Nufarm Limited (OTC:NUFMF) Q2 2020 Earnings Conference Call September 22, 2020 8:00 PM ET

Company Representatives

Greg Hunt – Managing Director, Chief Executive Officer

Paul Binfield – Chief Financial Officer

Brent Zacharias – Group Executive Nuseed

Hildo Brilleman – Regional General Manager Europe, Middle East, Africa

Conference Call Participants

Grant Saligari – Credit Suisse

Alex Karpos – Goldman Sachs

Richard Johnson – Jefferies

John Purtell – Macquarie

Evan Karatzas – UBS

Anna Guan – Wilsons

Belinda Moore – Morgans

Jonathan Snape – Bell Potter

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Nufarm Annual Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. Please be advised that today’s conference is being recorded.

I’d now like to hand the conference over to your speaker today to Mr. Greg Hunt. Thank you. Please go ahead.

Greg Hunt

Thank you, Kevin. Good morning everyone. Welcome and thank you for joining us today. This is the second set of results that we’ve delivered since the tragedy and I guess the disruption from COVID began. It’s hard to believe that six months has passed us by and I certainly hope that you’re all healthy and like us, coping with the daily disruption to your lives.

Before we start today’s presentation, I just like to draw your attention to the disclaimer, particularly the section on forward-looking statements.

Today we really want to cover three topics that are fundamental to Nufarm’s value and our path to improve returns. Firstly, Paul Binfield and I will provide an overview of the financial performance for 2020 and the steps that we’ve taken to refocus the portfolio, strengthen the balance sheet and drive value from our operations.

Our Regional General Manager for Europe, Hildo Brilleman is joining us and he’ll take us through the European results of financial year ’20, but importantly the performance improvement program that he is leading for the European region. And Brent Zacharias, who many of you would know if our Group Executive for Nuseed and he’ll provide an update on the transformational growth opportunities within our seed’s portfolio. And we’ll finish up with the outlook and priorities for 2021 before taking any questions that you might have.

Before I turn to the results, I want to start with our safety performance and some comments on the impacts of COVID to Nufarm. Safety is our most important priority and I am pleased to announce that we achieved Nufarm’s best every safety performance in 2020. This hasn’t come by chance or by good luck. It takes the combined effort and the focus of the entire organization to improve safety outcomes. Our challenge now is to lock in the improvements and maintain the vigilance that keeps safety top of mind for every employee and that will continue to be our number one priority.

Our record safety performance was achieved in the context of the global pandemic and in relation to COVID we are very fortunate that the agricultural industry is considered essential by governments in the markets in which we operate.

Crop protection products are an essential input into the food value chain and demand for our products has continued to be driven primarily by seasonal conditions. The impact of COVID-19 for Nufarm has mostly been limited to the turf and ornamental market in North America and the horticulture and ornamental markets in Europe.

Our manufacturing and supply chain teams have done a tremendous job to continue to supply our customers across the globe. All of our manufacturing sites have remained opened and although we have had some interruptions to raw material supply and some logistics delays, there has been no material financial impact from supply chains caused by COVID-19.

The extra costs that we’ve incurred in manufacturing and logistics to maintain supply and ensure the safety of our people have largely been offset by reductions in discretionary spending and the major impact on our financial performance is related to the foreign exchange losses, which Paul will speak to later.

Turning to commercial performance, 2020 certainly wasn’t the year anyone would have planned. Whilst we have been relatively resilient in the face of the pandemic, headwinds from droughts and floods and industry side supply chain issues impacted performance, particularly in the first half.

We reported a loss of $456 million for the year. This includes $389 million of material items post tax, including the impact of the sale of the South American business and the impairment to the European assets that we announced earlier this month.

When we look at the underlying performance of our continuing businesses, EBITDA was down 21% to $236 million and this was primarily driven by a decline in European earnings and reduced earnings in North America in the first half as it recovered from last year’s floods. While it’s a disappointing result, we have seen improved momentum in the second half and I’ll speak more to that shortly.

Improving cash generation is a major focus and we made good progress on this front. Underlying cash from operating activities was up $137 million on the prior year with better control of working capital more than offsetting the decline in earnings.

The sale of our South American business in April of 2020 was a very significant milestone. It delivered upfront value for shareholders and has reshaped our portfolio. Our continuing businesses are now focused in the regions and businesses where we believe that we can drive higher margins and better cash flow.

The divestment also transformed our balance sheet. We’ve reduced net debt by more than $800 million and our leverage has reduced from 3x to 1.9x or 1.5x excluding the AASB 16 adjustment. This provides us with the financial strength to manage the inherent volatility in our industry.

From an operational perspective, our Australian, our North American and our Asian businesses returned to growth in the second half of the year. Our major focus now is driving value from the investments that we’ve made in Europe. We’ve had another difficult year in this region with very poor seasonal conditions and elevated raw material costs impacting margins. However, we believe that Europe has reached an earnings trough and we can deliver a significant turnaround in performance in the coming year.

The improvement program that we had launched in Australia in 2019 has been expanded to Europe and the rest of the company. We are targeting $35 million to $40 million in benefits from this program over the next two years. Just under half of this is expected to come from the challenges to our manufacturing footprint that we already announced. The balance comes from an additional $10 million to $15 million that we are targeting in Europe and a combined $10 million from our corporate and North American operations.

The program kicked off earlier this year and the changes that we’ve made to our functional structures and our discretionary costs have achieved a run rate benefit of approximately $5 million coming into the financial year – ‘21 financial year in Europe and another $5 million in corporate and North America.

We also made excellent progress in our Nuseed business. The first commercial sales of Omega-3 canola oil were made in September this year. This is a very significant milestone and marks a shift into the next phase of commercial development as we ramp-up production and sales. Nuseed also acquired a new technology platform, carinata during the year, and Brent will talk to this later in his presentation.

I mentioned earlier the positive earnings momentum in the second half of the year. You can see this here on slide seven, which shows the improvement by region and it also demonstrates the resilience of the business to COVID-19 over the past six months.

In Australia drought breaking rains on the East Coast in late January and good follow-up rain generated strong demand in the second half and we delivered underlying EBITDA growth of 125% on the prior year. Our business in Asia also recovered from poor seasonal conditions in the first half and also contributed to second half growth.

In North America our return to more normal seasonal conditions increased crop plantings in the second half, generating increased demand and more than offsetting the impact of lower demand in the turf and ornamental segment due to COVID-19 restrictions.

EBITDA for the European business declined significantly in the second half, with very weak demand in the final quarter. We have continued to be impacted by higher raw material costs in this business. However, one pleasing aspect of the second half result was a reduction in the SG&A cost that we can control and Hildo will elaborate on this again in his presentation.

The Seed Technology segment had a mixed second half. Revenues were up with increased new seed sales; however, earnings were down due to a bad debt and increased commercialization costs for omega-3 and carinata and Brent will speak to that in a minute.

Before I hand over to Paul to discuss the financial details, I want to take this opportunity to acknowledge that after 9 years as CFO for Nufarm, Paul has advised us that he is leaving to peruse new opportunities. He’s not escaping just yet, because he’s got another set of accounts to prepare for our next financial year, which ends in about a week’s time and he’ll stay on with us beyond that until the end of the calendar year. However, I’d like to take a moment to pay tribute to Paul’s contribution to Nufarm.

He has been an integral part of our leadership team through a period of significant challenge. He has played a pivotal role in many of the projects and events that have and continue to shape our company. Paul has shouldered a tremendous workload with proficiency, agility and always with a touch of a good handler. He embodies our new found values and has been instrumental in helping to shape our culture. He’s also been a colleague and a friend and he will be missed.

I know you’ll join me in wishing Paul all the very best for his future. Paul.

Paul Binfield

Thank you, Greg. This is a complex set of financial statements due to the divestment of the South American businesses and FY’20 being the first full year of adopting the new lease accounting standard AASB 16.

We focused our content today on the continuing business and where material we will highlight the impact of the new leasing standard. I should also draw your attention too, to the fact that we have made sales of about $85 million at zero margin to Sumitomo and Latin America under the transitional supply agreement and where appropriate we’ve excluded these – excluded the impact of these sales in our commentary and our figures.

With a change in our year ended 30 September we also provided information in the appendices to the presentation respecting prior year figures to reflect the 30 September period.

As Greg outlined, while FY’20 was a disappointing year in terms of our result, we in this financial year is far better shaped than when we started it. The balance sheet is much stronger, thanks for the proceeds from the sale of the South American businesses. Furthermore better cash flow for improvements in working capital management have also strengthened the balance sheet.

Momentum of the business in the second half was good across most regions and has continued since year end. We are already starting to see early benefits from the performance improvement program and we continue to meet new and important milestones in Omega-3.

In constant currency and excluding the zero margin sales to Sumitomo, revenue was down 0.5%, reflecting a weak first half in Australia and North America and also difficult trading conditions in Europe.

Underlying EBITDA was $236 million. The gross profit percentage was down about 130 basis points reflecting margin pressure in North America, but particularly Europe and Hildo will take you to though the drivers of this later in the presentation.

Expenses were adversely impacted by the weak Australian dollar. They were largely well controlled in North America, ANZ in Asia. In Seed Technologies, expenses were higher as we got capability to fully commercialize Omega-3 and we took onboard carinata for the last eight months of the year.

European cost increases include a full year of additional supply chain costs incurred in transitioning the acquired portfolios. The increase in depreciation and amortization were $165 million in the prior year to $201 million in FY ‘20 is largely the impact for the AASB 16 adjustment recognizing additional depreciation, one right-of-use assets of $24 million. The balance relates to amortization on recently launched products.

Financing costs comprising net external financings, net foreign exchange gains and losses and lease amortization increased $32 million. Net external financing costs reduced by $2 million to $65 million. Foreign exchange losses increased $28 million to a loss of $24 million for the year, due primarily to pandemic related exchange rate volatility, particularly in that March, April period. Finance charges on leases increased $6 million due to adoption of AASB16.

The tax expense was adversely impacted by the non-recognition of the tax benefits on trading losses. These tax loses remain available for use in future periods. They are simply not recognized on the balance sheet and the dividend remains suspended.

So turning to specifically to material items. Material items totaled $389 million post tax, which is a non-cash impairment of intangible assets in European business of $180 million after tax, to recognize a moderated outlook of future earnings based largely on an expectation of continuing margin pressure on the base product portfolio.

The profit on the disposed on the South American business, plus the tax expenses and transaction costs resulted in a net after tax loss of $160 million. Partially offsetting this is a recognition of the tax asset in Brazil of $9 million in Jan 2020.

We put the charge of asset rationalization cost relating to denounced closure of manufacturing facilities in Australia and Austria into about $20 million and the balance being restructuring costs relating to the implementation of a comprehensive performance improvement program. Net tax assets of $33 million are being recognized and booked as a material item. Well FY’20 has been a very challenging you for Nufarm, so the important highlights in the year have been improved cash flow generation, which in turn has contributed to a stronger balance sheet.

Nufarm operates in a working capital intense industry and hence active and successful management networking capital is a very important element in being able to deliver, acceptable returns to shareholders. The unprecedented weather events in Australia and the U.S. over the last couple of years have placed greater pressure on our working capital management processes. However, in the second half of FY ‘20 we saw very encouraging signs that the focus on our working capital management process is starting to bear fruit.

Net working capital at 31 July, which is the trough in our cycle was $143 million lower than the prior year and average net working capital of the sales of 46%, trending towards our target range of 35% to 40%. Even hitting the top of that target range resulted in the further release of cash from the balance sheet of $150 million. The improved net working capital management has flowed through to stronger cash flows, underlying cash flows from operations, improvement in the prior year by $137 million.

Capital expenditure has also been well managed in the period and underlying cash flows from net investing activities is down $5 million on the prior year. The major investment in FY ‘20 with the majority of the spend on our new Greenville plant that we commissioned in September 2019.

We expect capital expenditure for FY ‘21 to be approximately $180 million. The major new projects for the coming year includes some modest CapEx at our plant in Wyke in the U.K. to expand and the further Fortress acquisition, an important profitable phenoxy herbicides that are developed and manufactured there. We will also incur further development spend on our omega-3 canola oil as we’ve developed the product for entry into segments outside of agriculture.

So turning to the balance sheet. Our financial position has been significantly strengthened following the divestments of the South American businesses. Net proceeds from the sale were applied to reduce debt. Leverage at year end was 1.9x within the target leverage range of 1.5x to 2x core net debt to EBITDA.

We define core net debt as net debt at the trough of the working capital cycle that typically occurs in July or August and including AASB 16 adjustment for these liabilities as well. This target range enables us to better manage inherent volatility in our industry.

The company has excellent liquidity also with undrawn facilities at year end of $648 million, plus scope to 30 utilized working capital facilities. Cash on the balance sheet totaled $687 million. This places the business in a very robust position going forward.

I’ll hand you back to Greg who will provide you some future color on the performance in the regions.

Greg Hunt

Yeah, thanks Paul. Look, as I said earlier, I was very pleased with the positive momentum that we generated in most regions in the second half of the year as headwinds eased and I think the best example here is Australia where it really was a story of two halves. Calendar year 2019 was the hottest and driest on record in Australia, and sales into the 2020 summer season was very low.

In late January we received drought breaking rains which stimulated very strong demand on the east coast and our manufacturing plants basically shifted gear from being idle to full capacity. This provided strong momentum to second half earnings, which as I said earlier underline EBITDA up 125% on prior year.

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In addition, we estimate that around $10 million of the full year earnings improvement came from a performance improvement program that we started last year. The program has improved our cost base through a mix of SG&A and supply chain improvements and it really does provide us with a more competitive position.

The next phase for the Australian business will be the closure of the insecticide and fungicide manufacturing facility that we have here in Laverton. This will provide us with supply chain benefits of around $5 million per annum from the end of calendar year 2021.

We also achieved a very significant reduction in working capital, as a result of the strong demand and we will be looking to retain these improvements. From a weather perspective, the early indications suggest an improved outlook for the summer season 2021. It is still however early days and we are – but however you know we are at a much better position than we were at this time last year.

A number of product launches planned in financial year ‘21 will further support earnings growth. These launches include a new insecticide, and a new preplanned herbicide that has promising activity to combat growing ryegrass resistance, which is a real issue here in Australia.

Turning to Asia, which has had another very good year despite the impact of the Indonesian drought in the first half, EBITDA is up 13% from the prior year, driven by stronger margins from a changing geographic and product mix and continued cost control. Asia has been a steady contributor to earnings for a long period of time now and from the 1 October we will be combining it with our Australian, New Zealand business to create a new Asia Pacific region. By combining these businesses, we will be able to pursue further efficiencies across our manufacturing and supply chain efforts and create opportunities to leverage our portfolio more effectively.

In North America we had a difficult first half; however, we clawed back some of that gap in the second half with stronger sales into the crop segment, particularly in Canada, more than offsetting the impact of COVID-19 on the turf and ornamental segment.

We have positive underlying momentum in this business. We will have a full year benefit of our Greenville facility in financial year ’21. This was commissioned last September and it provides us with logistics benefits and it allows us to respond more quickly to surge demand.

And this investment builds on the investments that we made in the new insecticide and fungicide facility in Alsip and the significant upgrades at Chicago Heights that we made in recent years. We now have a streamlined modern and efficient manufacturing footprint in North America from which to service our customers.

And again, we have an expanded portfolio for financial year ’21 with a number of product launches in the U.S. and Canada to build on the new gold distribution agreement that also kicks off in financial year ‘21.

Turning to Europe. The last couple of years has presented challenges; however, this is a valuable business with a quality portfolio and we expect to see a strong earnings rebound as headwinds ease and we strengthen our supply chain and reduce our cost base.

I’m going to hand over now to Hildo Brilleman. Hildo joined Nufarm in October of last year and he was appointed to the role of Regional General Manager on 1 January this year. Hildo has more than 20 years of experience in the industry and he is bringing that experience with a fresh set of eyes and new energy to our European business. He will take you through his thoughts on the Nufarm business in Europe, and how we see the earnings rebound unfolding.

Over to you Hildo.

Hildo Brilleman

Thanks Greg and thanks for the introduction, and thanks to those joining in the call today. I would like to start today by sharing some of my first impressions on joining Nufarm and the road map for the European business.

As said, Nufarm has a strong and valuable business in Europe with a well-established customer base. The business has been built around a strong phenoxy, PGR, plant growth regulators and copper fungicide portfolio. This is traditional chemistry, but still in strong demand and Nufarm has a double digit market share in each of these market segments.

The acquisitions in 2018 expanded and diversified our portfolio and the bulk of earnings in the current year were actually generated from these portfolios, and these are good products, strong products that customers want to buy. They are well aligned to the crops Nufarm is targeting in Europe and I mentioned cereals, oilseed rape pastures and also the combination of trees, nuts, vines and vegetables and we called those the TNVV crops.

The registrations are also weighted into the counties where Nufarm has a strong presence; Germany, France, Spain, U.K. and Poland. There has also been significant investment in people, processes and systems with a new pan-European ERP system, and for the first time it connects the entire European business. So we already have a good base and the next steps on the roadmap for Europe is to improve the competitiveness of the supply chain and our cost base, and this is the work that is now underway.

Before we go through the detail of the roadmap, I want to talk through the drivers of the fiscal year ‘20 results, and to provide some for that, I’ve included the map that shows the seasonal conditions for the main growing season in Europe in 2020. And I’m sure that you know this kind of drought map, as it is quite similar to what you have seen in Australia.

However, I have to say that after 20 years in this industry this has been one of the more difficult years I have known. Hot, dry conditions in Northern and Eastern Europe, all the way up to Romania and Ukraine have reduced demands for crop protection and Nufarm’s revenue in 2020, and the sales are down by around 3% in Australian dollar and more in constant currency.

Competitors have also seen this pressure and this has resulted in a very competitive market environment again this year. The main counties impacted from the Nufarm perspective have been the U.K., Germany and France. We held ground quite well in other markets, considering the conditions, including the impact of COVID-19, especially on horticulture and ornamental markets.

Looking at the results on slide 20, you can see the decline in revenues was in the second half. In particular, the fourth quarter was much lower as we scaled back our autumn sales campaign. This was driven by general partner caution from building stocks and also partly due to a decision on our part to hold back sales to optimize margins. This is a shift in our approach from prior years. What we are trying to do is optimize margins and achieve an appropriate level of Nufarm inventory within the channel, so we can continue to stimulate sales closer to the end user demand.

On the next slide, I’ve provided an overview of the various drivers of the result. So starting with the largest movement first, volume and mix. This is largely due to the seasonal conditions we just discussed and the shift in sales for the autumn camping. COVID-19 also had an impact and we would expect most of this demand to come back as we return to more normal conditions. I think it’s important for me to stress here that I’m confident we have not lost market share in our key markets and this is confirmed by second quarter industry black box data.

Looking at the price drive of AUD 40 million, this reflects to some extent the competitive conditions due to the weaker demand. However, there’s also an element that represents pricing pressure from generic products, so we believe a portion of this element is more systemic. It is this pricing pressure in our base portfolio that has – that was the catalyst for us to take an impairment of certain intangible assets, and Paul will comment on that later.

On cost of goods sold, the impact of sustained higher raw material prices was around $12 million and another $5 million for increased conversion costs at our manufacturing facilities, and I’ll speak to those factors later as we do see some easing in the coming 12 months to 18 months.

SG&A costs also increased and this included some one off costs and also a full year of supply cost to transition the acquired portfolio. On the positive side of the ledger, we increased sales of products from our manufacturing plants to other industry participants, and we also expanded sales into non-agricultural markets.

In total, it’s a disappointing result; however, we believe fiscal year ‘20 is the earnings trough. We have a clear plan to address the issues that are within our control and we see some early indications that the headwinds of fiscal year ‘20 may be easing.

So turning to slide 22 for the outlook for fiscal year ‘21 and why we are confident we will see this improvement. I’ll start first with the two columns on the left hand side that are under our control and these relate back to the road map I addressed earlier.

Firstly, building a fit and efficient cost base. European business has undergone a significant transition in the past few years and to my mind that has contributed to an inefficient cost base and one off cost. The acquisitions of the portfolios almost doubled the size of the European business. At the same time as the portfolios were being integrated, a new ERP system was introduced along with a new shared service center and new ways of working. This upheaval is at an end. We now have a clear opportunity to shape the organization to be close to our customers, to be agile and efficient and there is significant scope to reduce our cost base as we go through this process.

The improvement program in Europe kicked off at the start of this calendar year when I started as the Regional General Manager. I have to acknowledge that we were slowed somewhat as the onset of the COVID-19 and the need to redirect resources to address the initial phases of the pandemic, but we have made good progress nonetheless.

The program to-date has focused primarily on our back office and a small part on our supply chain. More than 20 colleagues have left the business so far and we have made other cuts to our discretionary spending to bring the run rate benefits of the program so far to around $5 million.

We have many more opportunities to address and the next phase of the program will expand further into supply chain improvement and logistics optimization. As said, we are targeting a $15 million to $20 million run rate savings by the end of fiscal year 22 and I believe this is a realistic target.

The next plank of the program is about improving the competitiveness of our supply chain and reducing conversion costs. We conducted a review of our manufacturing footprint earlier this year. That analysis has shown that while our MCPA synthesis and herbicide formulation operations remain competitive, gaps have emerged in the competitive position of our 2,4-D synthesis and insecticide and fungicide formulation, and we have already announced that 2,4-D synthesis at Linz will close early in the next calendar year and this will allow us to procure products at a cost that is much more competitive than our own operations. It will allow us to improve our market offer and increase margins on this important molecule.

The estimated annual run rate benefit of this initiative is up to $10 million, and we are still working through options for other aspects of the manufacturing footprint and there may be further opportunities to improve margins coming from this analysis.

The third pillar is raw material costs. It has been our view for some time that raw material costs will decline as additional environmentally compliant capacity is brought online in China. However, this was delayed by the devastating explosion in the Jiangsu province in March last year.

As the Chinese economy has reopened after the COVID-19 lockdown earlier this year, we’re now finally seeing some improved product supply and lower pricing that suggests this capacity is finally reaching the market. And you can see from this price chart here for the active reasons for Tebuconazole and Prochloraz that pricing for these products has improved significantly since March.

It’s very early to say that the headwinds are behind us and of course, we do need to first utilize any higher cost inventory we have on-hand before we would realize any benefit. But this does have the potential to improve margin significantly if it is a shift seen consistently across a broad range of our active ingredients.

The final element of the drivers for fiscal year ‘21 is weather. This one is obviously outside of our control; however, I think the bridge we provided earlier shows the significant impact this could have on our performance. I know my colleague in Australia, Peter O’Keeffe had a very difficult two years and is now starting to see some of the benefits from the swinging conditions, and I can reassure you the team in Europe is looking forward to also enjoying that.

So, at this point I’m going to hand over to Brent Zacharias, who will take you through the seed technology segment, but I’m staying on the call for the Q&A and I will be very pleased to take any of your questions. Thank you. Brent.

Brent Zacharias

Thanks Hildo. Nuseed has achieved a number of important milestones during the course of FY ’20, in particular in relation to our omega-3 canola and carinata platforms. The seed technology segment result includes both the new seed business and the seed treatment business.

Despite some significant headwinds, particularly in relation to drought impacts in Australia, segment revenues increased by 8% to $198.8 million. Gross margin also improved reflecting higher sales of recently launched products in the seeds portfolios.

While revenues and margins were higher, a combination of lower end point royalty payments on 2019 Canola crops in Australia, higher investments in our growth platforms and a one-off bad debt write down contributed to lower EBITDA and EBIT performance. The segment generated an EBITDA of $31.5 million compared to $38.5 million in financial year ‘19.

Turning to the next slide, we are very pleased that Nuseed achieved sales growth in all regions and across all of its core crops. While overall canola contributions in Australia were down, a significant swing to Nuseed hybrids will result in strong royalties the fall due in this new financial year.

In Latin America, the period saw higher sales of sunflower, canola and sorghum with Nuseed now the leading sorghum supplier in Brazil. Following new product launches, Nuseed also grew market share and margins in the North American sorghum market and grew volumes and share in the sunflower segment.

Importantly, first sales of Nuseed’s hybrid canola were secured in the large Canadian market and in the United States. New products were also successfully launched from Nuseed’s strong European sunflower pipeline, helping drive volume and share growth in that region.

Moving to the next slide, I’m excited to share some updates of our Omega 3 program today. Our value beyond yield strategy focuses on building proprietary positions to deliver downstream benefits to customers and consumers. During financial year 2020, we made significant progress on key strategic objectives.

In relation to our omega 3 canola platform, we collaborated with key aquaculture industry partners to complete commercial scale fish feeding trials involving more than 1.5 million salmon. These trials demonstrated key benefits of new seeds Aquaterra omega 3 oil, including improved fish health, resulting in improved survivability and improved sustainability outcomes.

Our initial commercial 2019 crop was successfully harvested and processed. Just prior to year end, Health Canada and the Canadian Food Inspection Agency confirmed regulatory approvals for new seed omega 3 canola in relation to cultivation, use in aquafeed and livestock feed and for human consumption. Canada by the way is the world’s largest producer of canola and a major producer of salmon.

In September of 2020 we finalized the first commercial sales and forward orders of our proprietary omega 3 canola oil Aquaterra. This follows more than a decade of development and significant and marks the beginning of a new phase in the delivery of shareholder value from Nuseed’s value beyond yield growth platform. We are very pleased to have a broad set of leading global aquaculture companies engaged in commercial discussions and recognizing the benefits of Aquaterra in the areas of survivability and sustainability.

Plans to scale production and expand sales of omega 3 canola are now advancing. The 2020 crop has been mostly harvested and is on track to double oil production for 2021 sales. Canadian regulatory approvals received in July 2020 are an important element in supporting our future expansion.

Branded as Nutriterra, omega 3 canola is also being developed for the human nutrition market and completed the patient testing phase of an important human clinical trial during the year. This is the first human clinical trial undertaken to assess the safety and efficacy parameters related to a plant based source of omega 3. Analysis phase of the trial is now underway.

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Turning to carinata, Nuseed secured a second value beyond the old technology platform last November with the acquisition of key assets relating to the carinata crop. Carinata is being developed as a feedstock for renewable fuels and high protein non-GM meal for livestock feed. During financial year ’20, third party certifier confirmed Nuseed’s carinata cropping system and resulting oil as best-in-class for greenhouse gas reduction from an agricultural feedstock crop. This drives significant premiums for the carinata oil.

We executed a multi-year offtake agreement with St. Paul, Europe’s largest oilseed crusher and biodiesel producer and completed the first commercial sale and shipment of our crop from Argentina to Europe. Nuseed’s proprietary carinata platform includes a closed loop contracting system with growers, with the commercial certainty attached to our St. Paul agreement, along with confirmed sales into downstream fuel brands we have substantially expanding grower contracting for the 2020 crop.

Before handing back to Greg, I’ll just make a few other comments. Looking ahead, I am confident that we have crossed an important threshold that positions Nuseed for strong earnings and growth over coming years. In this current financial year, an improvement in seasonal conditions in Australia augurs well for improved canola harvest and plantings. We will also book endpoint royalties on strong financial year ‘20 sales of hybrid canola.

With additional new products scheduled to launch across all regions, we expect to grow share in sunflower and sorghum in North and South America and in Europe. Financial year ‘21 is also expected to see a step up in crop production, commercial activity and in related sales associated with both, our omega 3 canola and our carinata value beyond yield platforms.

Having secured initial commercial arrangements in relation to both, Aquaterra and carinata, FY ‘21 is expected to see positive EBITDA contributions from both of these programs. Beyond FY ’21, a continued ramp-up and active carinata oil production will drive cost efficiencies and margin improvement that’s associated with both greater scale and better performing seed grades.

Together with our exciting Nutriterra Omega3 opportunity in human nutrition and continued growth and seeds contribution, I believe we will see a progressive step change in value revenues and earnings from the Nuseed platform over the next four years.

I’ll now hand it back to Greg.

Greg Hunt

Thank you. Thanks Brent. So look, to summarize although 2020 was a very difficult year, we have made good progress on a range of initiatives that have strengthened the business and we believe that we will improve returns. Our balance sheet is much stronger and our portfolio has been refocused on regions with higher margins and stronger cash flows.

After safety, our number one priority in 2021 is improving returns to our European business. The turnaround in this region and the benefits from the broader performance improvement program can deliver a very meaningful lift to earnings in 2021. Our cash generation is improving and as Paul outlined, there is opportunity to further improve.

The Nuseed business continues to hit major milestones and as Brent just took us through the first commercial sale of Omega-3, it really does mark a shift into the next phase of commercialization and we genuinely believe that this is a very valuable business and we’re excited about what it can deliver in the coming years. We ended the 2020 year with positive momentum and this is continued into August and September.

With that, I’ll hand back to the operator to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mr. Grant Saligari from Credit Suisse. Please ask your question Grant.

Grant Saligari

Good morning, thank you. A couple of questions on Europe if I could please. One, I guess I’d just be interested in your view on sustaining competitiveness in your phenoxy manufacturer over the longer term, and I guess maybe related to that, I’m just interested in the way you think or how well you think your product portfolio is positioned as the European grain deal continues to develop, because as you’ve acknowledged yourself, you’ve got a very traditional chemistry skew in Europe. So interested in your views on both of those please?

Greg Hunt

Yeah, thanks Grant. I might take the first one and then Hildo can talk to the product portfolio and the potential impacts on farm default.

So look, in relation to phenoxies, so we’re really talking about our MCPA and specialty phenoxies business in Wyke. You know we are a global leader and you know the production from that operation is globally competitive. We have planned to invest modest capital to de-bottleneck the production and reducing our operating costs in FY ‘21, but we believe that that is a sustainable operation.

Hildo, would you like to just make some comments in relation to the portfolio?

Hildo Brilleman

Yeah, so looking at the phenoxies MCPA and derived products. Yes, this is a chemistry that has been around for quite some time. With regard to the regulatory status of these products, they are actually pretty secure and what is also good to mention is that with other products leaving the market, these products take a more prominent position in the weed control program of our farmers, especially when we look at weed resistance. So the reason why we invest is to maintain that competitiveness, but also to continue to grow that business.

Grant Saligari

Which other products are leaving the market Hildo?

Hildo Brilleman

Well, on the herbicide of course you’ll hear about the pressure on glyphosate, but yeah, there is a wide range of products that are going through NX1 renewal, and this is independent of the European deal. What deserves to be mentioned here is that this will create new opportunities as well as products leave the market, but of course there are some impacts on our business as well, but that has been planned for and that has been taken into account moving forward.

Grant Saligari

So I guess what I’m just trying to understand is whether you think you need you know further product development or to change the mix of your product range as Green Deal continues to develop, because it seems to be only heading in one direction?

A – Greg Hunt

Yeah, it’s an interesting question, but if I look at one of the key development pipeline products that we have, it’s actually combining Century and Surf chemistry with our phenoxy chemistry, leading to a new differentiated mixture and this is exactly the type of innovation that we can do now with this expanded product range and our regulatory assessment is that that product will be registered and actually can take more space in the market. So that relates to the phenoxy range.

Grant Saligari

Okay. If I could just sneak in one quick extra question, just on the expense side, just noticed the R&D expense was probably the only expense line to decrease. So I’m just wondering whether there’s any timing, the impact on R&D programs available or what the reason for that decline might be please.

Greg Hunt

Yeah Grant, the R&D expense tends to be very lumpy in nature. Certainly in terms of our R&D activity, it’s fair to say that we’re probably more focused in that space and you should probably expect to see a step up in R&D expenditure going through to ’21. So once we have gone through you know difficult times, you know cash has been tight and very well controlled over the last couple of years. We absolutely have not wound back our R&D program, and what you see there simply is a phasing issue. So expect to see a step-up in terms of next year.

Grant Saligari

And will you be able to mitigate that with other cost offset in addition to the 35 to 40 or should we consider that as going to be some of the partial offset to that 35 to 40 as it comes through?

A – Greg Hunt

I think you should see that as being a bit of a partial offset, because as I was saying, we are focused on making sure that we had a nice pipeline of products coming through and continue to invest in that space. So there will be a step up from what you see in terms of the current year expense and that will be a partial offset to the cost improvement program that we outlined.

Grant Saligari

Okay. Alright, that’s helpful. Alright, thank you very much.

A – Greg Hunt

Thanks Grant.

Operator

Our next telephone question is from Alex Karpos from Goldman Sachs. Please ask your question now.

Alex Karpos

Good morning team, thanks for the time. First, a quick one on my end, can you just touch on channel inventories maybe at the group level and then any region that stand out for being you know particularly full or particularly a good set up in to FY ’21?

Greg Hunt

Yeah Alex, that’s maybe the best way to handle it is if we just quickly go around the region. In North America, as we reported at the half, there were higher channel inventories because of the carryover from the previous period. We’re now seeing channel inventories in North America, certainly in relation to herbicides at more typical levels. Our intelligence is there is probably still some insecticides and fungicides at higher levels, but certainly from herbicides a reduction and we would be well positioned for any increase in demand in herbicides.

Here in Australia, again you know we’ve had a very strong sales program over the last six months and that’s continued into August or September. So certainly when you consider the last two years, we’re in a lot better position than we have been.

And I think in Europe, and Hildo might want to comment more. I think he did touch on the fact that you know we do have some inventory in Europe because of the very low demand in the last quarter. So we’re going to go into this period with high inventories than we would like, but we are starting to see increased demand in Europe you know over the last couple of months. So apart from that, I think from an inventory point of view we are positioned very well.

Do you want to make any comments Hildo in relation to Europe?

Hildo Brilleman

No, I agree with what you say and yes, the channel inventories for serial fungicides and PTR’s is higher than normal, but we have good visibility on that and we have taken that into account and are planning forward.

Alex Karpos

Great! Thanks for that and onto I guess the more COVID impacted segments in terms of the U.S. turf and ornamental and you know in horticulture, have you seen those start to rebound in recent months or are they still pretty depressed?

Greg Hunt

So, I think certainly strong growth here in Australia, good momentum in Europe. In North America it’s a little more subdued and I think in the crop segments you know we are starting to see some activity, but in the T&O segment, I would be cautiously optimistic. You know we’re still seeing demand there a little – certainly flatter than you would normally see at this time of the year.

Alex Karpos

Got it, and one more if I may. [Cross Talk] Sorry, go ahead.

Hildo Brilleman

No, just to add on, ornamentals in Europe, it is bouncing back to 70% in the thick of the pandemic, but we see growers going back, planting new crops and the bounce back is fairly rapidly.

Alex Karpos

Thanks for that, and one more quick one if I may. I appreciate the incremental color you’ve given on the European earnings bridge, very helpful. But if I look into next year, you call it a $12 million raw material cost headwind in FY ’20. If those raw material costs kind of stayed at spot, as in you outlined with the chart on slide 22 I believe, would that $12 million completely reversed? Would it partially reverse? Like how do we think about the current pricing backdrop in I guess more number terms?

Greg Hunt

You want to have a crack at that Hildo?

Hildo Brilleman

Yeah, so a number of factors at play here. Of course, we have some inventory that we have to work through. We see considerable AI decreases, AI price decreases moving forward. So we see that benefit coming through in the second half of the next fiscal year. So I would say that with inventories that we have on-hand, not all of those headwinds will be turned around, but will make good progress on that in the second half of fiscal year ’21, and together with also our cost containment and reduction program on conversion costs we’ll see benefits of an overall cost of goods sold reduction in the second half of next year.

Alex Karpos

Great! Thanks, that’s it from me.

Operator

The next telephone question is from Richard Johnson from Jefferies. Please ask your question Richard.

Richard Johnson

Thank you very much, great. Can I just start with the manufacturing closures and I was wondering if you could just run through the thinking and the strategy behind that again, and I’m thinking about that particularly in the light of the time or the long dated nature of the program, in the context of your comments about momentum in the business and demand seemingly improving in a lot of the key areas, and you know presumably that’s not making any difference to your decision, one can see that, but I just don’t really understand what the thinking is.

A – Greg Hunt

So in terms of the long dated, it really, it centers around the registrations. When you close factories, you need to know that the alternative source that you have, that you have a registration. As an example, with the operation in Linz, we supply products from there into Brazil, and as part of the agreement that we have with Sumitomo, we will continue to supply products from that factory until the registrations for the alternative source are gained, and we would expect that to happen within the transition period.

And here is Australia with the insecticides and fungicides operations again, you know we will look to source some of that from China, some of that from the U.S. and some of that production from Malaysia, which is part of the reason that we’re looking to create the Asia-PAC region, so that all takes time.

Richard Johnson

Got it, thank you. And then just returning to the previous question on price and raw materials in Europe, I mean is there a risk that as raw materials drop away given the competitive backdrop that you’re seeing, and I presume that’s not going to change a great deal, that actually that accelerates price declines and therefore removes any margin improvement you might otherwise get.

A – Greg Hunt

Look, I think it’s fair to say that it may be difficult to capture all of that margin, but frankly prices have held up reasonably well. I mean if we look at the Century and Surf portfolio, you know we’ve probably had sales this year of somewhere between $220 million to $230 million. So you know we’re not at the levels that we hoped that we would be, but as those prices, raw material prices come down, you know it will probably – because they come down for everybody, they are not just coming down for Nufarm.

I think that – we will capture as much of that benefit as we possibly can. It’s difficult to say and probably unrealistic that we would capture 100% of it, but I would be disappointed if we couldn’t capture 60% or 70% of that margin.

Richard Johnson

Grant, thanks, your answer is really helpful; and then just a couple of quick ones, one of Brent. I was wondering if he could just update us on where the fish oil price is and what his expectations are for that going forward.

Brent Zacharias

Thanks Richard. Fish oil prices have actually held really quite constant. I think coming into the COVID pandemic, there was you know initially some question as to whether Peru is going to capture their whole quota and we saw a little bit of movement in fish oil prices at that time, but they did go and secure, I think it was 95% of a very large quota this year. So it’s been interesting and that you know despite that, there’s actually quite a significant supply of fish oil in the market versus what people originally thought.

The market prices have been holding quite steadily, you know in that sort of $1,900, $2,000 a ton range for the Premium catch. So we’ve seen some interesting volatility for fish oil prices over the last three years, but I would say that, you know it’s showing that even with the COVID-19 impact that fish oil prices are staying relatively high and quite constant.

Richard Johnson

Great! Thank you. And I don’t think I can let Paul get away with not answering questions, so just a couple of easy ones presumably. I think I’m right in saying you took an onerous contract below the line. You might have talked about this before and if you have, I apologies, but I was wondering if you could give any details on that.

Paul Binfield

Yes, sure. The onerous contract division relates to the supply of 2,4-D out of that phenoxy to Sumitomo LatAm off the back of the transition supply agreement. It was tied up in that particular transaction. So essentially what we have seen is the China price or the price of 2,4-D out of China has basically fallen below that cost of production at Linz. As Greg mentioned, a number of those products have registrations tied to Nufarm related manufacturing sites. There are no alternatives, and therefore we basically now have an onerous contract in terms that we’ll be supplying Sumitomo below our cost of goods.

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Richard Johnson

Okay, so that’s just zero margin going forward then?

Paul Binfield

Well, essentially its negative margin, but obviously the release of the provision or zero out any loss.

Richard Johnson

Got it. And can you remind me what the royalty income that you used to book in Europe to Latin America was. I know it’s not a huge number, but just out of interest.

Paul Binfield

It’s around that $4 million to $5 million mark, that sort of level. Now obviously again that has disappeared, and that is I guess part of the, I guess stranded cost, one of a better term that we need to play out of the business post LatAm.

Richard Johnson

Got it, thanks. And you know very good luck and thanks very much for all your help over the years.

Paul Binfield

Thank you, Richard. Thank you for your support.

Operator

Our next telephone question is from John Purtell from Macquarie.

John Purtell

Hi, good morning everyone. And Paul, I wish you all the best as well going forward.

Paul Binfield

Thank you, John.

John Purtell

Paul, just to follow-on. I mean on the interest guidance that you’ve given for the year, just in terms of what are the major drivers within that, I think it’s fair to say it’s a bit higher than that was expected given the de-gearing post Latin American sale?

Paul Binfield

Yeah, sure John. So a chunk of that interest is coming off the high-yield bonds, which obviously is denominated, so if the interest – if exchange rates remain at the current level, then we’ll see some reduction in that going forward. I think the other real plus too that we’ve seen and again, the figures that we’ve given you basically is pretty much pulling up our budget.

So the other real benefit that we’ve seen from budgeting time is average net working capital has come in substantially better in the fourth quarter. Again, that’s actually a key driver in terms of net debt. So again, the chance that we could possibly beat that interest target we put out there, along those lines as well.

John Purtell

But in terms of all the aspects as to why the number is not lower, I think there was obviously – there is much lower debt. So I would have thought that would have had a bigger flow through to the interest line.

Paul Binfield

Yes, there is lower debt. I guess, what we were seeing during the year John was working capital was sort of staying, you know so it’s definitely high in certain regions. We – obviously, that was feeding straight through to net debt and what we have seen in the last quarter is a substantial improvement in that and therefore the net debt coming down quite materially. So what I am saying is that if we can actually continue that positive trend, my expectation would be to see the actual interest that we can deliver in ‘21 is below that target that we put out there.

John Purtell

Okay, thank you. And just a broader question for Greg and Hildo, again sort of focused on Europe. I mean we’ve spoken a fair bit on Phenoxies, but just in terms of the outlook for fungicide and insecticide, how you see that? And what are the competitive pressures that are out there? I mean, are they much more manifest for phenoxies and less so for fungicide and insecticide?

Greg Hunt

I think John, there certainly continues to be pricing pressure in the commodity products, and the acquired portfolio is more protected from that pressure and it does provide us, as Hildo was saying before to improve the mix and to improve margin. Hildo, do you want to add anything more to that?

Hildo Brilleman

Yes, it’s – when you have single AI products, the competitive pressure also from generic entries, where we have to differentiate the mix shifts, that’s where you can retain more of the value and the other thing I wanted to mention is with asset benefit coming from the Century and Surf portfolio, we have real gem in our hands, because there are lot of competitive exits and asset benefits has been able to fill part of that gap and on the back of label and geographical expansion for that product where we continue to grow the margin from that insecticide.

John Purtell

Thank you, and just the last one continuing on. I mean, can you talk sort of broadly about any sort of new material product registrations coming through? And because in the past, we’ve spoken a lot about sort of pipeline. And then presumably, they’re going to be more focused on that fungicide and insecticide?

Greg Hunt

Sorry.

John Purtell

Yes, it was a just around – just around, if you can provide some sort of color around the degree or extent your product registrations coming through? Are they sort of more or less than normal coming through the pipe?

Greg Hunt

Hildo?

Hildo Brilleman

Yeah, no, as I said, on the Century and Surf portfolio where we can and have a good opportunity, this geographical and label extension also bringing on more crops is a key plan to our product development strategy and this is coming through the coming fiscal year and the years to come.

What I would also like to emphasize is that with the Surf acquisition, we got a very good range of sulfonylurea herbicide chemistry and we have launched and are in the process of launching some differentiated mixtures there and we are seeing increased uptick and momentum behind these new product introductions. So it’s a good example that we’re starting to unleash the potential of the Century and Surf portfolio more and more now that we have integrated these portfolios.

Greg Hunt

John if I can just probably just add another comment to that. I mean while we have some exit from our portfolio, you know there’s also upsides for us from the removal of competitive products for the market. You know as an example, chlorothalonil and epoxiconazole won’t be available in the market next year and these products or products containing those compounds in the market value is about EUR 400 million. So we would expect tebuconazole and prochloraz products to be a strong beneficiary of these exits and there regularly are viable substitutes for farmers at equivalent price points.

So you know we still think that acquisition, given what is happening in the market, it’s disappointing to now that as we said many times before, you know these are quality products, they are recognized brands. They have a place to play in the market and as we see some other products fall out, the opportunity for these products is just so much greater.

John Purtell

Many thanks.

Operator

The next telephone question is from Evan Karatzas from UBS. Please ask your question Evan.

Evan Karatzas

Good morning, thanks for taking my questions. I appreciate all the detail around that European recovery. It’s actually pretty helpful. Can I just move to North America, can you just talk to what the T&O EBITDA impact was there, I guess from COVID and all that? Just trying to get a sense of I guess what the recovery could be going forward?

Greg Hunt

Look, I think probably about $10 million, $4 million or $5 million in EBITDA.

Evan Karatzas

Okay, cool, thanks. And then just, sorry just last one on North America. That new distribution agreement that you’ve won or received. Can you give any more color on that, and even on a few of them over the last couple of years, if you could add just some more color it would be great.

Greg Hunt

In terms of sales probably, $30 million odd. So in terms of revenue it’s about $30 million.

Evan Karatzas

Yeah, cool. Alright, and then just a final one. Just going onto Omega-3 [inaudible]. Can you just give me a bit more color and detail around the regions that you’ve won sales in or how many customers are signed up or any sort of areas that you’re sort of focusing on now, its Chile or Canada or Norway?

Greg Hunt

Yeah, sure I think so. You know I think we’ve been signaling for a lot that our primary focuses. Their initial launch has been in Chile and that’s where we did – in those locations we did a lot of our work. So I can confirm that our very first sales are to a global leading player that happens to have locations in Chile.

But I would also characterize the data as much broader than that. We are in very advanced discussion with multiple players in the industry and getting a lot of support. So, we are being a little bit careful in how much detail we provide around that at this time, because it’s still a fairly sensitive time for us with a lot of discussions going on.

But yeah to your question, Chile is a really critical first market for us as we look out across other geographies, you know obviously locations like North America, Canada and Europe, Norway, U.K, overtime are certain targets for us as we look at the advantages that we’ve now been able to demonstrate, particularly in salmon production.

Evan Karatzas

Yeah awesome! Alright, thank you guys. I appreciate it.

Operator

And the final question in queue today is from Anna Guan from Wilsons. Please ask your question Anna.

Anna Guan

Thanks guys for taking my questions. Most of my questions have been answered previously, but just one final one on the cash flow. Paul, can you talk us through how the normalization worked, particularly around the sale of LatAm, that’s $417 million?

Paul Binfield

Yes. So essentially, it sounds like you found that note sets and then will sort of helps take you from the underlying operating cash flow through to the reported. You got to remember that the – we sold the LatAm business at the peak of the working capital cycle. So that’s a significant $400 million cash outflow that you’re seeing potentially is the sale of the LatAm net working capital as of 31 March.

If you look down at sort of a couple of lines to the net investing bit, you will see that the cash that we received from Sumitomo wasn’t the 188 purchase price. It was something like $100 million higher than that, because that’s potentially the working capital adjustment that we got Sumitomo to make, reflect the impact of working capital at a higher level. Does that help you?

Anna Guan

Yeah, that helps. So I’m looking at Note 12 in the account, so we can see the FY’20 working capital there. What was sort of the drag versus the PCP?

Greg Hunt

In terms of net working capital. So, where are you talking specifically Anna?

Anna Guan

So I’m looking at page, Note 12 on page 74 on the accounts.

Greg Hunt

Yeah, so essentially and in particular what’s your issue? So we do sell. Obviously, the assets that have been sold and you’ll see there the assets, working capital at that particular point in the cycle of the business is pretty much at its high point. I’m not sure [Cross Talk] happy to pick it up off-line if you want and text you the detail.

Anna Guan

No, no, I see what you mean now. Thanks a lot. Thanks.

Greg Hunt

You’re okay.

Anna Guan

Yes.

Greg Hunt

Thank you.

Operator

And that’s all for questions for today. I’d like to hand the call back to the speakers for closing remarks. Please continue.

Greg Hunt

Okay…

Unidentified Company Representative

Actually, I think we have got a couple of more questions there Kevin. Could we just take one or two more?

Operator

Yeah sure. Our next telephone question is from Belinda Moore from Morgans. Please go ahead.

Belinda Moore

Good morning, everyone. Paul, can I just double check page six of your account, where you’ve given that guidance for the 30 September, the new financial year. Can I check, is that including the two month stub period, so its effectively 14-months’ worth or is it 12 months? The way you talk about that – just 12?

Paul Binfield

Yeah, its 12 months commencing on October.

Belinda Moore

Okay. Also can I just check, what does the Greenville facility in ‘21 add sort of for the annualized EBITDA impact please.

Paul Binfield

The actual D&A, the depreciation impact?

Belinda Moore

No, I’m sorry, what earnings are you targeting for that facility? What’s the outlook in ’21?

Paul Binfield

Yeah, it’s hard to sort of pin it down. In a sense, the benefits of Greenville really come in reduced costs. So in terms of the business case that we put out to support that investment, the cost improvements are sort of in the region of $3 million to $5 million. Now we’ve clearly got some of that benefit in the current year, because the plant was commissioned in October and started hitting sort of more commercial volumes in the second half. So certainly a portion of that will come through in the second half. There will be a further income to come through in FY’21.

Belinda Moore

Sure, and then post the sale of the South American operations, you said you’re always going to target reducing corporate costs. They were an outflow today of just under $57 million. How do we think about that going forward?

Greg Hunt

I think again, I think on one of the slides too, the expectation of the benefit is coming through from the cost-out program that we’ve got underway and corporate as well and truly in the gun there. So essentially you know you can expect to be see corporate costs coming off a further $5 million.

Belinda Moore

In ’21.

Greg Hunt

Right.

Belinda Moore

Okay. And then just lastly, is it fair to say that you can sort of get that 40% working capital target in ’21?

Greg Hunt

Look, I think hitting 40% in ’21 is going to tough. I expect to see us below the county level of 46%, but I do think hitting 40% is absolute achievement in ’22.

Belinda Moore

Okay. Thank you for your time.

Greg Hunt

Thanks Belinda. Thank you.

Operator

And the next telephone question is from Jonathan Snape from Bell Potter. Please ask your question Jonathan.

Jonathan Snape

Yeah, thanks. So just some questions around that Page 6 guidance numbers again you put out there and I appreciate you already commented on the interest level. But the step-up in depreciation and amortization is about $20 million relative to what you just put out. Can you tell me what’s driving that?

Greg Hunt

Yeah, I think there’ll be an element of additional depreciation coming through from the full year of Greenville. You are also in a position to whereby the Omega-3 commercialization obviously is well under way and therefore we’ll start the amortization of that amount.

We’ve got a full 12 months of carinata and of course again carinata commercialization commencing in the current year. And again, launch of some new products coming through the pipeline and places that we talked about the gold product in North America and a number of new products coming through in the ANZ business as well. So there is actually a lot of activity in terms of commercialization of new portfolio coming through Jonathan, and that’s what the catalyst is to drive higher D&A.

Jonathan Snape

Okay. So if I look and you’ve got $35 million [ph] of interest, $220 million of D&A and then FX; I think in the past you kind of said it’s like $1 million a month just to keep that stuff going, so you know call it $10 million. So you are going to have somewhere around that $310 million of costs below D&A before we get to tax.

I’m just trying to do the bridge here, because if I have a look at I guess what you just reported in EBITDA this year, look at that chart you did for Europe and you know you probably had, let’s call it $25 million bucks of seasonal stull you should get back just if its normal and you open your door.

You know if I look at the summer crop vis-a-vis what you would have done two or three years ago, you should have 20 there. I think you called out a couple of things in the U.S., you know T&O I think you mentioned earlier about $5 million, you got about – I don’t know, about a third of those savings probably come through. I guess what I’m trying to figure is, do you guys actually expect to report a net profit after tax in 2021?

Greg Hunt

We do.

Jonathan Snape

You do? Okay, anything material, because it’s waterfall, it’s kind of hard to get there.

Greg Hunt

I don’t think. In the current environment Jonathan you’d be pretty, you wouldn’t expect us to be giving guidance out there and you know the rules around it are pretty tough at the moment, so I can’t really answer that.

Jonathan Snape

Okay, thank you.

Greg Hunt

Thanks Jonathan.

Operator

Ladies and gentlemen, there is no further questions at this time. That does conclude the meeting for today. Thank you for all participating. You may all disconnect. Have a great day!

Greg Hunt

Thank you.



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