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2004 Senior Management Briefing 10 September, 2004.

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Presentation on theme: "2004 Senior Management Briefing 10 September, 2004."— Presentation transcript:

1 2004 Senior Management Briefing 10 September, 2004

2 Strategy and growth overview Andrew Lindberg Managing Director

3 3 Financial objectives Return on equity - Achieve 15% return on equity for the AWB Group in the medium term Solid EPS growth - Landmark acquisition to be more than 35% EPS accretive (pre-goodwill, post synergies, post one-off costs) by 2005-06 Stable dividend payment - Expect to maintain dividend payment at current levels for 2004-05 Improve quality of earnings - Reduce exposure to crop by achieving more than 20% of PBT not related to Australian wheat by 2004-05

4 4 Some “Landmark” achievements Network consolidation Re-branding of all branches Back office consolidation - relocation of critical staff to Melbourne Recruitment of finance and insurance specialists Incentive program implemented for all staff AFS license and transfer of IBD arrangements with 85% retention rate Phase 1 procurement completed with improved terms and conditions being obtained in all categories SA pilot program - $2/tonne merchandise voucher Launch of Fastrak Finance At least 95% of the way through the integration stage, and 15% of the way through the growth stage

5 5 Survey question: “Last year AWB took over the Landmark organisation to form Landmark – an AWB company. Generally speaking, how comfortable would you say you are with the two organisations now being joined?” Most customers are comfortable with Landmark being an AWB company …

6 6 Targets will be achieved by implementing three dominant business strategies AWB’s overarching goal is to implement an Integrated Business Model... Leading position in Australian rural services Leading rural financial services and insurance provider Australia’s leading global grain trading business People and Capability

7 7 Integrated Business Model will position AWB as Australia’s leading agribusiness

8 8 Three growth areas Leading position in Australian rural services Leading rural financial services and insurance provider Australia’s leading global grain trading business Fertiliser and merchandise are the main areas targeted for growth Cross selling Leverage buying power in the network Improve merchandise and supply chain effectiveness Increase product base – build on AWB’s natural advantage to provide a wider range of products, better interest rates, and streamline credit processes Specific areas targeted for growth include lending, deposits, wealth management and general insurance Continue to focus on mandate to maximise grower returns Expand the suite of commodities, origins and risks managed Strengthen the differentiated position for Australian wheat

9 9 Outlook Australia’s agricultural outlook -Wheat crop: between 21 to 24 million tonnes for 2004-05 -Livestock Cattle numbers forecast at 27.6 million head for 2004-05 Sheep numbers forecast at 99.5 million head for 2004-05 -Wool: shorn wool production estimated to be 440 million kilograms greasy for 2003-04. Wool prices are heavily dependent on foreign exchange rates Integration of Landmark -On track to meet EBIT enhancement opportunities indicated at the announcement of the acquisition in August 2003 -Primarily cost synergies and finance growth at $5-$10m in 2003-04 increasing to $30-$40m by 2005-06

10 Charles Stott GM – Rural Services Rural Services

11 11 A period of change 2001 & 2002 Merger Dalgety & IAMA Achievement synergies Maintain revenue in existing businesses Establish new brand identity Capture merchandise and logistics opportunities 2003 Growth phase Nationalised structure Merchandise sales recovery East Coast fertiliser expansion Drive wool and livestock growth and productivity National finance and insurance expansion 2004 Integration and growth Capture cost and revenue synergy benefits Centralise head office function Expansion of financial services and growth Drive wool, livestock and merchandise growth and productivity Network optimisation Account management OBJECTIVE 2004-05: Integrated Business Model

12 12 Merger of Wesfarmers Dalgety and IAMA in 2001 resulted in Landmark becoming Australia’s largest rural merchandise distributor Stores across Australia stock a range of animal health, cropping, fencing, fertiliser and farm hardware product Merchandise products are distributed via 230 company owned branches, 47 franchises and 120 members and agents, and supported by over 200 agronomists Australia wide Merchandise

13 13 Merchandise overview Competitive environment Key opportunities Intense price competition Commoditisation of products Rationalisation of suppliers, particularly in the chemical sector Channel proliferation leading to increased competition in distribution Low demand for cotton inputs due to lower production, irrigation cuts and biotechnology Livestock carrying numbers reduced following drought with expected impact on Animal Health and management sales Cotton prospects improved with increased water availability Commoditisation of products – 75% of chemical products expected to be off -patent by 2005 – Generic products are becoming a bigger part of the farmer’s decision making process Operational improvement opportunities Meet all price points … a generic strategy will be important

14 14 Significant supplier of fertiliser distributing over 1 million tonnes per annum, as well as retailing liquid, trace element and specialist fertilisers The major fertiliser products are globally traded commodities, resulting in: –Limited scope for differentiation between retail outlets; and –Importer traders ensuring world price movements rapidly flow through to domestic price (i.e. volatility) Fertiliser

15 15 Fertiliser overview Competitive environment Key opportunities Limited product differentiation Large number of agents and dealers competing locally Requirement for logistics services in some markets Ongoing rationalisation of industry players Market volumes increasing Nitrogen use increasing Local prices driven by world prices Increased market share through acquisition of independents Cross sell bundled product offering … growing market share and volume is important

16 16 One of Australia’s largest marketers of livestock Operating in all States and Territories throughout Australia Handles 20% of livestock trading in Australia Core business is sale of livestock through saleyards - 70% sold via auction Livestock trading is also a part of the business Landmark supplies processors, supermarket processors, lot feeders and live export markets Livestock

17 17 Livestock overview Competitive environmentKey opportunities Pressure on core agency business from increased direct selling to processors Major competitors involved in vertical integration Private agents cutting commission rates to gain share Rationalisation of saleyards Increase business into grain fed markets Strong meat and live export markets Productivity improvements, saleyard rationalisation … prices are expected to remain strong

18 18 Handle approximately 25% of the National Wool Clip (500,000 bales) Provide traditional broking / auction selling services as well as a comprehensive range of Risk Management products 50% interest in Australian Wool Handlers ‘AWH’ (with Elders) – wool handling Not involved in any downstream processing Wool

19 19 Wool overview Competitive environment Key opportunities Strong competition for a record low volume of wool (sheep numbers at 96 million in 2003-04) Small, low cost regional brokers have increased market share Ongoing price discounting Rationalisation amongst brokers to occur Move from wool to meat likely to continue Fall in wool production has created an opportunity for industry rationalisation and consolidation Good prospects for sheep meat will assist building flock numbers Low levels of supply will provide support to wool prices … increased throughput is the key

20 20 Landmark real estate has two main activities: Real Estate - Rural property sales - Residential property sales

21 21 Real Estate overview Competitive environment Key opportunities Metro and town real estate agents moving into small farm areas causing margin pressure Sophisticated players with marketing and sales representatives Low market share in residential real estate Limited capital Variable pay structure Outlook is for steady growth … good platform to grow residential market share

22 22 Extending and creating value and building the Integrated Business Model Growth Day 1 – August 29 2003 Transition Integration Planning Transaction Integration Project Management Integration June 30 2004 Full completion/transition has now occurred of all Landmark accounting, finance, treasury, business development, HR, risk, corporate insurance, IT, marketing services, stakeholder relations and legal functions within AWB functions Network, IT and HR Integration are on going Integration September 30 2004 Synergy Benefits Completion and Signing Integration of Landmark

23 23 Outlook Opportunities exist to grow in most activities Commodity prices expected to remain strong Real Estate values expected to plateau

24 Network Operations John Maher GM – Network Operations

25 25 Branches Members Franchises / Agents Staff = 293 3547 29 19 461 Staff = 363 43 19 11 Staff = 239 2814 37 Staff = 350 31 857 Staff = 455 Network structure and rural footprint

26 26 Account Management Network Optimisation Integrated Business Model as well as……. –Training & Development –Profitability Improvements (financial services & merchandise / fertiliser) –Operational Excellence Network operations will focus on

27 27 The number of activities utilised by each customer of Landmark is low FertInsL/StockMerchWool Fert Ins L/Stock Merch Wool Activity – Key Customers Penetration across other activities (%) High cross sell growth opportunities Account management – cross sell opportunities

28 28 Utilising data to segment Landmark & AWB’s customer base Developing appropriate service level protocols & disciplines Improving differentiation in service levels Account management – customer relationship management (at branch level)

29 29 1.Institutionalise the customer knowledge historically maintained with individual employees. 2.Evolve the culture from an activity specialisation focus to a customer relationship focus, and build an account management philosophy. 3.Increase “share of wallet” from our existing customer bases. Key strategies for account management

30 30 Improve profitability, capture growth and improve return on capital Optimise current branch /franchise options Optimise network footprint Optimise network format Branch categorisationOutlet design and standards Identification and analysis of growth opportunities Network optimisation (continued)

31 31 Market Share Average size Corporate Branch Market Share vs Market Size Market Potential Identified opportunities within each geographic segment and branch catchment area Profit contribution by outlet is variable due to a number of factors

32 32 Branch Franchise Size of circle indicates value of channel partner’s revenue Three distinct channels to market Leveraged properly, provides a competitive advantage Principal’s share of channel partner’s product category sales Channel partner’s inflation adjusted growth rate Network configuration Member

33 33 Strategies in place to optimise our foot-print and maximise profit pool opportunities High potential business managers matched to high potential locations Optimal store configurations Optimal catchment areas Efficient channels to market What will the network look like in 3 years?

34 Update on IFRS Paul Ingleby Chief Financial Officer

35 35 Background Progress to date Project timeline First time adoption What’s next Update on IFRS

36 36 In July 2002, the AASB committed to full adoption of International Standards –Global capital requires consistent reporting –Consistency with Europe, fewer differences from US GAAP Applies for financial years on or after 1 January 2005 First applies to AWB for the half year ended 31 March 2006 including comparatives Impact disclosure is qualitative at 30 September 2004, and quantitative at 30 September 2005 AWB project kicked off January 2004 and Deloitte was enlisted as an expert consulting partner IFRS background

37 37 Major impacts identified –No impact on pool reporting –Impediments to hedge classification –Goodwill impairment testing –Performance rights and share plans to P&L –Balance sheet method for deferred tax Documentation of first time adoption position Realistic project timelines with resources identified and committed Board and audit committee regularly briefed Progress to end of August

38 38 Sep 04 Sept 05Sept 06 Mar 05Mar 06 Project timeline 12 345 Sept 04 Comparative opening balance sheet Exclusion of AASB 132 &139 ASIC disclosure AASB 1047 qualitative impact analysis Systems implementation strategy March 05 Half year comparatives Exclusion of AASB 132 &139 Inventory of instruments Accounting for trading transactions Valuation methodology March 06 Half year IFRS compliant report Sept 05 Full year comparatives excluding AASB 132 &139 Transition entries identified for AASB 132 &139 Full policies to include AASB 132 &139 Systems in place for all IAS requirements including AASB 132 &139, where applicable: hedge, designations, effectiveness and testing AASB 1047 quantitative impact analysis Sept 06 First full year IFRS compliant annual report

39 39 Maintain Landmark acquisition accounts No financial instruments comparatives Retain Foreign Currency Translation Reserve No revaluation of fixed assets AWB’s first time adoption

40 40 Draft opening balance sheet Implement comparative data capture –2005 financial year –Non financial instruments only Leverage tax consolidations software and Market Risk Control Framework Implement financial instruments detailed hedge assessment What’s next for IFRS

41 Wheat prices, futures and global supply Sarah Scales GM, AWB (International) Limited

42 42 World wheat production has increased 56 million tonnes to 608 million tonnes in 2004 Significant production increases occurred in the –EU-25106 mmt to 129 mmt –FSU61 mmt to 84 mmt –India65 mmt to 72 mmt –China86 mmt to 90 mmt US crop declined from 64 mmt to 58 mmt World wheat production

43 43 World wheat production & consumption Source: USDA 2004

44 44 World wheat trade – 5% major exporters * 2003/04 & 2004/05 – estimated Source: USDA

45 45 World stocks A larger world production was required as world stocks remain historically low –From 202 mmt in 2002-03 to 167 million tonnes in 2003-04 to 132 million tonnes in 2004-05 and 142 million tonnes 2005 Other major world crops are showing the same trend –Corn from 148 million tonnes in 2002-03 to 85 million tonnes in 2004-05 –Rice from 139 million tonnes in 2002-03 to 68 million tonnes in 2004-05 This prevents a huge production swing into one crop Human consumption demand increasing at long term trend of 1% Feed demand will increase 7 million tonnes due to larger feed wheat availability in 2004-05

46 46 Kansas futures

47 47 Prices Production risk premium has been removed from the market and this has seen Kansas futures decline from in excess of US$4 bushel to US$3.40 bushel APW National Pool return has declined from $220 FOB to $197 FOB for 2004/05 pool Weaker currency is supportive to price

48 48 The future Increased production and export supply from the Russia and Ukraine likely over time Exports from the Black Sea work initially into the Mediterranean, then Africa and the Middle East This is one of the major drivers for AWB to focus on increasing exports into Asian markets over the next five years AWB exports into Asia in 2004 will be greater than 10 million tonnes for the first time

49 49 Outlook Risk premium has been taken out of current prices Strong competition from Northern Hemisphere export origins in the short term There is still a tight balance sheet that will react to any production issue in 2005 China expected to continue strong import program in 2005 AWB confident of retaining 50% of Iraq import demand

50 Financial Services Marcus Kennedy GM – Financial Services

51 51 Priority Outcome AFSL licence Licence approved within timeframe Enabled AWB to continue to offer the IBD’s IBD Prospectus & major customer migration IBD Prospectus & major customer migration Prospectus launched 85% conversion Protect & shore-up Harvest Finance business Protect & shore-up Harvest Finance business On track to achieve $5m uplift On track to achieve $5m uplift Over 70% market share Improved sales mgt & RFM’s recruited Segmentation of customers Aligned targets and incentive plan What we have achieved to date

52 52 Term Loans Seasonal Finance Line of Credit Fastrak Finance Lending $1b book Call Investment Account Rural Cheque Account Rural Card Term Deposit Deposits $280m book General Insurance Crop Insurance Stud Livestock Insurance Transit Insurance Insurance $120m book Landmark Finance Online Plus Transfer funds Views statements Pay bills Net Access 2,800 clients Harvest Loan Flexible Drawdown Loan Advanced Payment Deferred Payment Harvest Finance $1.5b book Financial Advice Master Trust Platform Investment Products Wealth Management New business opportunity What do we offer clients?

53 53 Lending Deposits Wealth Management Insurance Total Agri-business market Earning potential of total market Harvest Finance $4b $80m $760m $140m $11b $110m $2.1b $42m $30-$35b $610m How big is the opportunity?

54 54 LendingHarvest FinanceDepositsWealthInsurance Larger clients Larger deals More professional operators Cashflow out of sector Equity in Farms unlocked Lower premiums Scope to differentiate Market share erosion Increased choice and competition Greater competition for customer ownership Pressure on smaller operators Increased need for seasonal funding E-solutionBarriers to entry Focus on choice and independence Shake-out of Intermediaries E-solutions Clients approached by brokers on fee for success basis Maintain strength Greater focus on lifetime value Greater competition for customer ownership Role of intermediary is key Lending opportunities Leverage client base Increased investment High advice need Increased complexity Competitive market Technology, scale, increased regulation Increasing role of intermediaries Farm succession issues Farm consolidation Market trends and impacts

55 55 Distribution footprint in rural 430 outlets across all regional areas Local representation and service 70 Finance specialists Often on farm & close to clients business Deeper customer relationships than other Financial Service providers Deeper customer relationships than other Financial Service providers Insight into the financials and operations of a clients total business More individualised business/product transactions per client Rural focus Specialist focus on agri means no distractions Deeper understanding of agri needs e.g. we want the physical, we see the fund flow (e.g. livestock, grain, wool etc) Supplier relationships Strong suppliers in all categories –Lending: Rabo –Deposits: NAB, WBC –Insurance: WFI, CGU Why we can win

56 56 LendingHarvest FinanceDepositsWealth MgtInsurance Product  Relationship pricing and bundling  Cross sell and bundling programs  Tap into commodity cashflows  Create agri specific offering  Fill product gaps People  Recruit and develop high calibre RFM’s  Specialist grain expertise  FSRA skill accreditation  Recruit/ acquire advisory business  Recruit and develop specialist staff Process  Enhanced loan platform  Web enabled  Improve client statements  Full online proposition  Establish new platform  Supplier sales conversions  Web enabled Positioning  Build FS brand with primary producers  Reinforce strong brand with grain clients  Build FS brand across rural, regional and metro  Build FS brand with primary producers  Build FS brand across rural, regional and metro …to be a broad-based rural and regional financial services distributor with niche manufacturing capability where we have a natural competitive advantage What are our major initiatives

57 57 Rural customers traditionally under serviced Service based proposition Leverage customer insights across all business streams Business partnership Outlook

58 Trading Peter Geary GM – Trading

59 59 Trading group Sales & marketing (Services function – deal making ) Australia Trading International Trading Derivatives Trading

60 60 “To strengthen core trading capability and be a world class global niche agricultural commodity trader on a light asset base model” Trading will build on existing capabilities, domestically and internationally - Utilising a “fund-of-funds” approach to achieve: Tighter and faster decision making Dynamic capital and resource allocation Global trading focus Trading and marketing synergies Objective of the Trading group

61 61 Capturing Trading & Marketing synergies Pool Marketing (IS&M) complements Trading activities through its: Trading adds value to the Pool Marketing (IS&M) activities through its: Market position AWB brand Wheat market information Customer relationships Risk management skills Wheat acquisition skills and marketing information Customer solutions / product bundling offerings Competing product information Customer relationships

62 62 Sth Amer Other 26% 18% 11%1%11%15%1%17% Sth Amer Other 1% 28% 1% 2%47%19%1% Sth Amer Other 5% 10% 1% 5%35%9%34% Wheat Oilseeds Corn World trade based on 2003-04 World totalAWB Share 107 mt 75 mt 74 mt 16% 1.3% 1.4% Importers AWB’s global reach Source: USDA & AWB trade data 2004 AWB wheat exports 26% 3% 18%4%24%21%1%3%


64 64 But has changed dramatically over the past five years … Heavy Trading risk profile Assets Low Light High GLENCORE LOUIS DREYFUS BUNGE WILMAR CARGILL ADM CONAGRA CWB AWB opening space for a global ‘niche market’ positioning

65 65 Australia Trading (formerly Domestic Trading) EnvironmentPriorities & initiativesOutlook Large crop, margins continue to be pressured Drought Consolidating customer base Strengthening competitor base – consolidation of trading houses Conservative selling by growers following drought Opportunity to develop “deeper” relationships with key customers Strengthen sales links to intensive domestic livestock industries Expand commodity base Develop business in non-regulated export grains Develop livestock value-add activity Improve efficiency of risk capital utilisation (use fund-of-funds approach) Bullish domestic crop production outlook Weakening international and domestic commodity prices Market price curve keeping grain away from market …Outcome = diversification of Trading earnings

66 66 Chartering EnvironmentPriorities & initiativesOutlook Volatility in freight rates driven by commodity boom Counterparty/market default driven by price extremities Pool chartering dependent on size of export crop Opportunity to expand primary grain export business into 3 rd party freight opportunities Opportunities to increase global presence through single operational strategy of all AWB freight books Opportunity to develop back freight businesses (e.g. fertiliser) Develop additional skills in freight market intelligence Increase operations of vessels in global freight market Increase CNF sales of Pool and Non-Pool tonnage Continue to develop a presence as a 3 rd party freight supplier Freight rates weakening globally through 2005 Increased vessel supply Economic growth rates from China …Outcome = 24 hour global market coverage in conjunction with Geneva Chartering

67 67 Freight market $

68 68 International Trading (formerly Global Operations) EnvironmentPriorities & initiativesOutlook 2004-05 larger world crops, lesser price volatility prospects (lower execution risk, but fewer trading opportunities) Inability to attract capabilities to develop niche strategy of business Increased competitive pressures from global multi- national trading entities Merchants’ industry international consolidation Improve quality and origin of earnings and build deeper tailored relationships with a range of highly valued customers Secure regular supply and/or origination agreements in key markets Diversify revenue by covering more markets and products Leverage marketing and trade finance capacity Expand and strengthen trading skill set & capability Align IT to origination and marketing strategies Larger global crop production; declining market volatility Increase penetration of AWB IT into new markets and customers …Outcome = better market coverage and increased other origin grain volume traded

69 69 Derivatives Trading EnvironmentPriorities & initiativesOutlook Drought impacting physical volume Grower willingness to forward contract Market price environment and its impact on product attractiveness Customer buying in at lower price environment Build deeper tailored relationships with a range of highly valued customers Leverage Landmark business to provide an expanded product & service offering to our suppliers and customers Continue to build on business through existing AWB customer base and physical flows Expand business to external financial clients and other commodities Broaden the grower product range to increase volumes and marketability of products Improve sales effort through regional networks Good uptake of scale with overseas buyers Opportunity to bundle with physical wheat price …Outcome = Improved quality and origin of earnings

70 70 Strong growth across all activities Only domestic trading with national presence – reliable trading partner Fewer players through industry consolidation and exit of medium sized trackers Strong uptake by international customers on product range Well recognised expertise in chartering environment Outlook

71 Questions

72 72 For further information contact: Delphine Cassidy Head of Investor Relations T: +61 3 9209 2404 E:

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