, formulation improvements and efficiency measures in Chicago Heights, together with 2,4-D efficiency spend in APAC, is also included in the spend. Consistent with previous communication, in total, PPE and intangible investment is estimated to be around $200 million per annum over the next 3 years to support Nufarm's growth ambitions, $100 million in each category, being intangible and PPE. We've also initiated a very important and significant upgrade in our phenoxy capacity at the Wyke operation. This project aims to reorientate Wyke's capacity to high-margin products to support growth beyond FY '26. This project is expected to cost circa $140 million over the next 3 years, a majority in FY '25 and '26, and deliver substantial returns well above our cost of capital in FY '26. In line with our capital management principles, we assess growth opportunities such as the Wyke investment with regard to return on funds employed. And we aim to set a target return on funds employed [ that remains ] above Nufarm's weighted average cost of capital. ROFE has fallen year-on-year, principally driven by the higher-than-normal net working capital and should return to its growth trajectory as we grow EBIT and net working capital normalizes. Turning to Slide 17. The asset-based lending credit facility, together with the 230 -- 2030 USD 350 million unsecured notes, has created a flexible and durable capital structure that accommodates funding requirements for the group's net working capital cycle. This year in particular, the ABL facility has worked efficiently given funding is secured against inventory. Further, the group continues to retain access to substantial amounts of cash and committed bank liquidity. A slower-than-normal working capital unwind due to industry-wide destocking has resulted in September leverage of 1.9x, although within the target leverage range of 1.5x to 2x net debt-to-underlying EBITDA. The net working capital seasonal build, given sales phasing, is likely to result in leverage above the target range at the first half of '24 but importantly is estimated to be below or at least within our target range by the end of second half of '24. Summarized: Our balance sheet is strong. We have the capacity and flexibility to seize opportunities as they arise and support our growth aspirations. I will now hand to Rico, who will take you through our crop protection revenue aspirations.

Thanks, Paul. As Greg mentioned earlier, we continue to see the benefits of our investments in innovative agricultural solutions. Our portfolio supports the important sustainability goals such as zero hunger and life on land. We do that by enabling our growers to produce more with less while providing products that help them adapt to climate change and minimize unintended environmental consequence. Innovation and technology will drive Nufarm's sustainable growth. And we will now give you an update on our development pipeline, which we first presented in February 2022, at our Investor Day, and updated in May as part of our first half report. We continue to have a pipeline that will deliver across our [ core products ], our targeted geographies over multiple years; and will strengthen our customer relevance; and support our revenue aspirations. The pipeline remains unchanged from our first half report. Our top projects are all active and continue to have an estimated market size of 6.65 billion. However, in the last 6 months, we've made good progress with our pipeline as the projects advanced to later-stage gates and eventually are launched and become commercial products. To help you navigate this slide, we have therefore highlighted [indiscernible] that has made progress since the first half result 6 months ago. The achievements are related to stage gate advancements, adding new markets or launching in the first countries. On the next slide, I will share some examples of product launches, but the overall message is that we are on track to deliver our 2026 ambition, and our pipeline also looks promising beyond that. Similar to the first half, we also launched a number of products in the second half. Bear in mind that our [ products ] generally have staggered launches because we don't get the registration at the same time in all countries, but this continue to be active until they have been launched in all target markets. As an example: We have now received the first registrations of Joust. The project remains active since further launches are coming. Our portfolio consists of 5 platforms. The foundational solutions such as Joust and Carnadine are what we refer to as the [ bread and milk ]. They are products farmers use every season and they are incredibly important to solve critical agronomic problems. In this platform, we have made good progress on some of our [ key products ] such as Joust; [ Optera Pro ] and Carnadine. Please allow me to add a bit of more color to some of these products. Joust is one of the few remaining triazole fungicides which are still allowed in the EU and will benefit tremendously from the phaseout of other triazole fungicides. The same is the case for Carnadine, which is the only remaining insecticide in the neonicotinoid group which is still approved for sale in the EU and will also benefit from that status. We also had good news from the EU Commission, who recommends re-approval of glyphosate for next 10 years. As you know, we are increasingly investing in innovative solutions that are covered by various forms of IP. I'm pleased to let you know that we've achieved several important milestones for our innovative solutions. We achieved the first registrations for our Duplosan family of products in Canada, where we'll be launched later this year as Oxbow and BlackHawk in different mixture combinations. Oxbow controls the herbicide-resistant kochia weed. Kochia is a very troublesome and hard-to-kill tumbleweed present across Canada and the U.S. 100% of all kochia weed in Canada are resistant to at least 1 herbicide but sometimes up to 4. We also achieved registration of Allstar, a brand-new and unique 4-way mixture combination, including 2,4-D, which is both fast acting and controls a board (sic) [ broad ] range of weeds. This product will be launched in the turf and ornamental segment in the U.S. later this year [ also ]. Terrad'or, which we have previously launched with great success in Australia, has now also been launched in Indonesia. And we are working to add more crops to our Australian registration. In Indonesia, we also launched Gracia, which is a new [indiscernible] insecticide developed by one of our strategic R&D partners. In the biological solutions, we also achieved important milestones. Last year, we launched our bionematicide Trunemco in the U.S. And earlier this year, we launched the product in Brazil together with our distribution partners. Trunemco is a biological nematicide which controls nematodes, a type of soil parasites living off crops like soybean and corn, causing a negative yield impact. Nematodes can be controlled through the use of biological nematicides, which is now the fastest-growing category within the larger biological market. Recently, we have achieved registration for Trunemco in China; and plan to launch later this year. We've also submitted our registration for [ Exsolant and Simpell ] in the U.S. these last few months. These products contain spinosad, which is the most important bioinsecticide in the world today. And this submission sets us up for launch towards the end of '24 or beginning of 2025. In India, we recently launched our Cuproxat fungicide and expect to see growth in this important market. India is already [indiscernible] largest biological market, and we are pleased that we are now present there with a core product. In the adjacent solutions, we launched Prospr in collaboration with one of our partners. Prospr is an autonomous self-propelled sprayer, and this actually marks the first for our Croplands business. The insights into new application technologies that we're gaining through our Croplands business are very valuable and grants us an unique competitive edge in innovation that none of our peers in the crop protection industry has. In crop.zone, we also note a good progress these last 6 months on both the technology side but also with new commercial partners in Germany. Likewise, we garnered the attention of 40 key customers in a NUCROP field day in Spain showing off the technological advancements of the crop.zone technology in combination with our Volt.fuel product. In the integrated solutions area, I am pleased to inform you that the U.S. EPA has agreed to recognize carinata as a crop for label extensions. This means that in our crop protection business we can add the carinata crop to our product labels and support our Nuseed colleagues with high-quality agronomic solutions. In Serbia, we also held a joint Nufarm and Nuseed field day with 200 customers from across Europe, Africa and Middle East, showcasing the combined seed and crop protection solutions of Nufarm. The response from customers was overwhelmingly positive. These are just some examples. In fact, we have had more product launches in the second half, but also I want to highlight, generally speaking, these new products are higher-margin products and, as such, contributors to the improvement in average gross margin in the full year. Altogether, we are quite pleased with the progress in the second half. And as mentioned earlier, our pipeline is on track to deliver our 2026 aspiration. I will now hand over to Brent, who will talk to more very exciting growth opportunities.

[indiscernible], Brent?

Yes. Can you hear me?

Yes. You're [indiscernible].

[ Okay ], there we go. Thank you. Thanks, Rico. And good morning, everyone. Greg has already taken you through key highlights of the current year results, so I will focus on our growth and outlook. I've previously outlined our growth aspirations for the seeds technologies business over the medium to long term. Today, I'm pleased to share that we are well on track to deliver 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. Innovation and delivery of sustainable plant-based solutions to new markets continues to be a very strategic, profitable and transformational position for our proprietary seed technologies platform. Looking forward, seed technologies is expected to remain in a high-revenue growth phase supported by continued investment across our platforms. After successfully expanding our omega-3 canola contracted production supply base in the last growing season, we are now expanding downstream customer sales and deliveries of Aquaterra and Nutriterra. In FY '24, we aim to further expand omega-3 contract plantings in support of our objective to double oil production and supply to capitalize on increased market adoption into the FY '25 period. We also aim to significantly expand carinata plantings with a strong trajectory and greater geographic diversity, including further expansion in Argentina, Uruguay and the U.S.A.; and first commercial plantings in Europe and Brazil while also further advancing developments in Australia. Energy cane, our newest addition to our bioenergy platform, is moving from development into expansion phase, with enhanced product development and commercial capabilities supporting the recent launch of next-generation hybrid [indiscernible], demonstrating greater than 30% greater sugar and ethanol production per hectare than existing standard sugarcane products in marginal and degraded land areas. While further scale-up investments in the energy cane business continues, we expect a more material contribution beyond the FY '24 and FY '26 periods. Revenue growth in FY '24 is expected to be driven primarily by omega-3 and bioenergy. Seeds, crop revenues are also expected to be higher but not to the extent of the record growth posted in FY '23. Given the timing of relevant milestones, anticipated licensing income in FY '24 is expected to be lower than FY '23 but will continue to meaningfully support further investments in scale-up and expansion activity. FY '24 EBITDA is expected to increase, albeit more modestly than FY '23, before an expected acceleration of EBITDA growth into the following years. To summarize. FY '23 has been a very strong year. Collectively, our financial, strategic accomplishments and growth outlook all indicate that we are firmly on track to deliver on the $600 million to $700 million revenue aspiration by FY '26 at 20% to 25% EBITDA margins. I'll now hand back to Greg. [Audio Gap] did not relate directly to the '23 result, it does underscore why we are confident that we're on track to meet our '26 revenue aspirations. 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. And at the same time, there is increasing pressure to meet our food needs more sustainably. Advances in science and technology are rewriting the way we use land and plants to supply not just food but energy and a wide range of other new products. Nufarm is at the forefront of these changes, 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 revenue and earnings. We have the balance sheet strength to deliver this growth and benefit from opportunities as they arise. Turning to the immediate future. Grain and oilseed use-stocks remain tight. Grain prices remain attractive, supporting grower plantings and demand for crop protection products. We are planning for further growth in EBITDA in seed technologies in '24, albeit at more modest rate than we experienced in '23 as we continue to invest in scaling our omega-3 and bioenergy platforms. Omega-3 and carinata are together expected to represent a meaningfully greater proportion of seeds revenues from '24. We're planning for continued momentum in crop protection product launches in '24, accelerating through '25 and beyond, as Rico has outlined. And we have a strong product pipeline that supports our '26 objectives. We have a strong balance sheet. And we expect to remain comfortably within or below our targeted net leverage range of 1.5x to 2x EBITDA by the end of financial year '24. We expect trading to remain challenging in the first half as the industry adjusts to a lower level of input costs, and to return to growth in the second half of fiscal '24. Importantly, as [ we've ] said a number of times, we remain on track to meet '26 revenue aspirations of $4.6 billion. So with that, I'll hand back to you, Rachel. And we can take some questions.

[Operator Instructions] Your first question comes from Evan Karatzas with UBS.

Just first one for me, can you just speak to the inventory situation that's out there for yourselves and the industry; and then I guess, by extension, just how that relates to the potential balance sheet delevering that you're expecting or talking to as well, please?

Yes. Thanks for the question, Evan. As we've said, channel inventories -- and you will have seen this from many of our peers' commentary, that channel inventories are relatively low across most regions. The elevated inventories are at the manufacturer level. When you look at our inventories, about 50% of our inventories are herbicides, where we tend to have higher stock turns. And we expect that inventory to move as we get closer to the Australian winter and the North American hemisphere spring crop in Q2 and Q3. And whilst it's really sort of [ too early ] to talk about the earnings outlook -- therefore, we're not giving guidance. However, I can probably provide some high-level commentary on current trading, demand outlook and therefore inventory levels that may help answer that question. In APAC, we are planning for an improved result as we work through the remaining inventories, which are at relatively low levels. And I wouldn't expect the same price impact that we saw in Q4 of '23. In North America, we've got higher absolute inventories. And I would expect higher revenues in '24 but continued margin pressure as we sell down. And in Europe, I guess probably an improved result because of less impact of regulatory outs. We still expect to have an improved manufacturing performance but not where we plan to be in a couple of years time with the capital that we're spending on that plant. And as Brent has already outlined, we're forecasting $50 million to $70 million of revenues from omega-3 in '24 and then doubling out to '25 and growing from beyond. Paul, did you want to make some specific comments in relation to inventory and leverage?

Yes. So Evan, I'd expect inventory to come off even further, as we've sort of called out. And at the moment, [ we're at about 155 days ]; and our normal inventory, depending on products and so forth, [ to ] average somewhere between 120 to 140 days, depending on the products. So when you look at that, there's probably another, let's call it, a couple hundred million that could come off that number quite easily. It will be a question of when, not if, as Greg alluded to, so I don't expect that to really normalize until into the second half of '24, once we're sort of -- we've worked through the normal. As I said in my speech, again, we'd get to normal reordering and sales [ program ] in terms of when the cadence returns to normal. The other thing too to take into consideration is how that -- how our payables sort of track that. And it's really the delta between your payables and your inventory that -- and obviously [ it's your variable ] net working capital associated with that, so if we can -- we pare that back -- when I'm saying pare it back, it is, i.e., that the -- as we reorder, our payables go up. And therefore, the delta sort of narrows between [ safe and what it is ] at the moment. So that could be anywhere between [ 200 to 400 ], depending on, i.e., the delta between the two, depending on the inventory reduction. So it's, to my mind, [ actually ] this is all -- [ I'll say this pretty clearly with ] a lot of people in lots of meetings that this is going to be a second half story in the sense of [ assess us ] on the second half of '24 and what that looks like because we've still got some work to do to get back to a normal position.

Okay, great. I really appreciate all that. If I can just squeeze one more and maybe for Brent; just, I guess, what you're hearing or seeing on the ground from your customers or the industry just in regards to your omega-3 product as well, please.

Yes, sure. Thanks, Evan. I'd say we're certainly at a stage in the market. And I think everyone is aware that the fish oil supply has been fundamentally challenged this last year with the cancellation of the first quota from Peru. And we're seeing all-time highs of fish oil pricing just because of the constraints in that marketplace. That combined with multiple years of customer experience now with Aquaterra, we're seeing very strong demand and really strong signals for market adoption, which is great considering that we've been expanding our supply base. So I think we're in a short- to medium-term dynamic here where we can see very strong market adoption both on Aquaterra -- and then also, as we've outlined today, seeing good adoption and more strategic relationships in the Nutriterra human health side. So I think we're at a place in the market where they really need us, and it's a good place to be right now.

Your next question comes from Richard Johnson with Jefferies.

Just a couple of points of detail. Greg, I'm presuming your guidance for seeds. The slide says modest growth. Is that meant to be more modest growth?

Yes, I'll take that, yes. Look. It's more in the sense that it will be an increase year-over-year. And the way to think of it is that we expect licensing income come off, and the EBITDA associated with that, but growth in omega-3 and carinata to basically [ cover any ] delta between the [ licensing revenue/EBITDA ] that comes off, so -- but -- it's growth, but it's modest growth compared to FY -- ending FY...

[indiscernible] 67%...

67%, yes.

Yes, okay, perfect. And is it possible to give us a sense of what you think the first half-second half split might be in '24...

Yes, yes, yes, no. I look at -- I think, at the half, we said that '23 was likely to be sort of 70-30. I think we finished at 72-28, and I would expect '24 -- the '24 split to be more in line with 60-40.

Perfect. And then just a couple of ones on seeds. So it's probably for Brent. Brent, when we look at the '26 aspirational target and the ranges you've given both for revenue and for margin; and then we think about the sort of tone of the commentary you're giving at the moment, particularly around omega-3, I mean, what accounts for the difference in that range? Or putting it another way, what needs to happen for you to kind of hit the high end of that range?

Sure, yes. Thanks, Richard. I think we're now in a position where you can see 2025 and 2026 are really just around the corner for us; and the fact that we're outlining $50 million to $70 million in revenues from omega-3 in FY '24, which is from FY '23 plantings. We're also saying that we're directionally aiming to double that in terms of planting FY '24, which should double that revenue into 2025. And if you follow that type of trajectory as well as other things that we see as the growth factors in the business, I think, so long as we have good market conditions and achieve our grower expansion targets, we can say we are very comfortable in terms of that range right now and, hopefully, are on a track to hit into that range either earlier or towards the higher end of it.

That's very helpful. And then -- and sort of in the same veins, could you remind me what the sort of curve looks like for carinata plantings over the next few years just in growth -- in a growth sense?

Yes, sure. I can give you some context as to how to think about that. We -- as Greg and I outlined, we did not achieve our planting targets this year because of the significant drought in Argentina, but what we did plant, growers were very pleased with where they had moisture because we just launched our new hybrids. So we would say that we intend to be back on track in Argentina in terms of that growth in '24; plus now the expansion of our second year in the U.S., second year in Uruguay and now our first year in Brazil and in Europe. And the way to think about new market expansion is typically we would plan to enter a market with about 5,000 hectares and then aim to double that each year thereafter. So hopefully, that can give you a bit of a trajectory to think about. We do see ourselves not only having geographic expansion but now being able to accelerate quite quickly with our hybrids that are fitting in each of those markets.

Your next question comes from William Park with Citi.

Just while we are still talking about seed technologies, can I just ask about the FY '26 EBITDA margin target range? I mean given -- if my math is correct, given that you've already sort of achieved the top end, I mean, would you -- would it be fair to say that there are some upside to that margin target? Or do you expect sort of ramp-up costs and timing associated with that with respect to carinata and omega-3 to keep margin at that sort of level before sort of meaningful improvement beyond FY '26?

It -- do you want -- I'll just jump in for -- what's actually improving the margin is basically the licensing income, which is a lumpy result, if you like, in the FY '23 period. So that's driving a higher, if you like, EBITDA margin than what we would have otherwise expected. So that will drop off next year because of that lumpiness, if you like, so therefore, we -- it's not that there's upside. It's just that this year is a little unusual because of these licensing fees that are driving a higher EBITDA margin than what we would have -- otherwise we've been planning for.

And if I could be a bit more tedious. What's your expectation around sort of margin versus then FY '21 levels too? I mean, are you -- in '24, are you [ sort of ] FY '21, FY '22 levels? Or are you expecting sort of an improvement from FY '22 levels? Or just wanted to understand sort of how you're thinking about this.

Brent, do you want to talk about the growth trajectory?

Yes, yes. I think, to answer the question a little bit further: Some of the things that play into this is the product mix and the margins in each of our product lines, not just omega-3 and carinata. We have seen margin expansion across the whole business in each of the crops as well as the -- each of the new technology platforms, so I would say that we comfortably will sit within that range of 20% to 25% EBITDA margins, but we've continued to improve the quality of the business right across the whole seed technology platform, so yes. I think you could -- certainly as Paul has outlined, staying at the level of 25% EBITDA margins might be difficult next year, but we're continuing to improve the quality of the business. And I think certainly -- being at the baseline of where we were in '22 and above is clearly in line of sight.

Your next question comes from John Purtell with Macquarie.

I just had a couple of questions. Just in terms of what you're seeing, as far as AI prices and some of the main trends there. I think there's a chart in the appendix there, but obviously if there's a view that prices have bottomed out or are bottoming out, that should help reordering.

John, it's Greg. Look. I thought -- at the half, if you go and look at my commentary, I thought we'd sort of bottomed out there, but clearly, if you look at those charts, I mean, glyphosate and 2,4-D both fell further in the second half. But we -- certainly now as we move into October and November, we're starting to see glyphosate prices move up but -- and certainly 2,4-D. So as we often say, no one rings the bell at the bottom, but all the indications are that we will see active ingredient prices start to move up. But I wouldn't expect significant movement, frankly, until we see this inventory work through in the first half and back to more normal levels of demand-supply dynamics in the second half of '24.

Just the second one is sort of related to that. I note your comments there are North America reordering expected in Q3, not the second quarter. Is that sort of, I suppose, more a traditional sort of seasonal pattern? And presumably that's also impacting the SKU that you referenced earlier.

Yes. I thought I said Q2 and Q3, as we move into the spring cropping in the northern hemisphere, but as I did say, our inventory levels proportionately in North America are higher. So I would expect to see revenues increased over '24 but continued pressure on margin, to some extent, offsetting the contribution from increased revenues.

And just the final one. In relation to APAC, you mentioned before, Greg, that you're planning for an improved result as the price impacts you've -- have sort of washed through there, particularly in that second half, but what are you assuming for seasonal conditions within that?

Well, I guess we always budget sort of a normal season. I think it's reasonable to expect that -- with El Niño developing, that we could see a smaller winter crop, but look. Frankly, it is really too early to call. We are [ taking a ] more cautious approach to the level of raw materials that we're bringing into the country for the winter crop, but if you look back at El Niño events over a number of years: El Niño doesn't necessarily equal drought, certainly not what we saw in 2019 and 2020, but all the indicators are smaller crop, smaller winter -- certainly smaller summer crop, which is relatively immaterial for us, anyway; and a smaller winter crop in '24. So I would say we're taking a cautious approach to the way that we're building inventory into '24, if that's helpful.

[Operator Instructions] Your next question comes from Jonathan Snape with Bell Potter.

Can you hear me okay?

Yes. Thanks, Jonathan.

Maybe a first one for Paul. I noticed you made some comments around working capital and particularly around the payables. If I looked at your off-balance-sheet facilities -- and I know you don't want these questions, but it's kind of dropped down. About 4% of your payables is financed by off balance sheet this year, whereas traditionally, I think about last 5 years, it's been more like it's 1/4 of your payables has been financed by those facilities. And it looked like there was almost 300 million of debt that came on balance sheet from off balance sheet. When you're looking into next year, when you start that reordering process on actives and you shift from finished to active ingredients [ and inventory balanced ], should I expect that to kind of normalize back to kind of what we saw in the last 5 years?

Yes, first of all, I love the questions from you, Jonathan. [ That's all right ]...

[indiscernible].

[indiscernible] absolutely. The short answer is yes, as -- these payables [ are stale ] in the sense that these are old payables. And that's why we put our hands in our pockets. And we said that at the half, that hands were in our pockets and until we've sort of worked through the inventory. So as we get back to a normal cadence of reordering, that we will -- we do expect to utilize the [ supplier financing ] facility. And we use that for good reason because we get [ 180-day ] terms. So it will increase our payables days accordingly. So yes, we will be utilizing that facility and you will see a switch from basically on balance sheet to off balance sheet.

Okay, great. And look. Can I just ask around the licensing revenues? And I want to make sure I'm looking at the right segment note here. I think it was like 19 million last year. It was 55 million this year. Is that all the carinata revenues coming through? Is there something else in there? And then the follow-on would be where should I be thinking, next year, that number kind of heads back to.

Yes. So in short, yes. That delta is effectively the bp license fees, so what you should be thinking next year is that, that delta halves.

Okay, so it's quite a material headwind and it's like [ $22 million ]...

Look. That's revenue; and as you know, in an EBITDA context, remembering this is funding the expansion and the activities associated with carinata, so it's not one for one. So you really need to think about, well, that's revenue, but the EBITDA impact is...

Less.

Less, yes, exactly.

Okay, okay. And well, maybe this is one for Brent, on the omega-3 side. I think you said doubling the volume would double the revenues, but if I remember correctly, the stuff you priced is way out of market in terms of pricing at the moment. Like the algae guys are north of [ $8,000 a tonne ]. And you were, what, south of [ $3,000 ], so if we're looking at a more realistic picture in '25, '26, if -- where oil prices are, I mean, how much power do you have to start to tweak the pricing mechanism on that omega-3 product? Because it does look like you guys are well below where fish oil, fish meal, algae oil is at the moment. I'm just trying to figure out how long you've got that stuff going for, how much power you have to tweak it.

Sure. A couple of comments on that. We've given a revenue range. Part of that is that, depending on timing of crush and timing of logistics, we may not sell all of our FY '23 produced volumes into the financial year of '24. It may -- some of that may bridge just slightly into the calendar year '24, so that -- hence the range. To your question on pricing: We actually are in a lot of discussions with our long-term partners in the industry right now in terms of what those right type of pricing mechanisms and structures do look like, recognizing that the market has fundamentally changed in these last 6 to 12 months. So what I would say, probably echoing my prior comments, is the industry really needs a scalable, sustainable solution like this right now. So what I would say is that there's, I think, a really good balance with us and industry trying to ensure that we can bring pricing solutions to them that are competitive but that also recognize the new market dynamic. So I know that's not real specific for you, Jon, but I would hope that both those 2 comments will, would help you to say we are seeing upside in the current market, for sure. We also think that, as other fishing quotas come back, we'll probably see a correction in fish oil pricing, but we think fundamentally and a lot of market analysts believe that there's going to -- a fundamental lift in what used to be 5-year average pricing in these markets. It's probably higher now going forward.

Yes, but if Corbion can get 30% volume growth and 20% pricing growth on an algae product, I mean, why can't Nufarm get double-digit pricing on double-digit volume when you're pretty much [ hitting ] head-to-head on the same product?

Yes, so -- and I don't think that's out of the question, I guess, is what I'm trying to say, Jon, so we're certainly well placed to understand how to manage ourselves in that marketplace. We're just probably being fairly conservative in terms of the guidance that we're also providing in the short term.

All right. And so look, one last one. Greg, this is maybe for you. On the APAC, did I hear correctly? Before, you said, I think, 50% of the EBIT these days was Australia, which would mean it's currently doing somewhere around about, I don't know, $35 million-odd. And you think it can get back to that $50 million to $60 million. Is that a second half type trajectory; or is it more going to come through in '25, assuming normal season?

I think what I -- yes, sure. I think what I tried to say was that -- give me a minute. [ I would take my notes here ]. What we were targeting for the legacy Australia, New Zealand business was a $50 million to $60 million EBIT target through the cycles. And if we look at financial year '23, that was actually $42 million. And if you look at the contribution of Australia and New Zealand from FY '20 to FY '23, the average was $54 million, so what I'm saying is, whereas the result may look bad in '23 when you compare it with '21 and '22 -- however, if you look at it through the cycles given that '21 and '22 were really outperformance years, then what I'm trying to say is that we -- that business is delivering to where we believe we could get it to. And I'll just make the other point that return on assets have been significantly improved over that same period.

Jon, can I just add one more comment just back to Paul's response on your question about the licensing revenue? I just want to add that it is not just bp licensing income. We do have licensing income from multiple parties, as I think Greg pointed out in his script as well, so while they're most -- they are the most significant, it's not solely bp license income. I just wanted to make sure we're clear on that.

There are no further questions at this time. I'll now hand back to Mr. Hunt for closing remarks.

Thanks, Rachel. And look: Thanks, everybody, for your interest. Maybe just a couple of key points that I'd make in summary, to recap. Grain prices remain relatively attractive, so therefore grower demand remains strong for both our seeds and our crop protection products. We expect improved trading in the second half as we move through the inventories that we've talked about in the first half. We've got a healthy crop protection pipeline, and with increasing active ingredient prices, that provides the tailwinds for us. And we've built the platform for continued growth from our seed technologies platforms. And our leverage target remains to be comfortably within our 1.5x to 2x by the end of financial year '24, and importantly, we remain on track for our financial year '26 aspirations. I'll look forward to catching up with some of you over the next few days. Thanks, Rachel.

That does conclude our conference for today. Thank you for participating. You may now disconnect.