GrainCorp Limited (OTCPK:GRCLF) Q4 2022 Earnings Conference Call November 15, 2022 6:00 PM ET
Company Participants
Robert Spurway – Managing Director and CEO
Ian Morrison – Chief Financial Officer
Conference Call Participants
Richard Barwick – CLSA
David Pobucky – Macquarie
Owen Birrell – RBC
Apoorv Sehgal – UBS
Grant Saligari – Credit Suisse
John Campbell – Jefferies
Liz Wells – Grain Central
Operator
Thank you for standing by. And welcome to the GrainCorp Limited Fiscal Year 2022 Results Briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Mr. Robert Spurway, Managing Director and CEO. Please go ahead.
Robert Spurway
Good morning, everyone. As said, I am Robert Spurway, Managing Director and CEO of GrainCorp; and together with Ian Morrison, our Chief Financial Officer, we look forward to taking you through the FY 2022 results, some commentary on our strategy and our outlook.
Before we start, I do just want to acknowledge the traditional custodians of the land on which we meet. For those of us here in Sydney, that’s the Gadigal people of the Eora nation. We pay our respects to their elders past, present and emerging.
I also will follow through on the pack for those that are following on screen and refer to the page numbers. Whilst we will start on page six, I just want to highlight the fact that at the start of the pack, we have got some background slides on about GrainCorp. That’s particularly there for the benefit of those of you perhaps joining for the first time and all of those slides have been shared in previous investor updates.
My reflection on those slides would be, it really highlights the strength of this business, the quality and integrated nature of our infrastructure assets, our Processing division and the way our people work to produce such strong results as we have seen in financial year 2022.
Just turning over to page seven, it is a record result for GrainCorp, with outstanding performance and A$703 million in EBITDA. We benefited from a second consecutive bumper crop on the East Coast of Australia.
We have delivered strong supply chain performance and demonstrated resilience in a year of many challenges for others. In short, we have made the most of the opportunities that have been there and the strong demand for Australian grain around the world.
Underpinning the strength of the result is our return on invested capital at a very strong 27.9%. We have seen strong payback on the additional capacity investments we have made in the East Coast of Australia, both recently and historically. We have seen record oilseed and food volumes, and we are seeing growth in our Agri-Energy area, particularly the used cooking oil part of the business.
We are driving our assets harder and doing what we said we would and that is delivering significant value for shareholders. Dividends of A$121 million in total in the 2022 year and that includes a final dividend declared today in total of A$0.30 per share. It’s an addition to the A$50 million share buyback that we completed in July and all the same leaves us with a very strong balance sheet, with core cash of A$177 million. Again, we are doing what we said we would. We are positioned strongly to invest in growth and continue to deliver returns to shareholders.
Just on page eight, it’s an opportunity to recap on the numbers, and I think this slide speaks for itself. A$703 million in earnings before interest, tax, depreciation and amortization, up from A$331 million in 2021; net profit after tax A$380 million, up from A$139 million, return on invested capital of 27.9%, up from 11.1%.
In terms of the areas that our teams have contributed to across the business, total grain handled, a very strong 41.1 million tons, keeping our supply chain moving throughout the year. We have lifted our oilseed crush volumes to 471,000 tons, up from 459,000 tons in the prior year, and as I said earlier, our core cash at balance date is A$177 million, up from a core debt of A$1 million at the close of the previous year. The business is performing incredibly well.
Today, we also launched our sustainability report for financial year 2022, that builds on our sustainability commitment and we are proud of the progress we are making and the commitments we have made into the future.
Just on some of the highlights in that report. We have mapped our Scope 3 emissions and we have progressed mapping the roadmap to adopt the TCFD recommendations. That allows us to develop further emission reductions plans across Scope 1, 2 and 3 emissions, as we look to rapidly decarbonize by 2030.
Importantly, the social aspects and our people are also an area we are performing well in. We have made progress on inclusion in our diversity action plan, and importantly, those people that contribute to the GrainCorp results are feeling satisfied and engaged with scores of satisfaction up to 87%. That’s important, not just in this result, but the confidence we have into the future with those people supporting us.
In terms of our integrity, we have underpinned the progress we are making and the commitments we have documented by establishing a governance structure that supports that. We have a new Board Sustainability Committee and we have appointed a new Head of Sustainability, supporting a wide group of people in GrainCorp that contribute to this area.
Just looking at a bit more detail at an important social aspect, our safety performance on page 10, we are pleased to see the improvements in reportable injury frequency rate, particularly through the second half of 2022, as we were able to rollout behavioral safety programs and spend more time with our people post-pandemic.
Clearly across the Board, we have still got some distance to go to achieve our commitment to zero harm and there are many initiatives in the business every day aiming for that goal and improving our performance.
Just on page 11, many of you will have seen this slide before, our strategic priorities to drive higher return on invested capital is something where we have seen great progress this last year. That strategy is deliberately split into two clear areas, what we call strengthening the core, lifting returns, driving existing assets harder and leveraging our capabilities. That sits alongside our focus on some very targeted growth opportunities and I will update you on those over the next couple of slides.
On page 12, I think, it’s important to just reflect on the global trends and the environment in which we operate. To call out four of those, population growth and changing demographics, decarbonization, disrupted global supply chains and technology and Digital acceleration. In each one of those areas, GrainCorp is thoughtfully considered the areas where we have a right to win and our response on how we will access those opportunities.
Our multi-origin strategy, our leading position in East Coast of Australia and indeed the proximity of our markets to the — proximity of our production areas to the major markets around the world.
On decarbonization, I have touched on the commitments we have made in our sustainability report and the progress we are making there. Importantly, we continue to partner with others, not just to improve our own performance, but to make a meaningful impact on the agriculture sector in general.
Whilst many have faced the impact of disrupted global supply chains around the world, GrainCorp has demonstrated incredible resilience. Our end-to-end supply chain has operated well, meaning that we have met our customer’s expectations through the year and made the most of the demand opportunities that exist.
We are pleased with the platforms we have in the Digital space. We are continuing to invest in areas like advanced and data analytics that will drive results and improvement into the future. We have also got our GrainCorp Ventures, which allows us in a very targeted way to partner and invest in opportunities into the future. We are strongly positioned as a Food and Agricultural business.
Over to page 13. Just to give you the context of this slide, for those of you that followed our investor presentation back in 2021, about 18 months ago, we committed to a range of activities that would lift our earnings by A$40 million through to 2023, 2024. As we touched on part way through this year, we are well on track to deliver that. In fact, we would say the examples here demonstrate it’s been fully delivered.
I am not going to go through all the detail on this slide, but this spells out some of the examples of the sorts of initiatives we spoke about when we launched this program. Our investment in East Coast capacity to leverage the opportunity of bumper crops has certainly returned well.
We have upgraded our mobile fleet to make sure that we are servicing the needs of our growers and improving the efficiency in the way we operate. We are continuing to diversify our assets and in particular, our port assets with the new sand contract at Queensland amongst other initiatives that see us handle a range of bulk materials through our ports business.
As I touched on earlier, we are controlling the areas we can control, lifting our performance in crush volumes and driving our assets harder, with increases in food volumes. We have completed the full end-to-end supply chain in our Canadian business and we are looking forward to continued improvement in our International business and the delivery from that area of the business.
We are building capabilities. I touched on it in the strategic area around advanced analytics, improving the planning outcomes across our large and integrated supply chain. And our customer experience focus will underpin the reliability of those initiatives into the future, ensuring that we are using insights and data to respond and get ahead of the trends that our customers and growers expect from us. In a nutshell, we are doing what we said we would and delivering strongly.
Just to expand on page 14, on the pipeline of future growth initiatives that we are exploring. We have touched on these over a number of previous investor presentations, particularly the themes around animal nutrition, alternative protein, Agri-Energy, Digital and AgTech and Grower Services. I think most of you are aware of our investment in the FutureFeed business designed to commercialize asparagopsis and reduce methane emissions from the beef and cattle industries.
We have continued to collaborate with CSIRO, v2food and others from our fats business to ensure that we are providing solutions to those participating in this exciting new market. We are increasingly pleased with our performance in the Agri-Energy area and indeed the opportunity that presents for growth.
We continue to explore areas to take advantage of those growth opportunities and I will touch on that in a bit more detail on the next slide. We have got partnerships that support decarbonization of agriculture and growing the connection that we have with our farmer growers.
Just moving to page 15. The Agri-Energy area is being — is growing strongly and we are seeing really strong interest in renewable fuel feedstocks and the capability that GrainCorp has in that part of the market.
On the right hand side of the page, we are already a leading supplier in used cooking oil across Australia. Our oil recycle business has more than a 50-year history and is up cycling in addition, sorry, in excess of 22 million litres of used cooking oil per annum. We are seeing great returns from that business.
We are Australasia’s largest crusher of canola seed and this year have achieved over 475,000 tons of capacity through our plants and indeed we collect and consolidate Tallow for customers around the world.
On the left hand side of the page, we are looking at opportunities to transform and grow that part of our business. We see strong ongoing demand as demonstrated in the table at the bottom left of the page and we continue to explore growth opportunities in terms of how we meet that demand, grow our feedstock supply and increase our capacity.
At this point, I am going to hand across to Ian Morrison, our CFO. Ian will talk through the financial performance in a bit more detail and the strong performance we have seen across all segments of the business. Ian?
Ian Morrison
Thanks, Robert, and good morning, everyone. I will now move on to slide 17 to summarize the financial performance for FY 2022. It’s pleasing to report record earnings across all parts of our business and I will touch more on the details of the Agribusiness and Processing segments shortly.
Just firstly on the Corporate segment. We have included here on this slide just a specific line highlighting the impact of the loss of A$24 million on the UMG investment, and that’s really just to aid comparability of the Corporate results.
The underlying Corporate cost is tracking slightly higher than the long-term run rate spoken about previously and that’s mainly due to the impact of increased investment in some of the pipeline of growth initiatives and also the impact of from higher incentives off the back of record results this year.
Also on this slide, note that depreciation and amortization increased year-on-year and that’s largely due to the impact from some shorter life assets and that’s associated with the large harvest with items such as tarpaulins and mobile equipment.
And lastly on this slide, we also saw an increase in interest and that’s off the back of higher commodity inventory holdings, along with those higher commodity values and also, of course, interest rates.
I will now move on to slide 18 to provide some further detail on the Agribusiness segment, starting off with our East Coast Australia business. FY 2022 saw a record crop production of over 33 million tons on the East Coast and combined with the high carry-in from last year’s bumper crop, this led to an increase in grain tons handled through our supply chain up to 41.1 million tons this year.
Outstanding execution by our teams saw our ports operating at close to full capacity in exporting 9.2 million tons of grain and that’s our largest year of exports in the last decade. We have also seen very strong domestic outload especially in the second half, with customers returning to our network as they seek reliable supply of grain.
Another feature of the result is the exceptional margins for our East Coast business, particularly in the first half, demonstrating the value of our supply chain assets.
Finally, for the ECA, it was also pleasing to deliver strong returns from the investments we have made over the last year in additional capacity to handle the large crop.
Now turning to slide 19, our International business delivered a strong result this year off the back of good margins from Western Australia, following their large crop. Our International business continues to play a key role in connecting both West Coast and East Coast grain to global demand and this customer focus saw GrainCorp as the largest exporter to a number of key destination markets, including Vietnam, Japan and China.
Turning to Canada, although our GrainsConnect Canada joint venture was impacted by drought in FY 2022, we look forward to improved volumes and margins, as production normalizes in that region. As Robert touched on before, we now have the full end-to-end supply chain completed, following the opening of Fraser Grain Terminal earlier this year.
Now just touching on feeds fats and oils business. On the fats and oils side, we have seen continued strong results from ongoing demand for renewable fuel feedstocks and that has more than offset the lower demand for liquid feeds across East Coast Australia.
Now moving on to our Processing segments starting with oilseeds. As you can see in the graph on the right hand side of this slide, FY 2022 has seen a continued trend of improved crush volumes, with an ongoing focus on operational efficiency and maximizing utilization of our assets.
We also saw excellent crush margins in oilseeds continue into the second half of FY 2022 and that’s led to a record result for our oilseeds business. The supply of canola seed in East Coast Australia, as well as the increasing demand globally for vegetable oils, that’s what underpinned those strong margins.
Turning to our Foods business, we saw an increase in sales volumes of 11% year-on-year, with good demand for refined vegetable oils. We are also really pleased to see the innovation pipeline in our foods business delivering strong results with our customer base.
I will now turn to slide 21 and through the cycle earnings. Before moving onto the balance sheet, I did just want to spend a few minutes talking about through the cycle earnings. As a reminder, this was a concept we introduced at our Investor Day back in March 2021. Through the cycle represents our view of our earnings in a theoretical average year of grain production, with typical conditions on margins.
Based on those assumptions, we forecast EBITDA in a theoretical through the cycle year being in the order of A$240 million, and as Robert noted earlier, we are confident we have delivered on the initiatives that underpin that A$240 million by FY 2023, 2024. On the graph, the TTC year of A$240 million is represented by the blue line and you can see how this compares to the last three years of earnings since the merger.
You can see that GrainCorp has significant operating leverage in large ECA crop years as demonstrated in FY 2021 and FY 2022. We are also confident we protected the business on the downside by variable — variabilizing costs and through the Crop Production Contract and you can see that from the severe drought year in FY 2020.
The key message from this slide is the ability to deliver substantially higher earnings in large ECA crop years from that operating leverage, supports longer term average earnings being greater than a through the cycle year.
Now moving onto the balance sheet on slide 23, we finished the year in a very strong position with a core cash balance of A$177 million. We have also seen a decrease in net debt year-on-year with the closing net debt of A$540 million.
I am just noting that this does remain above our longer-term average at year-end due to the elevated working capital and commodity inventory balances, with the ongoing export program. Overall, our balance sheet is in a very strong position, which provides significant flexibility.
Moving on to slide 24 and capital expenditure, similar to FY 2021, we saw higher CapEx, mainly to support additional capacity increases across our network to handle the large harvest and we are delighted with the returns from those investments.
On the right hand side, on D&A, as I noted earlier, we did see an increase as a result of those shorter asset life CapEx associated with harvest. We expect to see FY 2023 at similar levels to FY 2022 before D&A continues to reduce over time.
Now turning to slide 25 and the key message here is we are delivering significant value back to shareholders. The strength of our balance sheet, current performance and confidence in the future, enabled the Board today to declare a final dividend of A$0.30 per share fully franked.
That comprises of A$0.14 per share ordinary dividend and a A$0.16 per share special dividend. The increase in the ordinary dividend to A$0.14 per share reflects the Board’s confidence in average earnings being greater than those stated through the cycle earnings I touched on before.
We also completed a A$50 million on market share buyback in the second half of FY 2022 and along with the interim dividend of A$0.24 per share, that equates to total capital returned to shareholders of A$171 million through FY 2022.
This demonstrates our commitment to both investing in the business and delivering returns to shareholders. Further capital management will continue to be assessed in FY 2023 against growth opportunities and as franking credits accumulate.
On that note, I will now hand back to Robert.
Robert Spurway
Thanks, Ian. And I will just make some closing remarks on the financial year 2023 outlook. Just starting with that, conditions throughout the year have supported an above average East Coast winter crop for 2022-2023. In fact, ABARES in their September report forecasting a very strong and well above average 27 million tons.
I think everyone’s aware that ironically as good as that weather has been for the crop, it’s also created some devastating flooding and that’s impacted some regions and delayed harvest by several weeks. We do expect the impact of that flooding to impact on both yield and quality in parts of East Coast Australia and we are certainly seeing a higher level of feed-grade receivals.
In light of that flooding and the delays, GrainCorp is continuing to support growers with the logistical challenges presented by that flooding and we are focused on ensuring that our sites are well prepared for the delayed harvest. When the harvest does arrive, we will be ready and our teams are working hard to make sure we are supporting growers in any way we can.
I do just want to acknowledge that for those that have been directly impacted by flooded — by flooding and indeed for those that, including our staff and others working in communities, involved in the flood prevention and recovery effort, our thoughts and support are with you. Despite the flooding, we have already received over 1.1 million tons into our network and our year-to-date exports are already 600,000 tons. The supply chain is continuing to operate.
Just in terms of the global outlook, as expected, the exceptional margins we saw in the first half of 2022 have moderated in the second half and as the supply in the Northern Hemisphere has improved. We do anticipate continued good demand for Australian grain and oilseeds throughout financial year 2023 and that includes the feed grades that are going to be a feature of this current harvest.
We will provide earnings guidance at our AGM on the 16th of February in 2023, similar to the cycle we used last year, by which stage we will have much greater visibility over the harvest and the outlook for the year.
So, just turning to the last slide of the main part of the deck page 28. In conclusion, you have seen GrainCorp produce record financial results for financial year 2022. We are doing what we said we would. We are delivering on our commitments. We are doing that in a way that executes against our strategy. Our teams are working hard to improve the resilience of the business and do what we said we would, and that is generating significant value for shareholders.
We have a number of slides that follow through on our commitment to improved disclosures and transparency of our reporting contained in the appendix, but at this stage, Luke, I think we hand back to the moderator for any questions that might be there. Look forward to answering it.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question today will come from Richard Barwick with CLSA. Go ahead.
Richard Barwick
Good morning, guys. I just want to talk about the International business within Agribusiness and just trying to get a sense of the — but then also the, I guess, the variation that we might see from year-to-year, because if you look at it, the contracted grain sales are down, revenues up materially, obviously, associated with the commodity prices, and obviously this, we have got some history, if you go back long enough to go look at the old marketing business. So I guess my question is, when we think about the earnings contribution from the International part, should we be thinking about it more as a sort of a A$1 profit per ton or should we be thinking about it in terms of a margin applied to the revenue?
Ian Morrison
Thanks for the question, Richard. I am happy to take that one. So in terms of our International business, there are a number of components to it. So, you have got the WA side and then you have got GrainsConnect Canada, we have got our business in the UK’s Saxon and then we have also got origination from a number of other locations.
Probably the best way to think about it is on a more margin, similar to what you said before, Richard, of how you thought about it in the past. In terms of performance we have seen this year, that’s been a lot stronger off the back of a strong crop in WA.
In the appendix slides, we have included an earnings bridge and you can see a bit of detail on the uplift there and that does include the uplift from international and feeds, fats and oils, but a reasonable proportion of it is on the international side of the business. So, hopefully that gives you a little bit more of the context behind it.
And similar to what we have talked about with the East Coast Australia in previous reporting periods, the structural margins will be impacted by supply and demand dynamics. So it’s difficult to put a specific view of A$1 per ton margin on any given year, just with some of those dynamics changing.
Robert Spurway
And I think in that respect, it’s important to reflect back, sorry, Richard, just on the strategy, that it does provide for reliability of supply to customers, so they are not fully exposed to the Australian drought cycles and drought years.
But it also provides some diversification where we can access margins in years where the Australian crop is not so strong. So I think strategically we are very happy with the way that business is performing and operating in line with our expectations.
Richard Barwick
Okay. Thank you. And then my second question is going back to that slide 21 and I was just interesting, there’s a little bit in here. So, I guess, the suggestion here is that your downside in a poor crop year like FY 2020 is less than your upside in a good crop year, that A$98 million of EBITDA in FY 2020, is that the number you would sort of stand by going forward on a similar sort of volume scenario? I would have thought there might have been a bit of upside to that given the A$40 million EBITDA uplift and I obviously understand that’s a — the A$40 million is probably premised on a average crop year, but that A$98 million, is that the number you would steer us towards as on the downside or is there more color you can add on that?
Robert Spurway
I will make a couple of general comments and then I will hand to Ian on that one, Richard. Couple of things to remember, financial year 2020 was the end of three years of drought. So, I think, we have said before, it’s about as bad as it gets in terms of just a cascading effect of drought rather than a first year.
Secondly, you are right, that is before many of the operating initiatives that have been put in place, which obviously have leverage in a larger crop. So it’s hard to lock that in at all stages of the cycle.
But also in 2019 and 2020, we hadn’t fully furnished the variabilization of costs, the variabilization of the rail contracts and some of the other cost out initiatives that we had spelled out and have now fully delivered from the Demerger Scheme Booklet. So, I think, the context of that result and the timing of that is important. But, Ian, you might like to add a little more color to that.
Ian Morrison
Yeah. No. I think Robert’s covered it pretty well. Certainly we saw that as pretty much the double break scenario at the low point in the cycle, so it is a good barometer. And as Robert touched on, we have been working pretty hard since then to make sure we are well protected for that drought year and continue to deliver improvements in variabilization of cost.
The revenues that aren’t as exposed to the East Coast business through some of the initiatives that we touched on earlier, like the non-grain and other bulk materials we handle. So that continues to be a focus and our aim is to continue to lift that that low scenario and number.
Richard Barwick
Okay. All right. Thank you, guys.
Operator
And our next question will come from David Pobucky with Macquarie. Please go ahead.
David Pobucky
Good morning, Robert, Ian and Luke. Congratulations on the record result. So the first question just on the rainfall, the disruptive rainfall that we have seen on the East Coast. Do you think that it creates downside risk to the current ABARES estimate of 27 million tons or does it just cap potential upside to some extent? So just trying to understand whether it’s more of a quality downgrade impact as opposed to a volume impact?
Robert Spurway
Look, that’s a very difficult question to answer, David. What we do know, as I have said is that, it has certainly delayed the harvest. We also know that it has impacted and reduced quality and we are seeing that coming through. It’s much harder and perhaps unwise to talk on behalf of growers.
Other than to say that if we look across the more than 6 million hectares planted on the East Coast of Australia, as devastating as the floods are for those that have low lying areas, there are plenty of traditionally drier areas or undulating country, where the crops are looking pretty strong. And I guess that’s one of the reasons that we are keen to get through the next number of weeks working with growers to see where the volume ends up.
And as you know, in the past, we have avoided speculating on the ABARES number as a single source of the truth. But we have seen pretty strong harvest numbers coming in where harvest has started in Queensland and Northern New South Wales.
I think the other thing I would say is it depends a little bit on the weather patterns from here. A number of weeks of dry weather will certainly improve the situation for many and indeed all growers. Ongoing weather will only make it harder for some of those that have already suffered flooding.
I think the key issue and something that we work not just with growers on, but local councils and indeed government is making sure that roading and logistics are repaired and recovered as quickly as possible, so that farmers are able to move their grain around and they get it to sites and out through the export channel and we expect that will be something they are working with them on through what’s going to be quite an extended harvest.
David Pobucky
Thank you, Robert. And just the second question, as you noted, exceptional margins achieved in the first half, moderated in the second half as you expected. What would you need to see for margins to move higher or lower over the next year from current levels? So just trying to understand where margins in that marketing business are currently sitting relative to more average margin please.
Robert Spurway
Sure. Again, I am not sure I can give you an exact answer to that, but I can talk about the fundamentals that have endured for some time and we expect to prevail into the future and that is one of the world with growing population and demand for grain products and that’s further supported by the fact that global inventories of grain still remain at record low levels. So, not only have we got strong underlying demand, we have got countries likely to start to build strategic levels as inventory levels recover.
So, fundamentally and the outlook we see a picture of a very strong demand and supply are struggling to keep up. It’s very clear over the last year we have seen some particularly that unforecasted supply shocks, particularly the conflict in the Black Sea and the impact that that’s had on global supply chains overall.
So, look, going forward, it’s too early to call what the next Northern Hemisphere crop is going to be, but we would say that prevailing La Nina conditions over the last couple of years have typically created very good production across Australia and created more downside risk in drought conditions across other large growing areas, including Argentina, Middle East and the Southern Hemisphere, but certainly impacted by La Nina conditions and the U.S. and Canada, which has had an improved crop this last 12 months, but remains to be seen what that looks like going forward.
So, hopefully that gives you a bit of color on the way we think about it. Overall demand for Australian grain remains strong. We expect that to continue and I think if anything, there is more risk of supply side risk and downside than there is a deterioration in demand, which is there for good fundamental reasons.
David Pobucky
Thank you, Robert. Appreciate it.
Operator
And our next question will come from Owen Birrell with RBC. Please go ahead.
Owen Birrell
Hey. Good morning, guys and, yes, good on the — good on you guys for the record results again. I just had a question around the through the cycle commentary that you have put there on slide 21 of A$240 million. I just want to confirm that that’s sort of an underlying earnings for the Group and not just the Australian Agri business? And how does the A$40 million from initiatives play into that A$240 million number, should we be adding that to the A$240 million?
Robert Spurway
I will answer quickly and then hand to Ian, if he has anything to add. So, first of all, yes, it is for the Group, so it’s a total bottom line number. To reiterate what Ian said, it is on a very specific set of assumptions. It’s an average year with average crop production, average carry-in and carryout.
So no sort of movement of benefit from year to year and the A$40 million builds on back when we announced this 18 months ago, we were saying that the underlying business was probably at around A$200 million at that point.
So the A$240 million includes that A$40 million that we have spoken about, but it doesn’t include any further upside of ongoing momentum and the continued work we are doing to find further efficiencies and improvements in the business. Ian, have you got anything to add to that or does that cover it?
Ian Morrison
No. I think that covers it, Robert.
Robert Spurway
Hopefully that answers your question, Owen.
Owen Birrell
No. That’s very clear. That’s very clear. I guess a follow-on question to that is around the sensitivity of the underlying business to cost inflation. You talked about increasing your variabilization of costs. I am just wondering does that play out negatively in a high inflation environment. I just want to get a sense of how the business is positioned as we move into sort of high inflation over the next couple of years?
Robert Spurway
Yeah. Sure. We can both add some comments on that. I think our cost control over the last 12 months has been a good feature of the result and something we are very pleased with. Despite the very high activity in the network, the teams at all levels have done a good job to manage the cost base through that and as you would expect with the high volumes we have seen in many cases, significant improvement on a cost per unit or cost per ton basis and we continue that culture across the business.
More fundamentally, in terms of labor, we have a whole range of agreements that mostly have already been agreed and of anywhere between one year and three years to run. So we are not immediately exposed in totality to any type of wage inflation or pressure beyond the normal course of business and renewals of those agreements as they come around.
And finally, and I think, structurally across our business, we describe ourselves as extraordinarily resilient in an inflationary environment and that’s because commodity prices are set by global markets, and therefore, we are not even having to do anything to pass on the inflationary pressures.
The vast majority of inflationary costs are set and included by the market, including the financing cost of commodities and that’s baked into every sale and purchase that we do in the commodity part of the business.
So, again, I think, that sets us on a very strong position in an inflationary environment and the light of the fact that we are a staple product, people always need to eat, that provides a fair bit of resilience as well on the sector we operate in. Ian, anything to add?
Ian Morrison
No. That covers it really well. And across our business, a lot of the contracting is done on an ongoing basis off the back of the crop. So it’s not the scenario where we have got multiple years of revenue locked in and then having to tackle the cost pressure, so it’s able to be built into the commodity price effectively that you are paying for grain or what you are selling to an end customer. So, that really does provide a lot of protection both on the cost inflation but also on interest.
And but over and above that, what we are focused on is cost control and regardless of that, it’s all about being the most competitive and low cost supplier and supply chain we can be, so that we are in a strong position relative to other supply chains, not just locally, but globally. So that’s really the focus.
Owen Birrell
Can I just confirm that the labor agreements that you mentioned, you said they go out two years to three years left to run. Are they — so they have inflation indexed or there are sort of fixed escalators in those labor contracts?
Robert Spurway
No. They are all fixed and agreed amounts at the time they were negotiated. So, to put it in context, we have got several tens of agreements across the broad aspect of our business. So, the point I am making is, we are not exposed to any one single major enterprise agreement coming up for renewal.
Owen Birrell
Okay. That’s great. Thank you.
Operator
And our next question will come from Apoorv Sehgal with UBS. Go ahead.
Apoorv Sehgal
Good morning, Rob, Ian. Just one question from me, please. Just to what extent do quality downgrades to grain actually impact GrainCorp in a negative way? Like, my understanding is access to volume is the key driver, so just explain how downgrades to quality could impact you. And I am also just curious, if the changes in quality we see could actually create any arbitrage opportunities for GrainCorp?
Robert Spurway
It’s difficult to answer that in one single answer, but I will try to give you some color on it, Apoorv. Generally speaking, it doesn’t have any direct impact on us, because the cost is borne by the grower or the customer.
Pleasingly and on an ongoing basis, there is very strong demand for feed grades. So that can help support the business into the future, particularly in an environment where there is such strong volume.
Operationally, there are probably some benefits around the edges in terms of it simplifies the segregations that we need to operate at sites, if you have got an overwhelming majority of the grain we are receiving, it allows us to reduce operational cost by consolidating that grain at our bunker sites. Ian, you have seen a number of these sorts of events over the years, have you got any color to add to that?
Ian Morrison
Yeah. No. I’d agree with those comments that the volume is definitely the much bigger driver than what the quality of grains come in at, so really that’s the main focus.
Apoorv Sehgal
All right. Thanks, guys.
Operator
And our next question will come from Grant Saligari with Credit Suisse [ph]. Please go ahead.
Grant Saligari
Good morning and thank you. I have got a question around the sales volumes in foods. So, there was a really strong step-up as you noted in food sales volumes to 236,000 tons. I guess two aspects to the question, one is, how close to capacity does that then put you in terms of thinking about further opportunity? And the second part to that would be, just thinking about the stickiness of that volume, can you comment, you probably don’t want to mention specific customers, but the market segments that that volume is going into, and therefore, the stickiness of that potentially in subsequent years, please?
Robert Spurway
Yeah. Look, in general, we have a number of key contracts with customers and we won’t name or specifically talk about individual customers. In addition to those contracts, we continue to work with innovations and new applications for those products and customers that we have, including the reference I made to some of the applications for plant-based fats being used in the growing area of plant-based foods.
In terms of your question on capacity, if you look at the major food sites, we have our West Footscray facility in Melbourne and our New Zealand Foods business. It varies across the different lines and production lines, each of those sites have a number of production lines usually linked to the type of packaging that we are doing in typically spreads or oils type products and we can tweak capacity by relatively small investments in the packaging formats on the lines that we do.
But what we would say overall is that, particularly our West Footscray facility is running at a very healthy utilization rate and it would require some modest investment to see significant steps — step-ups in the volume through that plant in particular and that’s off the back of the hard work we have done to attract and retain the customers that we have.
Grant Saligari
And the stickiness of that volume would be — should the expectation be that that volume is sustained into 2023 approximately?
Robert Spurway
In short, yes, we have strong contracts and certainly the short- to medium-term and a very long track record and history with most of those customers over a number of years.
Grant Saligari
Okay. I have a second question if I could, just around the domestic grain sales, which stepped up quite a lot on the prior period and sort of led to a lower carryout than I had been forecasting. So, I was just wondering whether there is any additional color on the domestic sales volume, presumably it would have been economically better if the grain was suitable to hold it over for an export pathway. So any color you can provide on the step-up in the domestic sales volume would be helpful, please?
Robert Spurway
Yeah. Sure. So, that’s the 6.4 million tons you are referring to and indeed…
Grant Saligari
Yes. That’s correct.
Robert Spurway
… we did see strong growth in demand for that in the second half. Look, first of all, in terms of your comment on the margin of that versus future certain margin or demand for it. The pricing takes into account those considerations when we commit to those sales.
I think the factor most likely driving that stronger demand that we saw in the second half was the reliability of our supply chain. We have seen many of the other channels to market, particularly on demand, disrupted by the fact that individual operators are struggling to access transport.
And I think it again shows, not just the strength of our assets, but also the strength and the scale of our network that we are able to reliably satisfy customer demand, both domestically and in the export channel. So they were a healthy contribution to the business in the period and we would expect ongoing good demand in the domestic markets as well.
Grant Saligari
Okay. Thank you. That’s very helpful.
Operator
And our next question will come from John Campbell with Jefferies. Go ahead.
John Campbell
Hi, guys. Congratulations on a really strong result. Just a follow-up question related to the downgrading of at least some of the 2023 or 2022-2023 crop into feed grade, does that mean that or presumably that the feed grade product is supplied only locally, there is no export market for feed grade product?
Robert Spurway
No. Absolutely not, John. There is very strong demand globally for feed grades and indeed very good pricing for that and I think that’s one of the mitigating factors for growers. They are seeing very high decile pricing for feed grades and that’s off the back of that strong global demand for feed grade. So although it some portion and thinking that feed grade is a downgrade, necessarily it’s just a change in terms of a greater…
John Campbell
Yeah.
Robert Spurway
… proportion of feed grade than we might see in any given year. But that certainly doesn’t change the dynamics or the market opportunity that is prevailing for that product.
John Campbell
Yeah. I mean I guess it was reading the outlook slide, it seem to be suggesting you were calling it out as a negative event and now on the call you are sort of essentially saying not, it’s not the case?
Robert Spurway
Yeah. Certainly don’t think we are calling out quality as a negative event, other than bearing in mind the very important stakeholders here being growers, whilst they are getting record prices for feed grade wheat in particular. It’s kind of one of those things that if it were milling grade. It would be worth even more. So the farmer weighs the cost of that in an environment where the input costs have been pretty high.
So it is pleasing that that feed grade still is providing good returns to growers. But to be clear, in terms of the impact on us, it’s more an objective statement around one on the negative or positive sentiment, the positive aspects of it is this very good ongoing demand. And as I said in answer to Apoorv’s question, it does in some respects simplify help us manage our cost base, as well as part of an overall feed harvest.
John Campbell
Yes. Got it. And then, obviously, you have already said, it’s just too early to call exactly what the impact of floods and extensive rain will be on the — on that five-year forecast, so that’s fine. You have already answered part of my question. The other two questions I had, what are you seeing in terms of Ukraine’s grain production status, and secondly, in terms of their export and their port operational status? I mean you — are you getting a sense of how much it’s been impacted both on the production and the shipping capabilities?
Robert Spurway
Yes. We are. We still have people on the ground in Ukraine. But it’s fair to say, we rely heavily on some of the externally available data as well. Couple of things, there has been quite a strong Russian production crop and that is still finding its way to some markets across the Middle East and Africa in particular.
The areas of Ukraine that are under Russian control include some pretty significant growing regions as well. And therefore, it makes it much harder on a like-for-like basis to determine or forecast the Ukraine production in isolation. But typical numbers we are hearing are in the order of 50% to 65% of a normal or average crop.
I think the greater challenge and difficulty for Ukrainian growers and supply chains, is the ability to get that to market and whilst we are seeing some grain come out through the year-end brokered grain corridor, that has been quite volatile as you have probably read in the news.
And it’s fair to say that most of the major grain traders and operators including ourselves and indeed the vessel operators are not falling over themselves to go into the Black Sea, where significant risk and in many cases lack of insurance makes it a highly speculative and risky business.
So our view and we have said this before is we would see significant disruption from Black Sea disruptions for at least the next two years to three years. And I think even with a moderate recovery in that supply is still well short of where global demand is at and that fundamentally sees us in a good position on the global supply demand situation.
John Campbell
Yeah. And then just…
Robert Spurway
That’s why…
John Campbell
Oh! Sorry, Rob. Go on.
Robert Spurway
One final comment I want to make, just in relation to feed grades, be very clear, there is still a significant volume of milling grade we would expect to come through, satisfying both domestic and international demand and we have seen that in the harvest that’s already been received. So it’s not all feed grade they are at, it’s just a higher portion. We are running up against time, John, but I think you have got one more question, which we will try to answer quickly.
Operator
And that question will come from Liz Wells with Grain Central. Please go ahead.
Liz Wells
Hello. Thank you. I have got a question about rail, it’s been impacted by La Nina, Murray and other ports still closed when it was originally scheduled to open on November the 1st. The Hans line was closed by flooding. Kembla has been out for — was out for some months. Is GrainCorp taking any steps to up its rail capacity or lobby for better resilience or efficiencies in the rail network?
Robert Spurway
Yes. We continue to work with our partners who operate rail for us, also the various track owners in the different states to ensure that, ultimately, we are representing the needs of growers and being able to efficiently move grain to export ports.
I think the issues you referred to and in particular the Port Kembla one and the line out through flooding there for a number of months is included in the exports that we have done. So I think the 9.2 million tons that we have exported over the 2022 year, demonstrate the reliability of the GrainCorp supply chain, irrespective of some of the disruptions, including the reduction in rail capacity through that period of disruption.
So I will answer your question, we continue to work with our partners to ensure we maximize the amount of grain going on rail and we are comfortable that that will be a strong feature of the year ahead as well, keeping grain moving and maximizing the opportunity of the export program.
Liz Wells
Thank you.
Operator
And that concludes our question-and-answer…
Robert Spurway
Okay. That brings us to — go on.
Operator
I am going to turn it over to you for closing remarks.
Robert Spurway
Look, again, I just want to thank everyone for joining us. We are delighted with the result. We look forward to catching up with many of you one-on-one over the next number of days for further questions-and-answers. Thank you everyone for joining. Good day.
Operator
That concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.
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