TRANSCRIPTION. AWB Conference Call. Date: 10 February Conference ID number: [START OF TRANSCRIPT]

Transcription

1 TRANSCRIPTION Company: Title: AWB AWB Conference Call Date: 10 February 2009 Time: Conference ID number: Moderator / Speaker: 11am AEDST jl Philip Gentry [START OF TRANSCRIPT] Good morning to analysts and investors, and thank you for all joining this morning. The purpose of this call, as I m sure you are aware is to update you on our performance for the half so far and to provide a little more colour around the release that we put out this morning. In essence, it is of course very disappointing to have to report that we are expecting first half profits to be well down on the corresponding period last year. This is largely a result of the weak wheat trading conditions and in particular the extended drought that we ve seen in recent months. If you think about the same period last year, particularly from a Landmark perspective, we had rising commodity prices approaching records, we had input prices that were also rising and hence a propensity to buy early, and also a certain amount of early rainfall last year. So it was very good conditions for quite a strong first half for Landmark. This year those factors are all reversed and in effect we have had commodity prices obviously well down off their peaks. We ve had input prices coming off and an expectation they will fall further and therefore growers preferring to wait rather than to buy, and across Southern and Eastern Australia, pretty extensive drought and little or no rain. So the operating environments have been significantly more difficult and that has led to the trading conditions for Landmark being well below where they were last year. With respect to ACM, their performance is also below where it was last year and in large part because of the drought as well and the subsequent impacts from that. So just running through the key ones. Clearly the flow of grain into GrainFlow is below where we would have liked it to have been, although still ahead of the same time last year. And pooling, we're expecting somewhere between 2.5 and 3 million tonnes, which we think is

2 not a bad outcome in what was an uncertain environment about how it would unfold, although we were hoping for closer to 4 million tonnes before the season started. From a Landmark Financial Services perspective, they are tracking pretty well in what is not an easy financial market environment and credit quality remains very strong in that book, and from an international commodity management standpoint they are well ahead of the same period last year and ahead of expectations as well. We, as a group, are taking a number of actions to deal with the performance which is below where we would like it to be. These include cost reductions on a range of fronts, including a hiring freeze and profit improvement plans in all the businesses, more rigorous margin management, a very close watch over credit positions, more efficient working capital of every management and I ve already touched in recent months on some of the targets and some of the businesses we're aiming for there, and continued improved business processes and controls. So that is a summary of where we're at. We would not normally give guidance before the half year, because things are fairly uncertain in the agri world, but clearly, the first four months, and we only got the January results yesterday, were sufficiently far away from the mark that we felt an update was very important. I would now like to hand over to anyone that would like to ask any questions. (Stuart Jackson, JP Morgan) Hi Phil. A couple of questions. First of all with regard to rural service, can you put a bit more granularity in terms of where the weakness is coming through in terms of business wise? We ve obviously seen IPL and we ve seen Futuris come out with some comments about the fertiliser market and having to revalue inventories and that sort of stuff. Is that affecting your business? And going to the livestock and all the other parts of the business as well. And secondly, as part of the windup on the pools business a couple of years ago, you intimated that you would have to take some sort of write-off around about now, is there any asset write downs or anything like that coming down coming through the numbers as well? Let me deal with those one at a time, thanks Stuart. We don t we tend to operate largely as an agent, so we don t have significant inventory of fertiliser and at this point don t anticipate any significant write downs on that score. The major impact from a fertiliser standpoint is simply a volume one. There has been not a lot of buying activity and so that s been the major influence there. From a broader landmark perspective, about half of the under-performance compared with prior period is due to the performance of its investments and in particular HiFert and to a lesser extent AWH, but really the vast majority

3 of it is HiFert. It is about half the under-performance is in those investments and about half is related to just top lines not quite as strong as we would have expected, but given the drought conditions it has still held up better than it might have been. (Stuart Jackson, JP Morgan) It s fair to say that s mainly associated with merchant fert as opposed to livestock and Yeah, the predominance is merch and fert, although some of the other areas are a shade off as well, but their size is not so material. I think as we mentioned in the release, WA, Queensland and Northern New South Wales to some extent are all relatively solid, but the other states in particular have been quite weak. The second question was around the wind up of pools and some sort of write off there. Not quite sure what you are referring to there Stuart. Can you elaborate? (Stuart Jackson, JP Morgan) It was mainly a couple of years ago when the decision was taken to change the system I suppose and you were talking about having to write some assets off associated with the pools business itself once the single desk collapsed so there is no impairment charges? Don t anticipate any write offs in relation to any old pool assets or anything like that, that s all been done if it needed to be done. At this stage the only significant item that, as is usual at AWB, there will be the usual legal costs associated with the Oil for Food and associated legal issues. (Paul Jensz, Austock) Yes Phil, would you be able to elude to the amount of cash volume you have? You talk about the pool tonnage, are you able to talk about the total tonnage and maybe a market share guidance? Look, it is commercially sensitive, so I am not going to be specific, but the cash trading has been quite active and market share is quite tricky with us, because you can buy and sell many times in a season and so I m not sure there are any reliable market share data. But suffice to say, healthy, but more than a million tonnes but less than the pool. (Paul Jensz, Austock) Back to Landmark if I can Phil. On the cost base, Graeme and the team last year outlined a major change to cost base of the group, are you able to elude to the change you are making there in the cost base to repair some of this revenue damage? Yes, there were a number of activities already underway in Landmark and Graeme touched on a number of those at Landmark day around improving cost management in the business. Some of those related to the efficiencies that would be gained by SAP, others around working capital improvement and others around improving margin management in particular. All those are ongoing and we expect we will see benefits over the next 12 to 24 months.

4 In addition to that, given current trading performance, Landmark is initiating a further profit improvement plan to realise further cost reductions, but I m not going to spell that out for you on this call, we ll give you more details at the half. (Jonathan Snape, Citigroup) Thanks. I just follow on from Stuart s question from I guess what we saw from the competitors. If I m right the Elders guys wrote down quite a bit of glyphosate as well and I know you made a comment on fertiliser, but was there anything in there on glyphosate hits at all in there? Second, just on your capital position and in particular in some of the initiatives I think you were talking about back at the full year results, how they are progressing in terms of pulling capital out of Brazil and so forth and if you can give us any sort of update on where the unsecured notes are sitting at this point? I guess just lastly, just where the pool volumes are sitting today. Because I know you said 2.5 to 3 is the expectation, but what you ve got actually delivered into the pool at this point? Okay, in reverse order. The pool is already just over the 2.5 million mark. We d estimate that the wheat crop has still got something like 25 or 30% to be marketed and that we get some share of that. So you know, we're pretty comfortable with that range of 2.5 to 3 million. In terms of capital, the let me just get the full range of stuff in front of me here, okay. I talked about a number of things at the full year and in no particular order, the 20% reduction in Landmark working capital, that was a target for September 09 but is certainly well underway. The LFS funding model, again, that s a medium term issue which I would expect we will make progress on and be able to tell you more on in the months ahead. The DRP reinvestment plan. We obviously did that at the full year, that was underwritten. Risk assist, we had already made progress on at the full year and I d expect you will see further progress on that when we announce the results at the half. In terms of commodities reallocation, amongst the offshore businesses and back to Australia, that is more of an allocation that is done over a season, so you would certainly see that by the full year. Again, we will give you an update on that at the half. Sorry, what was the other question Jonathan? (Jonathan Snape, Citigroup) It was just on the unsecured notes. Obviously the Elders Rural Bank reported an 18% jump in their deposits given their bank guarantee, and I was wondering what you d seen in your unsecured notes?

5 I said at the full year that we d seen some reduction in those in the month or two following the introduction of the government guarantee and since that time we ve basically held those pretty stable. They seem to have stabilised pretty comfortably now. (Jonathan Snape, Citigroup) I think just last, just wondering about, I know you commented on fertilisers, that there were no write downs, but if there was anything on glyphosate or any of the other chemicals? Not at this stage. (Phillip Pepe, Deutsche Bank) Hi guys, Paul already stole part of my question, but I ll just ask in terms of volumes. You mentioned you were hoping for around 4 million tonnes to go through the pool, how much of that then you mentioned the international commodity management was better than expected, how much of the volume that didn t go through the pool do you actually think you managed to hang onto through the commodities management business? Secondly, what impact, if any, has the volatility in commodity prices had over the period on the trading business? Look, again in reverse order. Commodity price volatility has not had a particularly marked effect, to the extent commodity prices are down somewhat or down a lot on this period last year. That helps working capital. The volatility compared with this time last year is actually much reduced and to that extent it is both a plus and a minus. There may not necessarily be the trading opportunity available but it also reduced margin calls and the like, which helps working capital. So that s the impact from commodity volatility. Sorry, the second question? (Phillip Pepe, Deutsche Bank) Just in terms of the growth in the international commodities management business, how much of that do you think is volumes that perhaps would have gone through the pool this time last year and how much of it is new growth? The international commodity trading business is largely generating that growth. You know, a portion of that would be related to exports from Australia but the lion s share of it would be its own independent growth. (Matthew McNee, Goldman Sachs JBWere) Again, a lot of my questions have been answered but just a couple of questions Philip. If we re looking at the Landmark business versus the traditional old AWB business, if you look at Landmark, clearly there has been a bit of a deferral of purchases by farmers as you said, waiting for prices to come down. I m just trying to get a feel for how you are seeing that. I mean you are probably not going to know for another six to eight weeks how a lot of these things are going to go but is there a likelihood that some of those Landmark

6 earnings have been pushed into the second half? I m just trying to get a feel for how much of it is sort of permanent loss of earnings versus just pushing into the second half on Landmark. Look, it is a good question and it is hard to know with precision. I think a couple of things are worth pointing out. Firstly, if you think about the broader health of the grain sector and the agri sector in Australia generally for 2009, you know we have had a 20 million tonne wheat crop and a wheat price which is around $ depending on how you look at it. If you do the multiplication on that, that is by historical standards the largest cash inflow to the wheat sector ever. Even though the crop is not perhaps a record it is not at the million by historical standards the price is still very high. So we would expect that the grain sector generally is still going to have a pretty healthy 2009 and is going to be prepared to spend to invest in a healthy way in a new crop. In addition to that, we have seen input prices come down materially as well so their profit margins we think are reasonable and so we would be cautiously optimistic that a fair bit of the Landmark deferral that you refer to is deferral as opposed to permanent diminution. But again, I would agree that a decent chunk of it will get pushed into the second half and is somewhat dependent on breaking rains. (Matthew McNee, Goldman Sachs JBWere) The other question, just in relation to the commodities trading and the pooling business because that is the bit I think - as far as we re concerned, it is a bit harder to get a gauge for where your market shares are settling down and how much of it is a drop in market share. Can you just remind us what your actual pool receivables were last year versus that 2.5-3mt that you re talking for this year? Last year I think it was 4.3mt so this year we are going to be around 2.5-3mt which isn t miles away but obviously you know a smaller share of a bigger crop. (Matthew McNee, Goldman Sachs JBWere) So given the crop has doubled or pretty much doubled, not quite but getting that way I mean is that the key difference here? Is that the key issue I suppose compared to where you guys were a few months ago, obviously flying blind a little bit on how your market share was going to settle out? Is that one of the key drivers of where things have changed, just that much lower number? It is certainly one of them for ACM so the pool volumes are a little below where we would like them to be and that obviously also flows into harvest finance in terms of the volumes that we would have. Having said that, I think we need to be a bit careful. We are not chasing market share per se. We are focusing much more on margin per tonne so I would be a bit cautious on market share data and obviously you need to factor in what we do in a cash trading sense as well although it is hard to get reliable industry data there.

7 (Matthew McNee, Goldman Sachs JBWere) Just on the cash because that is the other part of the equation, has that gone up materially or is that down as well? I might say volumes are up somewhat but assisted in part with commodity prices being down, so working caps not dramatically different. (Andrew Wackett, Macquarie) Hi Phil. Just given all the ups and downs you have talked about here, can you maybe give us some guidance on the overall movement of your debt levels from September to March please? At the full year I gave some rough guidance to the effect that while March was traditionally a peak and well up on September, with commodity prices continuing to fall there was some prospect that we wouldn t see working capital levels substantially above where they were at the full year and I think that is probably about right. What I m saying is they are probably not too far away from where they were at the full year. We are not going to see them going up further dramatically notwithstanding March s peak relative to September in Australia. Does that help? (Matthew McNee, Goldman Sachs JBWere) That s great, thanks. (Stuart Jackson, JPMorgan) I suppose this comes back to the age old question again with regards to your debt levels. With the profit coming down, how are the banks feeling about your current covenants and where you are sitting with regards to that and your current need for capital? We haven t breached any covenants. The next test will be the financials at 31 March. But remember it is a rolling 12 month test in terms of EBITDA cover and so I would not necessarily be expecting there will be a breach. Let s get through to 31 March and see how we are going but there is certainly no expectation that is going to be a problem at this stage. (Stuart Jackson, JPMorgan) Given the second half was so strong last year and that is obviously going to provide some uplift in terms of those covenants for the 12 months to 31 March. But when you roll into the full year numbers you are probably going to cycle tough numbers in the second half. They are probably going to be weaker as well. How are you looking on a full year basis, the year to the end of this year? It is a fair way off to tell Stuart. I mean we certainly expect a stronger second half from first half and in addition to that, as we manage working capital better and as commodity prices continue to stay off their highs, it is quite conceivable that debt levels will be down as well and we can manage it in a way that is still comfortable. (Craig Spangler, Taylor Collison) Just following on from Stuart s question, given you are going to have such a weak first half, are you effectively saying that you need a better second half 09 reflecting significant growth on second half 08?

8 [END OF TRANSCRIPT] I m not going to give any prediction on the second half 09. The environment is just too uncertain and obviously the climate plays a big role. Having said that, there is a fair bit we can control in terms of the cost line and there is traditionally a second half stronger than the first half in any case. So we are going to have to see how that unfolds. We will clearly give you a better steer on that at the half year. (Craig Spangler, Taylor Collison) Just on international trading business, that that s trading ahead of PTP. What is the breakdown in terms of the accumulation type business versus the more sort of speculative trading type business? It is relatively as per previous years with the majority as back-to-back as opposed to speculative. (Craig Spangler, Taylor Collison) Great, thanks. Okay, well look thank you all for joining the call. We do have an AGM this afternoon and there will be a presentation and obviously speeches associated with that which might add a little more colour. But I hope this morning s conversation has given you a reasonable steer about how we are tracking and the expectations for the first half. So thanks for joining.