Lynch : Chair / CEO transcript and AGM presentation

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Lynch Group Holdings Limited (LGL)

Annual General Meeting 26 November 2021

Transcript of Chair and CEO addresses

Chair address

Lynch Group holds a unique position amongst listed companies on the ASX. We are a 100-year-old company, the largest distributor of floral products in Australia, primarily through the supermarket channel and the largest grower of premium flowers in the Chinese market. This combination of strong but predictable growth in Australia with the high growth offered by selling to Chinese domestic consumers in a low-risk environment provides shareholders the opportunity to participate in an exciting long term growth story.

Australian Operations

The core of the Australian business is the national supply of floral and potted product to our supermarket customers. Whilst Lynch Group has been supplying the grocery channel for over 30 years, it remains relatively undeveloped when compared to other markets. In the UK for instance, 55% of all floral products are sold through supermarkets. In Australia, that share is 19% but growing quickly. Lynch Group is changing the way Australian's buy flowers and potted plants. Our scale, innovation, worldwide sourcing capability and merchandising field force have greatly changed the perception of supermarket flowers which is why the grocery channel is rapidly growing its share of the overall floral industry. Over time we expect the grocery channel to approach the share of the total floral market that is currently achieved in the UK.

The value Lynch Group brings to its supermarket customers is our ability to plan and manage a complex category. We trade in a highly perishable seasonal product that is sourced from Tier 1 growers in Australia and from around the world. Growing conditions can often vary season to season and supply chains are prone to disruption - particularly evident during the COVID-19 pandemic. The flexibility of our supplier base and agility in reacting to inevitable changes, ensures a consistent year-round supply of high-quality product to our customers. This is exemplified by the Group's support of key events such as Mother's

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Day where 15 million stems are sourced from Australian and international growers, processed and displayed in store for what is largely a three-day sales window.

Our scale and longevity in the market is critical to securing supply from the very best growers. In many cases we are the growers' largest customer and therefore mutual trust and support is critical. Locking in the highest quality supply not only improves the offering (and vase life) to the customer but also minimises the risk of rejection of imported product by Australian Biosecurity. Our in-house quality team works closely with Australian Biosecurity to ensure that imported product is effectively treated and screened to protect Australia from damaging pests and disease.

Our product team continues to explore opportunities to deliver new and attractive products to customers. This not only allows us to take advantage of seasonal product, but to create beautiful offerings for household consumption, and increasingly for use as gifts. Lynch Group's supply of bouquets and arrangements and certain potted product is increasing our average selling price and allowing us to give customers broader choice and value. The lower retail price of supermarket products with improving perceptions of quality has underwritten the growth of the channel.

Lynch Group employs one of the largest merchandising field forces in the country. This team of dedicated professionals assist local store management with ranging whilst ensuring the presentation of product remains fresh to drive sell through. In addition to the normal supply of product to customer distribution centres, Lynch Group also manages an increasing number of Sale or Return stores (SOR). The buying plan (and wastage) for these stores is more closely managed by Lynch Group, allowing us to invest more heavily in stock depth, and ranging can reflect current buying opportunities sourced by our procurement team. SOR stores outperform core stores by a factor of 2 to 1 on average, although any waste is born by the Group.

Our three Australian farms support the Group with potted plants and Australian native flowers that are difficult to otherwise source at required specification, quality and volumes. This vertical integration of supply (including our farms in China) is a competitive advantage in maintaining consistency of service to our customers.

Lynch Group is the largest importer of floral product into Australia. Our fast-growing Markets sites distribute locally sourced products alongside imported lines to other wholesalers and florists which remain the largest customer channels. With our initial hub operation in Flemington and two satellite sites in Newcastle and Canberra and now a new hub in Rocklea, Brisbane, this volume adds to our procurement scale and provides additional flexibility in how we manage product flow. The Market operation allows us to more fully contest the general wholesale and florist segments that comprise the largest share of the overall Australian floral market.

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China Operations

Lynch Group has been active in China since 2004, building its first processing facility in 2008, and developing its first farm in 2012. The intention then was to provide a consistent source of high-quality floral product at competitive pricing to meet supermarket price points. Located in the Kunming region of Yunnan province in South West China, the area benefits from an ideal growing environment, with consistent rainfall, elevation (important for product quality) and good access to airport facilities. The Chinese government has been very supportive of the Group's expansion of farming operations as part of a national strategy to improve agricultural productivity, rural incomes and retain a skilled workforce in the inland provinces.

A second and larger farm commenced development in 2018 with the product of both initial farms largely being exported to support the Australian operations. Own production was supplemented with locally sourced product to provide well priced counter seasonal product into Australia.

Following a 10-year association with Van den Berg Roses (VdB) in China, Lynch Group acquired a 20% shareholding in 2019. VdB operated two large farms servicing the Chinese domestic market via a dedicated sales team. The IPO of Lynch Group in April this year funded the buyout of the 80% of VdB not already owned.

Today, Lynch Group in China is the largest grower of premium flowers in the country. Due to product quality issues associated with a fragmented and developing grower base, coupled with multi-layer ambient product distribution networks, the consumer market for floral products has been slow to develop. Today, the floral market in China is many times the size of most western markets, is growing strongly, and consumer buying trends centred around self- consumption and gifting, particularly during key event periods, is emerging rapidly. Per capita spend rates on floral products still remains comparatively low.

Lynch Group's access to premium floral genetics, investment in advanced growing infrastructure and systems, and direct distribution via its own contracted cool chain logistics, provides year-round supply of a high quality and unique product range to Chinese consumers at affordable prices. Today over 50% of farm production is sold to various retail platforms including supermarkets at fixed prices, suppressing the volatility of market prices. We continue to invest in value added products. The opening of the Shanghai processing facility in early 2021 was an important first step in bringing fresh, value-added product closer to the customer.

Importantly, Lynch's China operation is unique in that it is producing in China for the Chinese domestic market alongside its export operations to Australia. Notwithstanding recent trade tensions between China and Australia, China has continued to support local consumption and export pathways. There has been no discernible impact on Lynch's operations from a government or regulatory perspective and we are therefore confident in our continued investment

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in this exciting, high growth market. Lynch is able to deliver unique high-quality product at a low delivered cost via its technological advantage underwriting superior returns on our invested capital with demand likely to outstrip supply for many years to come.

Closing remarks

To complete an IPO, the VdB acquisition and set a record in sales and profit in both Australia and China in a single year would be an outstanding achievement. To have accomplished this in the context of the pandemic reflects the skills and dedication of your management and operations teams. We would like to extend our thanks to all stakeholders and look forward to another successful year across FY22.

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CEO address

Good morning, ladies and gentlemen. Today I will talk to you about our performance over financial year 2021, update you on progress on our current growth strategies, and provide an outlook for the remainder of the Group's prospectus forecast period across CY21.

FY21 was a busy and successful year for the business by any measure. It has been a year of strong growth, where we have substantially exceeded the forecasts that we set for ourselves as a team, and for our investors. We have successfully raised capital and listed the company on the ASX, at the same time finalising the acquisition of our partner business Van den Berg in China, with its two high production farms and leading domestic sales platform. And we have delivered on our key operational objectives in both Australia and China.

In Australia, the combination of ongoing range innovation, incremental improvements in our merchandising efforts, and operational improvements aimed at product speed across our supply chain, have enabled us to deliver a substantial sales lift across the year and in our important event windows. Our China business has benefited from a significant increase to our farm production footprint, and a big step forward in diversifying our sales channels, moving closer to the consumer through our direct partnerships with major retailers.

We have achieved this across an extended period of managing through the full range of impacts from COVID in both our Australian and Chinese operations. Our priority has been, and remains, the safety and well-being of our staff and their families. From the commencement of the pandemic in China in January 2020, we have put in place mandatory temperature testing and attendance records, heightened hygiene standards, strictly adhered with government health regulations, and conduct daily rapid antigen testing in our Australian operations in NSW and Victoria. I would like to thank all of our staff across our operations, for their energy and dedication, enabling us to keep operating across this uncertain and challenging period.

All in all, we are pleased to report on our progress across FY21 in both of our operating geographies.

Australian Operations

For FY21, our Australian operations achieved a record sales and earnings result, notwithstanding the impacts of the pandemic. Pro-Form Revenue of $288m was 27% up on 2020 with pro-forma EBITDA of $36m, 92% up on 2020. The pandemic has highlighted the strength of our business model, fully testing the flexibility and agility of our operational approach. We are fortunate that our supermarket customers have been able to operate through lockdowns, despite

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