Namoi Cotton : Preliminary Final Report

ASX ANNOUNCEMENT

26 April 2022

NAMOI COTTON LIMITED (ASX: NAM)

APPENDIX 4E, FINANCIAL RESULTS FY2022 & ANNUAL REPORT

For full details refer to the FY2022 Annual Report.

APPENDIX 4E

Namoi Cotton's ('Namoi') business spans fibre, feed, supply chain and marketing, with ginning being at the core. Our Vision and Mission is to be the leading Australian cotton agribusiness by independently linking growers to global markets. Our network of cotton gins at 9 locations in NSW and QLD is supported by warehousing and packing, connected by rail and road to container ports.

Provided below are the results for announcement to the market in accordance with Australian Securities Exchange (ASX) Listing Rule 4.3A and Appendix 4E for the consolidated entity Namoi Cotton Limited ('Namoi Cotton or Namoi' or 'Company') and its controlled entities ('Namoi Group or Group or Consolidated Group'), for the year ended 28 February 2022 ('FY2022 or FY22') and the previous corresponding period, 28 February 2021 ('FY2021 or FY21'). Financial results and key financial items from continuing operations are included in the following table. For further explanation of the annual financial results refer to the Review and Results of Operations section of the FY2022 Annual Report.

Results Summary

Dividends: Namoi Cotton will not pay any dividends in respect of the year ended 28 February 2022 (FY2021: nil). Audit Status: This Appendix 4E is based on the Consolidated Financial Statements which have been audited and should be read in conjunction with the complete final report.

FY2022 COMMENTARY

Safety and Customers

Safety is our number one priority. Our long-term injury frequency rate (LTIFR) increased this year to 15 [FY2021: 9], however the average number of shifts lost from each injury has been reduced to our lowest level with 2 shifts per LTI [FY2021: 12].

We are committed to our customers. We operated at 8 gin locations in FY2022 and secured labour despite ongoing Covid-19 restrictions. We delivered a premium service with 93% of cotton ginned by the end of August 2021, as demonstrated by strong grower satisfaction with a Net Promotor Score of 71.

Financial Results

Namoi delivered positive EBITDA in FY2022 with a simplified and strengthened business. This was achieved despite cotton production in the 2021 season (FY2022) being 40% below average, and additional expenses incurred in FY2022 to prepare for the anticipated above average 2022 season (FY2023).

• • Ginned 493,000 bales in FY2022 [FY2021: 124,000 bales].

• • EBITDA2 of $1.6 million [FY2021: $(12.7) million] and Loss after Tax of $(4.4) million [FY2021: $(14.4) million].

• • Underlying Gross EBITDA of $2.8 million (i.e. adding back depreciation and interest from Namoi Cotton Alliance ('NCA') joint venture and excluding JobKeeper payment) [FY2021: $(12.7) million].

Segment Results

The $15.4 million turnaround in Gross EBITDA from FY2021 to FY2022 was achieved from increased volumes, cost saving initiatives and the restructure of the NCA joint venture9.

Ginning Services - $9.2 million contribution. A $10.0 million increase from FY2021 with increased ginning volume that include the marketing of cotton co-products (cottonseed and mote) [FY2021: $(0.8) million]:

• • Operational efficiencies when compared against FY2020 (a year in which we ginned comparable volume i.e. 450,000 bales), with 9% lower operating labour cost per bale.

• • Lower cottonseed margin with lower feed prices given the record grain harvest.

• • Additional maintenance expense to prepare for the anticipated above average 2022 season.

Supply Chain and Marketing - $2.1 million EBITDA contribution (after adding back NCA joint venture depreciation and interest). A $7.2 million increase from FY2021 with joint ventures operating at a positive EBITDA level, despite the impact of supply chain disruptions on margin [FY2021: $(5.1) million].

Unallocated - $(8.5) million in corporate and support costs (excluding JobKeeper payment). A $1.8 million increase from FY2021 with additional staff employed and costs incurred to prepare for the anticipated above average 2022 season [FY2021: $(6.8) million].

Strengthened Balance Sheet

We made considerable progress to strengthen our balance sheet over the past year to ensure we have the capacity to be 'gin-ready' for the 2022 season:

• • May 2021, raised $10.3 million in equity. These proceeds, combined with earnings, have been used to reduce core debt and prepare for the anticipated above average volume in the 2022 season.

• • September 2021 renewed our partnership with the Commonwealth Bank of Australia (CBA) until October 2024. This will provide additional working capital facilities to fund the expected increase in cottonseed marketing inventory for the 2022 and 2023 seasons.

Net assets are $115.6 million at FY2022 year end, a $8.8 million increase on the prior year [FY2021: $106.8 million]. This included $4.3 million revaluation of Plant, Property and Equipment to fair value.

Gearing ratio reduced to 30% at FY2022 year end from 32% in FY2021. FY2022 net debt6 reduced by $2.2 million to $48.6 million and core debt (excluding cottonseed inventory for marketing) reduced by $4.7 million to $45.1 million.

2022 Season Outlook and Gin-ready Program

We leave a period of drought with a significantly improved outlook for the 2022 season (FY2023) with forecast near record cotton production. ABARES10 is forecasting cotton production of 5.0 million bales in NSW and Queensland, a 90% increase versus the 2021 season. Cotton Compass11 is forecasting cotton production of 3.27 million bales in our catchment areas, a 150% increase versus the 2021 season.

The medium-term outlook for cotton production for the 2023 season is exceptional where good water availability, as indicated by the current public regional dam water storage levels in our catchment areas, is at 10-year highs at 94%.

We expect to gin 1.1-1.2 million bales in 2022. Following three below average seasons, work on the 'Gin-Ready Program' commenced in 2021 to prepare for and manage the anticipated above average volume.

We are targeting to gin 95% of the 2022 season cotton by the end of August 2022 to maximise returns for growers through the following initiatives:

• • Additional $8.5 million expenditure in FY2022 (compared to FY2021) in 4PP projects, preventative maintenance, staff capability and pre-ordering imported consumables for ginning.

• • Securing staff to operate all gins with all (except North Bourke) operating 24 hours a day. This includes pioneering the development of a skilled overseas ginning workforce where we are contracting 13 overseas qualified ginners from Africa.

• • Delivering innovative solutions to growers that include tracking cotton quality, module cash advance and managing bale tenders.

Accordingly, we are well positioned to capture the opportunities with the return to an anticipated above average season in 2022 in conditions challenged by labour and supply chain constraints and inflation. Input costs for labour, fuel and consumables and supply chain disruptions may have a short-term negative impact on our margins.

4PP Strategy

Namoi is pursuing its 4PP Strategy to create premium value for growers and returns to shareholders through the cycle, that is built on four strategic planks:

• 1) Leading service and cost position - partner growers with our superior ginning network.

• 2) Innovative solutions - empower growers with differentiated products.

• 3) Broaden revenue base - geographically diversify our network and grow the core.

• 4) Great place to work - attract and retain talented staff.

The 4PP Strategy is targeting to increase through the cycle EBITDA by $5 million12 by 2026 from initiatives to reduce cost and access new revenue sources. This will be supported by an investment of $21 million in growth projects in ginning productivity and value-add capability.

4PP Strategy projects undertaken in FY2022 will deliver incremental earnings in FY2023 that include:

• • $2.1 million gin upgrade completed at Merah North. The increased productivity will improve ginned cotton outcomes for growers and reduce variable operating costs by 10%.

• • $2.5 million new cottonseed shed at Boggabri gin. This will enable us to better service the local livestock market and significantly reduce transport costs.

In conjunction with the 4PP Strategy we are exploring opportunities to expand and diversify our footprint into northern Australia, that is forecast to produce over 400,000 bales of cotton by 202713:

• • Discussions with Kimberley Cotton Company14 for their planned gin to service the Ord River WA, based on a planned 10% equity investment and managing their gin.

• • Exploring the construction of a joint venture gin with local grower(s) in northern QLD.

This announcement was approved by the Board of Namoi Cotton.

For further information, please contact:

Namoi Cotton Limited

John Stevenson

Chief Executive Officer (07) 4631 6100

• 1 Revenue plus Trading margin gains plus Other income/(loss).

• 2 EBITDA is a non-IFRS and unaudited measure defined as earnings before interest, tax, depreciation, and amortisation including share of profit from associates and joint ventures and excluding impairment charges

• 3 Loss attributable to the members of Namoi Cotton Limited.

• 4 Net cash (outflow)/inflow from operating activities and investing activities.

• 5 Total assets less current liabilities.

• 6 Interest bearing liabilities less cash and cash equivalents.

• 7 Interest bearing liabilities divided by Interest bearing liabilities plus Total Equity.

• 8 Residual capital stock unconverted has not been included in the calculation because they are antidilutive.

• 9 Namoi Cotton Alliance ('NCA') restructure involved realigning our supply chain and trading activities with our joint venture partner, Louis Dreyfus Corporation. NCA managing supply chain activities (Namoi has 51% share) and a new joint venture, Namoi Cotton Marketing Alliance ('NCMA') to manage cotton trading activities (Namoi has 15% share) where our exposure to trading losses (and profits) is capped at $1.5m p.a. with our joint venture partner providing funding for inventory.

• 10 Australian Bureau of Agricultural and Resource Economics and Sciences - ABARES (March 2022).

• 11 Cotton Compass (March 2022).

• 12 Through the cycle target EBITDA of $5 million is from 4PP Strategy projects, excluding the potential positive or negative impact on earnings in the normal course of business

• 13 MEITZ Report (North Queensland cotton gin assessment and feasibility study) and other industry reports.

• 14 For more detail, refer to the market announcement on 8 October 2021 where Namoi announced that it intends to enter into various agreements with KCC Kimberley Cotton Company Limited ('KCC') for the investment, construction and operation of a new gin to service the Ord River Irrigation Area.

This is an excerpt of the original content. To continue reading it, access the original document here.