For personal use only2500 m ln litres LME Cheese Whey Butter 2006 but milk no milk production...

JP Morgan’s Agriculture Corporate Access Day

Warrnambool Cheese and Butter Factory Company Holdings Limited1

David Lord – CEO / MD, Warrnambool Cheese and Butter13 July 2011

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Presentation Contents

• Dairy Export Market Outlooky p

• Impact of Strong Australian Dollar

• Domestic Market Overview

• Implications for WCB


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Dairy Export Market Outlook

A second commodity price boom

Drivers• Low stocks• Continuing demand growth

W h l d l i• Weather‐related supply issues• Rising feed costs

HeadwindsM k i• Market sentiment

• Chinese demand• EU pricing• Sth Hemisphere spring flush

J t t h• Japan catastrophe


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Global consumption is improving

Strong demand on world markets underpinning high commodity prices

Global consumption is improving

• World economy continues to recover

• Expanding middle class in SE Asia, China and Latin America.

I di th l t d• India on the longer term radar

With imports further boosted by localised events

• China is buying huge quantities post melamine

• Russia forced to cover its needs post drought

• Korea has an FMD problem

• Indian production not keeping up with growing demand• Indian production not keeping up with growing demand

• Japan catastrophe stimulating demand

• North Africa/Middle East wary of civil unrest


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2011-4

Monthly Chinese milk powder imports, 2005‐2011Global demand underwritten by China

China: facing a prolonged market deficit:

• Import preference remains strong– Consumers continually face quality issues

l d l h2009-7

2009-102010-12010-42010-7

2010-102011-1

• National inspection and licensing has removed processors and some milk flow

• Local milk production has fallen

• Rebuilding supply and the supply chain will 2007-102008-12008-42008-7

2008-102009-12009-4

• Rebuilding supply and the supply chain will take time

• Costs have increased

2006-012006-042006-072006-102007-012007-042007-07

- 20,000,000 40,000,000 60,000,000 80,000,000

2005-012005-042005-072005-10


• Source: Chinese customs statistics, CITIC, 2011For

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Russian dairy imports (excluding Belarus) 2005-2010

Russia’s ongoing dairy import reliance.

3000

3500• The #1 global dairy importer

• Adverse weather events in 2010

• Sector development plan in place since

+53%

1500

2000

2500

mln

litre

s LM

E

CheeseWheyButter

2006 but milk no milk production growth.

• Local farmgate milk price +60% from 2009

Ch ll d b i f l t d

500

1000

1500m

SMPWMP

• Challenged by informal sector and domestic logistics/infrastructure

• Increased reliance on Belarus and EU for imported product

0

500

2005 2006 2007 2008 2009 2010

Source: GTIS, Rabobank, 2011

p p


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Limited impact along supply chain so far

Japan is important (but its not China)Japan is important (but its not China)

Impacts of the quake and nuclear crisis are multifaceted

Implications for global dairy depend on net impact of these

At t it lik l th t At present it seems likely that

– On a national basis, impacts along the supply chain are not severe

– Short term: no major short term impact on trade

– Medium term: ‐ Fiscal stimulus may boost import buying

– Local production reduced & being directed to liquid market


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Supply side is responding as high prices reach the farmgate

Producing milk is profitable the world overprofitable the world over

Though growth will be constrained by deleveragingdeleveraging

And input costs will remain high


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Milk growth trends paralleling 2008

• Higher commodity prices have flowed to thehave flowed to the farmgate

• Production response slowed by weather‐related issues

• EU under quota so have room to move

• US expanding but facing• US expanding but facing input cost pressure


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Focus now shifts to Southern Hemisphere Spring flush

• Summer rain has

Figure 2: Milk Production Growth in Key Export Regions

Latest month Last 3 monthsturned NZ season around. Projections for FY12 season of + 5‐6%

EU 2.7% (Apr) 3.2%

US 1.5% (Apr) 1.9%

NZ* 31% for 3 months to May 2011

• Aust slightly up but slowed due to excessive rains. May h 1 2% th

Australia .8% (Apr) 1.3%

Argentina 17.7% (Apr) 17.7%

have 1‐2% growthBrazil -3.0% (Apr) -1.6%

SUM* 4.3% (Apr) 3.3% (to Apr)

Source : Rabo Bank


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US supply response critical to supply balance Net Dairy Trade ‐ USA

1,200,000

1,400,000• Not the lowest cost but the lowest cost

capable of significant expansion

1 5% ti d f 2011 b l 10 l

600,000

800,000

1,000,000

tres

ME

Q

• 1.5% tipped for 2011; below 10yr annual growth rate

• Industry increasing its focus on export opportunities and recognising rewards

0

200,000

400,000

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3T

hous

and

lit

pp g gavailable offshore

• Rate of export growth determined by offshore demand/supply gap

-600,000

-400,000

-200,000Q Q Q Q Q Q Q Q Q Q Q Q

2005 2006 2007 2008 2009 2010


Source: USDECFor

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Dairy commodity prices: bullish outlook despite some weakness

Prices will eventually come down; but trade will be at elevated levels

– Commodity prices too far above costs in too many regions

– Requirements in China will probably stabiliseq p y

– Demand will be slowed by retail price inflation

But not fast and not by as much as 2009 But not fast, and not by as much as 2009

– Demand conditions generally sound

– Lower cost regions remain constrained

– Costs of production will remain generally high

– No GFC on horizon


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Impact of a Strong $AUD

AUD/USD Exchange Rates f

Consistently high $AUD presents challenges for FX policy

1.0000

1.1000

AUD/USD Exchange Rates • With the exception of 2009, the Australian dollar has undergone a decade of sustained appreciation

0.7000

0.8000

0.9000

• Sharp rise in the $AUD against the $USD in FY11 (up 27%). For WCB improving export prices

0.5000

0.6000

0.7000 WCB improving export prices and effective hedging have helped offset the impact

• A consistently high or slowly0.4000

• A consistently high or slowly softening $AUD in FY12 will be a more challenging environment to manage


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$AUD Consensus Outlook

1.0800

1.1000

Forecast USD/AUD Rates

1.0200

1.0400

1.0600

0.9600

0.9800

1.0000

Jun‐11 Sep‐11 Dec‐11 Mar‐12 Jun‐12

ANZ May 3 NAB May 16 CBA 29 June Average

• AUD strength forecast to persist for at least another six months

• Leading economist median at 1.02 by Dec 11

• Some economists predicting ongoing support for AUD


Some economists predicting ongoing support for AUDSource: Financial Review

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Impact of a Strong $AUD

2012 T (USD 300 illi ) DA 2012

Stronger average prices in FY12 will be offset by adverse FX movement

2012 Turnover (USD 300 million) DA 2012

WCB Achieved rate 2011 0.9367

2012 DA Rate (1.00 - 1.05) 1.0250

Increase from Achieved to Budgeted rates 0.0883

% increase 9.4%

2012 FX R I t ($ illi ) (27 6)

• Export commodity prices have recovered since 2009 but not to highs of 2008

2012 FX Revenue Impact ($ million) (27.6)

• Export commodity prices have recovered since 2009 but not to highs of 2008• WCB expects average international pricing to improve in FY12 versus FY11 average• An average FX rate of $1.025 will impact revenues by $27.6 million versus FY11

achieved rate C l ti b t t dit i d AUD i i d t i t i


• Correlation between export commodity prices and AUD is required to maintain consistent dairy export returns

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Domestic Market Overview

Downward pressure on domestic wholesale prices to continue in FY12

Source: DA Situation & Outlook Report 2011

• Private labels continue to grow at expense of proprietary brands• Retail sales flat due to cautious household spending and borrowing• Price‐based competition between the two major supermarket chains resulting in

deep price reductions


deep price reductions• Competition also impacting on non‐grocery channel

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Implications for WCB

H1 FY10H1 FY11Earnings from

Diversifying revenues can help counter the commodity cycle

41.5%

24.5%

2.9%

0.5%7.5%

7.9% Commodities

Consumer Goods

Other

commodity products dominate when international markets are strong. JV’s and consumer business units

21.8%

(8 8%)

21.1%

81.2%

GOI Joint Venture (incl. services)

WCB Japan Joint Venture

business units feature strongly when global markets are softer

(8.8%)

• Dairy commodity revenues up 25.3% due to improved pricing which flows onto higher farmgate prices paid for raw milk

D i d i i d b hi h i U bl• Domestic consumer products margins impacted by higher input costs. Unable to pass on these costs in a competitive retail market

• Joint venture contributions improved but overtaken by commodity returns

• WCB has diversified its income streams to mitigate the impact of trading in volatile


WCB has diversified its income streams to mitigate the impact of trading in volatile International Commodity markets

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• Access to stable and growing milk supply is critical to extract maximum benefit f b d k lk f d

Access to Stable milk supply essential to maximising returns

from buoyant commodity markets. WCB sources milk from prime dairying regions in SE Victoria and SE South Australia.

SOUTHSOUTHAUSTRALIA NEW SOUTH WALES

Adelaide

VICTORIAVICTORIA

Melbourne

WCBWCB


WCBWCBFor

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• WCB is able to increase production by up to 10% without major capex.

WCB well positioned to benefit from continuing strong market conditions

WCB is able to increase production by up to 10% without major capex.

• WCB is currently implementing growth and value add initiatives

o Expansion of Sungold capacity

o Capability to produce higher specification powders

o Capacity upgrade for Warrnambool branded cheddars at Mil Lel plant

B i d d l b f ddi i l l dd• Business cases under development on a number of additional value add projects

• WCB is a low cost and efficient processor with significant product mix flexibilityp g p y

• Manufacturing Scale in cheese, powder and butter plants

• Unique single site configuration


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• WCB’s recent financial performance and significant improvement in financial

WCB has the Financial capacity to support growth projects

WCB s recent financial performance and significant improvement in financial position allows the business to be ready to take advantage of opportunities.

Half Year ended 31 December (A$m) Dec 10 Dec 09 ChangeHalf Year ended 31 December (A$m) Dec 10 Dec 09 Change

Revenue 254.6 203.8 50.8

Operating net cash flow 30.0 9.0 21.0

Net Cash Flow 36.7 24.5 12.2

Net Debt/Net debt plus equity% 19.2 49.9 (61.5)

Earnings per share (cents) 85.9 22.4 63.5g p ( )

Net Tangible Assets per share ($) 3.20 2.57 0.63


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First Half FY11 Highlights

Sales Revenue upSales Revenue $254.6 million up $50.8 million or 24.9%

International dairy prices up by 36 4% total volume down bySales Revenue up 24.9%

International dairy prices up by 36.4%, total volume down by 6.6%

Consumer Goods prices steady with volumes up 25.3%

NPAT up 309.0% NPAT of $36.4 million up $27.5 million or 309.0%

EBITDA $59 million Operating cash flow $30 millionEBITDA $59 million. Operating cash flow $30 million

Successful share placement and rights issue that raised a net $35.1m

Strategic Initiatives Net debt reduced by $60 million with gearing returning to traditional levels

Business improvement projects approved and commenced utilising funds raised in H1


utilising funds raised in H1For

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Conclusion

• Long term industry conditions remain positiveLong term industry conditions remain positive

• WCB is well placed to benefitp


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QuestionsFor

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