UPDATE ON FARMLANDS' RESPONSE TO COVID-19

Dear shareholder,

I hope this note finds you, your families and your stakeholders well in what are clearly extraordinary times for all of us.

I want to update you about where your co-operative stands as a result of trading under COVID-19. I also wanted to discuss our response and what may happen from here.

Farmlands remains challenged by the unknown nature of trading under COVID-19 – especially the timing and levels. Right now, our forecasts are telling us that our co-operative will be trading around 20-25% below what we were prior to the pandemic, with some parts of the business currently trading significantly below 30% of their pre-COVID levels this month. As you know, our Retail division is operating but with customers being unable to enter our stores, the trade is staying close to the above figure. Our Fuel and Card businesses are worse, our Nutrition and Grain and Seed businesses are better. To give you an idea of the scale of that unforeseen loss of trade, on last year's numbers an annual reduction of 20% would mean an annualised revenue loss of $540m and a resulting shortfall of $35m at the contribution level.

Before I go into the details of what we are doing about bridging that shortfall, I want to acknowledge the amazing contribution our people are making to ensure Farmlands can provide an essential service to the primary sector. Our people have had their own challenging circumstances in their home environments to deal with and have also had the work burden of "keep servicing our customer while changing the way you do just about everything". This has been no mean feat and on your behalf, I would like to pass on a huge thank you to our people for how hard they have worked to ensure everyone remains safe while they deliver on the promise of being an essential service for you, day in and day out.

Clearly if we are to continue operating the way we are, we have a big financial hole to fill. I have identified three areas to detail to you:

  1. What we have done.
  2. What we are working through.
  3. What we may yet have to do.

1. What we have done.

Our priority has been to focus on how we need to operate, what we can implement quickly and what is relatively "easy" to do. We do this while protecting our ability to meet the needs of our shareholder/customer in what is a challenging time for you as well. Since the advent of this pandemic, we have:

  • Cancelled our annual National Conference and stopped all air travel.
  • Established a headcount freeze, with the objective of not replacing people who leave while we remain exposed to these trading circumstances.
  • Called for voluntary uptake of annual leave and work hour reductions across our entire workforce.
  • Had the Farmlands Leadership Team remove itself from their annual incentive entitlements.
  • Rearranged our banking loan agreements to better align with cash flow projections.Reached out to landlords to request rent relief during these challenging times.
  • Introduced and rolled out our temporary e-commerce platform, "COVID Click and Collect".
  • Applied for and received the Government Wage Subsidy.
  • Instigated an "ideas register" for staff to contribute their own cost reduction ideas. So far we have received 32 ideas from staff and have implemented, or are working through the feasibility of implementing these.
  • Increased in Member Fees by $10 per Card per annum, to better reflect the cost to serve.
  • Closed Saturday trading.

2. What we are working through.

These are items that we see opportunity in but are more difficult to do and take some more time.

  • Working through credit terms with key suppliers to identify and deliver cash flow benefits.
  • Reviewing staffing level requirements, given the different way of operating, in order to identify cost saving opportunities.
  • Extension of the removal of incentive beyond the Farmlands Leadership Team.
  • Confirmation of rent relief.
  • Fast-track the efficiency solutions that have been enabled through our technology investment, particularly in our supply chain.
  • Complete review of sponsorship and marketing activity, with a view to minimising spend as soon as possible.

3. What we may yet need to do.

This is a difficult one to ascertain, as it is dependent on how long and under what circumstances we continue to operate. No decisions have been made in these areas and we have to make sure we are really clear on their impact – both cost and benefit – before we agree to proceed. Areas we are starting to do some thinking about include:

  • Ongoing store operating hours.
  • Additional debt financing.
  • Introduction of more "cost to serve" fees – to recover actual costs of providing some services to shareholders.
  • Capital raising.Further reduced staffing and/or remunerations levels.
  • Sale of property or non-essential assets.Retention of the Annual Bonus Rebate for FY20 year.

It is important to appreciate that although Farmlands is in the privileged position of operating as an essential service, our operating conditions and performance are far from normal. We all have a role to play to ensure Farmlands continue to be in a position where we can support you to the levels and manner that you have been accustomed and we know you appreciate. The business has recently made a significant investment in technology which is helping us expedite beneficial solutions faster. If you would like to know where you can help, I want to encourage you to:

  • Keep using your co-operative to source your farming needs. We are operating, we are open and we can continue to provide for you in the ways we have always done.
  • Use your Farmlands Card when you shop. It is a classic win/win – you get a better outcome through great pricing, one statement, one monthly payment, codable information and we get a fee for managing the transaction.
  • Embrace the technology solutions Farmlands offer. Things like email addresses, electronic communications (particularly statements) and using our online shopping platform, COVID Click and Collect all have significant value, as they reduce our cost base and give you better information, sooner.
  • Arrange for payment via Direct Debit. Given our circumstances cash flow is critically important right now. You can help your co-operative by ensuring we are paid on time – and you ensure you get your monthly rebate as well. Cheques are time consuming, have high bank fees, get lost and are not consistent with the investment we have made in streamlining our back office.
  • Ask yourself – what parts of my farming business can I deal with Farmlands where I currently don't? We have 7,000 Card Partners and provide agency services for many farming partners – like Ford, FMG, Meridian, Z Energy and Ballance fertiliser. Let Farmlands help you get a better deal for your inputs!

If you need any help on any of these things, your local Farmlands representative can get you set up in the way you would like to be.

Thank you for your commitment to –and your understanding and support of – your co-operative while we work through times that have been a unique experience for us all. Please know our decisions are first and foremost guided by how we can look after you effectively. Together we can get through this and Together we will come out stronger. One very pleasing aspect of this crisis is that it has rekindled broader New Zealand's appreciation of what the landowners of this country contribute to its economic viability and success. We are proud of our role within that and are confident we can continue being a contributor to your success in everything we do.

I hope this note finds you well.

Kind regards

Pete