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Edited Transcript of CGC.AX earnings conference call or presentation 26-Feb-20 11:00pm GMT

Full Year 2019 Costa Group Holdings Ltd Earnings Presentation

Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Costa Group Holdings Ltd earnings conference call or presentation Wednesday, February 26, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harry George Debney

Costa Group Holdings Limited - CEO, MD & Executive Director

* Linda Kow

Costa Group Holdings Limited - CFO

* Sean Hallahan

Costa Group Holdings Limited - COO

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Conference Call Participants

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* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Craig John Woolford

Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team

* David Pobucky

Macquarie Research - Analyst

* James Ferrier

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst

* Jason Palmer

Taylor Collison Limited, Research Division - Equities Analyst

* Larry Gandler

Crédit Suisse AG, Research Division - Director

* Michael Peet

Goldman Sachs Group Inc., Research Division - Executive Director

* Scott Ryall

Rimor Equity Research Pty Ltd - Principal

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. And welcome to the Costa Group Holdings Limited CY '19 Results Call. (Operator Instructions) I must advise you that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Managing Director and CEO of Costa, Harry Debney. Thank you, Please go ahead.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [2]

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Good morning, ladies and gentlemen. And welcome to Costa Group Holdings results presentation for the full calendar 2019 year. My name is Harry Debney, and I'm the CEO, Managing Director of Costa. Joining me in this presentation is Linda Kow, our Chief Financial Officer; and Sean Hallahan, Costa's Chief Operating Officer.

I'll begin with an update on business outcomes and trends. You will recall that in late October 2019, we updated the market on our revised guidance forecast for the full calendar '19 year. Today, I confirm this guidance has been met with an EBITDA-SL result of $98.3 million and NPAT-SL of $28.4 million. Our revenue growth was a solid 5.8%. Our statutory NPAT was a $33.8 million loss, and this includes material items, which are primarily noncash in relation to the mushroom category rationalization of aged facilities and African Blue acquisition.

The impact of multiyear drought and weather conditions on the tomato and berry categories became more pronounced in the second half of the year. This led to an intensive focus on external water sourcing at both Guyra tomato glasshouses, which enable the maintenance of crop cycles. At Corindi, as previously reported, the annual raspberry crop was removed in order to protect the perennial blueberry footprint.

Both the Guyra and Corindi areas received heavy rainfall in late January, with continued falls through February. This has restored a high level of water security at these locations. A replanting schedule was now being implemented at Corindi for raspberries as well as the new blackberry program. During the extensive bushfires emergency in early January, 1 of our 2 small Tumbarumba, New South Wales blueberry farms suffered fire damage to the insured packing and machinery infrastructure. Significant loss of this season's harvest from this farm also occurred, however, damage to plants was limited. The impact from the November '19 hailstorm on our citrus crop is expected to be at the higher end of previous estimates. In addition, early season yield estimates suggests a lighter crop due to both density and sizing, the extent of which will become apparent as the season unfolds.

Back to pricing levels, there was considerable improvement during January in most categories, particularly in mushrooms and berries. In Morocco, there are positive early signs for fruit yield, quality and harvest timing, indicating promising prospects for the season.

The China production outlook is positive, and the coronavirus has not had any immaterial impact to date on harvest activities.

There have been distribution and logistics challenges caused by the restrictions on movement of people and goods. However, the challenges are currently manageable, noting the peak harvest period of March to May is approaching. I also want to highlight the fact that we are intensely focused on supporting the health and well-being of our people in China, and they are doing an outstanding job in dealing and responding to what has been a challenging time for them.

In addition to the situation in China, the company is monitoring the global supply chain and market impacts to determine the extent of ongoing risk to the broader operations, all of which is manageable at this time.

Sustainable Commercial Farming. The year just passed, and the challenges it presented has reinforced the need for our ongoing commitment to Sustainable Commercial Farming, and it continues to be the foundation of our success. Our diversified portfolio of market-leading premium fresh produce, utilization of protected cropping across several categories and a big geographic diversity of our production footprint, together with our IP, innovative economic practices and year-round production will deliver meaningful benefits over the medium to long term.

I'll now turn to the major initiatives this year and 2022 and beyond. The company is working intensely to not only mitigate the challenges we faced in 2019, but we're also focused on major initiatives to ensure strong delivery from 2020 through '22 and beyond.

In our berry category, the tropical variety of programs at the Atherton Tableland site in Far North Queensland aims to create a new range of deliveries suited to low-latitude environments, including Southern China, Agadir in Morocco and Central Mexico. Only 3 years old, the first 2 selection is around the descaling early commercial evaluation. Extension of our premium Arana variety also continues, allowing us to differentiate our blueberry production during both peak and shoulder periods.

Our strong export performance in citrus remains a highlight with over 70% of our crop exported, continued reduction in tariffs in the Korean market, both bulk of greater volumes to be sold in that market in 2020. Further automation of our packing operations has occurred, which provided packing technology having been installed in our citrus pack house Renmark in the South Australian Riverland. The productivity benefits have been immediate with packing efficiency increasing to [60 revs] per hour compared to the previous [40 revs] per hour.

In avocados, we continue prematurity on our farms will contribute now to volume growth and see trade volumes increase.

Our $2 million trade production target remains on course to be achieved over the next 3 to 4 years. Export opportunities continue to open up, and we are well positioned to capitalize on this, including the upgrading of our Childers Central Queensland avocado packing facility, which means greater packing capacity allowing both Costa and our third-party growers to expand production in the coming year to meet customer demand.

The mushroom category in 2019 faced one of its most challenging years in recent memory. However, we are well placed to capitalize with a market rebound for the expansion of our Monart facility. Our weekly production capacity will double from 120 to 240 tonnes. Expansion of our brown mushroom subcategory will play an important role in developing our category offering and capitalizing on the premium pricing that these mushrooms attract. Although, our Perino brand snacking tomato remains a standout in those categories, a new branding and marketing will ensure retain and build further on its market-leading position. Ongoing R&D evaluation of snacking and cocktail cultivars continues as well as opening up new sales channels beyond the retail setting.

In our International segment, a seasonal extension program is well underway in Morocco. We now have a production presence in the south of the country in Agadir with 66 hectors at the end of 2019. And from this, we are producing a blueberry crop from December through March, which is ahead of other growing regions and, therefore, provides an advantage with respect to early season supply into both the European and U.K. markets.

Early trialing of new tropical varieties are promising. Our China footprint continues to drive the Jumbo blueberry proving highly popular and delivering a strong price premium. We are working closely with our joint venture partner, Driscolls, to better understand market needs and the conditions that drive strategic and economic -- and agronomic decision making.

As I've previously, and I reiterate once again today, in agriculture, we can never fully eliminate risk, only mitigate it, and this means we'll remain focused on actively addressing the risks associated with changing climatic conditions, improving our water security and efficiency of use, continuously implementing yield improvement, develop a superior IP and removing waste from our harvest in post-service practices, and importantly assuring that we have a highly skilled workforce to execute to our growth strategy.

Moving to our key financial metrics. Revenue of $1.08 million -- $1.048 million for the full calendar year was at 5.8% increase on the prior comparative period, calendar 2018. This revenue growth was led by the new Colignan citrus farm sales and increased table grape marketing volume. EBITDA before SGARA, leasing and material items, that is EBITDA-SL, was $98.3 million, a reduction of 21.5% on the prior year. Net profit after tax before SGARA and leasing was $28.4 million, while statutory impact was a $33.8 million loss, inclusive of material items and amortization of intangibles in the mushrooms category and African Blue. As of the end of December, our net debt was $178.8 million with a leverage of 1.82. A final dividend of $0.02 per share, fully franked just to pay, bringing the total dividend payable for CY 2019 to $0.055, also fully franked.

I now hand it over to Sean Hallahan, our Chief Operating Officer, to talk to the performance of our produce segment.

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Sean Hallahan, Costa Group Holdings Limited - COO [3]

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Thank you, Harry, and good morning, everyone. As mentioned in Harry's introductory comments, the second half of the year was particularly challenging with drought conditions impacting fruit sizing and yield in our late-season citrus, berry and avocado crops. A higher water expense was incurred with increased usage and spot pricing across the citrus farms. Alternative water sourcing arrangements were deployed at Guyra and Corindi.

With respect to market conditions, there continues to be strong reception for citrus and table grape exports into core export regions. Over 70% of the citrus crop was exported for the year with Japan continuing to be the priority market, taking up to 25% of our citrus exports. In the blueberry category, there was earlier industry peak volume over the late August to September period with results in pricing pressure. However, this eased by year-end. Overall, pricing showed modest improvement due to increased weighting of shoulder season volume.

As previously reported, mushroom retail channel demand was subdued in 2019 and remain so for the rest of the year, resulting in an unfavorable sales mix and low wholesale market pricing. The closure of aged high cost mushroom growing facilities in Queensland and Tasmania was completed in November, December, retiring circa 65-tonne per week of production, ahead of the new Monarto volume coming online. Tomato pricing was solid across both truss and snacking product lines with revenue growth in the category underpinned by consistent quality and production growth across all key segments.

In Avocados, there was reduced pricing due to strong industry supply volumes. We also provide an update on what we have called one-off issues with the raspberry crumble issue proving more costly than initially anticipated with steps having been taken to limit future impact. The costs associated with citrus fruit fly costs were contained against the initial estimate of $4 million.

Costa farms and logistics. The Costa farms and logistics segment delivered a solid performance throughout the year with revenue growth in logistics due to additional Sydney-based services leveraging the Eastern Creek facility.

I now hand back to Harry to talk through our International segment performance.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [4]

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Thank you, Sean. Our third major segment is international segment, encompassing berry-growing operations in Morocco and China. The delay in timing of the 2019 Morocco crop due to colder temperatures at the start of the season meant that majority of the crop had to compete with peak Spanish production, resulting in lower pricing.

The 2020 season has started strongly with better-than-expected volumes harvested from Agadir in December. And the northern farms are on track to meet positive yield and crop timing.

Our China operations delivered another solid year with our third commercial harvest completed. Market demand for blueberries has remained strong, particularly for the Jumbo product. Blueberry yields for the 2019 season was impacted by some pest pressure and smaller-sized fruits. Ongoing refinement of agronomic practices has seen a much stronger start to the 2020 season. Finally, blueberry royalties have seen continued growth from our non-U. S. licensing income from new territories.

That concludes the overview of segment performance, and I'll now hand over to Linda to talk through the financial results.

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Linda Kow, Costa Group Holdings Limited - CFO [5]

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Thanks, Harry, and good morning to everyone on this call. Before we move into the financials, I'd like to note that calendar year '19 is the first full financial year that Costa has adopted the new lease accounting standard. As we have applied this data to future periods only and have not reset to prior years, we have presented our financial before and after the adoption of the new standard in order to provide comparative information to the prior need.

Revenue compares according to the presentation, they're from pre-leasing numbers with our traditional EBITDA and NPAT metrics update excludes the impact of the change. These are reference to EBITDA itself and NPAT itself. Revenue for the year was $1.05 billion, $58 million or 5.8% above last year. Revenue growth led by the new Colignan farm sales and increased table grape marketing volume in the produce segment and international segment revenue growth from China and Morocco. The group has continued to broaden its revenue base with about 1/4 of sales are now from exports or international markets.

EBITDA-SL was $98.3 million, $27 million lower than last year but in line with guidance provided in October. The decrease was due to lower produce segment earnings with both CF&L and international segment achieved EBITDA growth for the year. NPAT-SL was $28.4 million (sic) [$28.1 million] , $28 million lower than last year and also in line with October guidance. Mature items and amortization fees were $61.9 million post-tax and primarily noncash. This includes a $61.7 million pre-tax amounts from mushrooms related to goodwill impairment and asset write-down and restructuring provisions associated with sites closed. We have also included immaterial items, the amortization of acquired intangibles and integration expenses associated with the African Blue acquisition. The acquired intangibles have now been fully written off.

Further details of material items are disclosed in the appendix in this presentation. The impact to the P&L from the adoption from the new lease accounting standards resulted in an uplift of EBITDA of $49 million. Additionally, our interest and amortization expense in total of $57 million, resulting in overall net profit after tax reduction of $5.7 million for the full year.

In the produce segment, revenue was $869 million, up 5.5% on the prior year. EBITDA-SL was $69.2 million, $29 million than last year, EBITDA margin was 8%.

Mushroom revenue reduced by 4.3% due to unfavorable SKU and channel mix, more volume sold into wholesale at reduced pricing. Berry revenue increased 4.4%, which was led by new blackberry sales. Despite the crumbly fruit issues, raspberry production and sales managed to achieve modest growth against last year. Blueberry volume was 5% lower than last year, with a reduced amount of stored fruit carried over from 2018 and slightly impacting. Overall, blueberry pricing showed modest improvement from last year due to increased weighting of shoulder season volume.

The tomato category achieved revenue growth of 5.7% underpinned by consistent quality and production across all key segments. Citrus category revenue growth was 20.5%. This was driven by table grape sales in the new Colignan farm as well as growth in the marketing program. Actual citrus product sales were in line with the prior year. Revenue in the avocado category reduced by 2%, which was due to low volumes from the Far North Queensland and Northern New South Wales regions as well as the conversion of some traded volume to agency arrangements where only commission is recognized in revenue as opposed to full sales value under the primary arrangements.

Seasonal revenue was $149 million, a decrease of 3.9% against prior year. Costa farm's revenue decreased by 6.5% with lower revenue on core avocado and mushroom produce lines due to lower wholesale pricing. Logistics revenue grew by 6.2% due to additional Sydney services leveraging the Eastern Creek facility. Seasonal EBITDA-SL was $6.5 million, up $0.7 million from last year. The Costa farm site achieved EBITDA growth through strong margin capture and trading outcomes despite lower revenues. And the logistics site continues to show year-on-year movement.

In the international segment, revenue was $92 million, up 18.9% from last year. EBITDA-SL was $22.7 million, up 7.1% and EBITDA margin was 24.7%. China achieved revenue growth of 58.9% with China now being a meaningful profit contributor to the group. Hectares under production increased from 50 hectares last season to 110. Most of the revenue growth was in blueberries, which saw a greater than 80% uplift in volumes, pricing was slightly lower than last year, but better-than-expected due to favorable jumbo product mix. African Blue harvest volumes were up almost 20% on prior year. However, the unfavorable crop peak timing and increased price competition from April resulted in average price reduction of approximately 15% just last season.

African Blue earnings contribution was significantly short of expectations due to the softer-than-anticipated pricing. This is the key driver of segment reduction versus pcp. Despite the significant earning shortfall against expectations, the Moroccan business was profitable in 2019. And royalty income growth for the year was modest, with timing of some U.S. plant sales falling into the new calendar '20.

Moving on to cash flow. We achieved a good cash flow outcome for the year with a strong release of working capital from June, where there has been some seasonal working capital buildup to close the year with neutral working capital movements. This is reflected in pre-operating CapEx cash flow conversion rate of 96%. Consistent with prior periods, the JV adjustments now solely relates to Driscoll's Australia JV with the lower share profit noted due to the raspberry crumble issue.

In response to the challenging year, strong discipline around operating CapEx has enabled spend to be managed at the lower end of expectation. Productivity and growth CapEx for the year was $121 million and includes expenditure on a new mushroom and tomato production facility and ongoing expansion of various into China and Morocco at smaller amount domestically. Growth CapEx was lower than expected due to timing of expenditure into calendar year '20, including the deferral of the new tomato glasshouse.

Moving on to balance sheet and net debt. Net leverage at December was 1.82x EBITDA-SL, which was better than expected through strong cash flow management. The balance sheet is now very well positioned with the refinancing of senior debt facility completed during the year and the recent $176 million equity raise, which was well supported.

Post-equity raise, the senior debt facility were resized by $50 million to $450 million through reduction of the 3-year tranche. All covenant at December have been comfortably met, and there has been no change to covenant or material commission, following business demand of equity raise.

On the balance sheet, the main call out is the reduction in intangibles, which reflects the mushroom category payments and amortization of African Blue intangibles. We also see first half in parity from the application of the lease account standard with right of use asset of $285 million and liability of $293 million.

I will now hand back to Harry for the business and growth plan update.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [6]

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Thank you, Linda.

I'll now turn to our business and growth plan updates starting with a specific update on weather and climate issues. Responding to climate change, the recent drought has highlighted that whether cycles are becoming shorter and more extreme and Costa has actively adapted this business model to meet climate challenge -- climate change challenges within our Sustainable Commercial Farming objectives.

Over the past few years, the business had another part, Water, as previously addressed. With a full review of water security having been undertaken across the business. This review included dam capacities versus rainfall, which led to the construction of the largest dam at Corindi, 2.5 years ago of 900 mega liters.

Future long-term water security at Guyra is now being assessed at lower-than-average rainfall, with arrangements for access to contingency bores in place. There has also been increased activity with respect to water rights, hedging and pre purchases. We've also increased our focus on enhanced water collection and recycling initiatives, which included last year recycling of 200 mega liters of drain water in our glasshouse tomato crops. Our energy, security, and use are focused on increasing the use of renewable energy with solar power now operational at our Monarto mushroom facility.

Other key investments to address extreme and variable climate conditions have included our Mundubbera Queensland table grape farm with climate netting, with 100% of the early season crop recovered by the end of 2020. Investment in early-stage technology to improve yield forecasting using climatic data and ongoing R&D developing blueberry variety for more challenging growing climates.

I also want to talk specifically about Costa's key exposure to the current drought, which included our Corindi berry farm, our Riverland citrus farms and Guyra tomato glasshouses.

Corindi. The Corindi berry farm is entirely self-reliant on water capture through a network of on-site dams. In late December 2019, we announced drought mitigation strategies including removal of most of the current annual raspberry crop and early pruning of low value blueberries. This was to ensure available water was directed to conserve the priority crop, including our Variety Improvement Breeding program.

Since that time, there has been excellent rainfall across the farms, with storages now at capacity, including the 900 mega liters dam, totally serves 1,600 mega liters. Plantings scheduled for late quarter 1, '20 will now proceed as planned.

In the Riverland, there are -- citrus farms have circa 55% of their total water requirements under permanent water rights, with a further 15% hedged.

Water allocations for the full year '20 water year are expected to be near 100% for South Australian water and 57% for Victoria water. However, there is a risk that allocations for the full year '21 water year commissioned in July and beyond reduced further subject to rainfall. To manage this risk, Costa has forward purchased further water spot requirements of circa 9,600 mega liters, which, subject to allocations for the full year '21 water year provides full coverage of their water requirements for the whole calendar year '20.

Guyra. At Guyra, there was an active water sourcing and management process adopted to manage water resources for our glasshouse tomato crops, which includes establishing and trucking water from new bores. The recent consistent weekly rainfall has alleviated immediate concern with full dam storages at both Guyra sites. However, long-term resolution of water security at glasshouse 1 and 2 requires restoration of access to water sourced from the Malpas dam, which supplies water to the Guyra and (inaudible) I should also report roof on the new nursery as part of the new glasshouse has been completed, which enables water capture from these new risks.

On the citrus crop, it is too early to make a definitive assessment of the current year's citrus crop. The impact from last year's hail storm is, at this time, expected to be at the higher end of previous estimates. The early season 2020 industry-wide crop forecast indicate fruit sizing for this off year is unusually slow to develop. Rain events and moderating temperatures should improve the situation. But at this point, we are anticipating a lighter crop, the extent of which will become apparent as the season unfolds.

On the Tumbarumba fire, Costa has 2 berry farms, Taradale and Rosewood in Tumbarumba, New South Wales, totaling 44 hectors. The Taradale farm was impacted by fire on the 1st of January 2020, with loss of the packaging shed, equipment and damage to its irrigation infrastructure. Restarting irrigation was the critical priority in order to reestablished plants and prevent mortality.

Approximately 10% of plants on the farm were directly impacted by the fire, with limited indirect damage observed on the remaining plants. Approximately 25% of the crop was harvested prior to the fire, with the balance of the crop unrecoverable. There was no direct damage to the plants on the Rosewood farm.

Moving to the growth plan update and starting with mushrooms. The Monarto compost bunker construction is nearing completion with ramp up occurring over quarter 2, 2020. The recent site closures in Queensland and Tasmania have enabled optimization of the overall category production base and sales planning. Pricing has improved during early 2020 with stronger retail demand and a tightening of industry supply.

In berries, the raspberry and blackberry long cane program will be ramped up over 2020. Our Arana blueberry variety will reach circa 30% of Costa's total blueberry production in 2020. Blueberry Variety Improvement Program remains focused on the development of low-latitude, tropical varieties for deployment into Far North Queensland, China, Morocco and the U.S. through licensing.

In the tomato category, as announced in late 2019, further construction of the new 10-hectare glasshouse has been paused pending improved long-term water security, we are actively working on.

In China, our footprint is currently 237 hectares, inclusive of the new development at Guangmen, which is currently being planted, and will be our fourth farm location. A new region has been selected for further expansion beyond the initial 5-year plan. The land selection

Is being finalized, with a likely production footprint of 50 hectares planned in 2021. Varietal selection and improvement in agronomic practices for local conditions in China will continue in order to optimize existing operations.

Our total Morocco footprint is 314 hectares, with development from further 23 hectares planned for Agadir in calendar year '20, taking the total Agadir footprint to 89 hectares. The first early season production at Agadir has been promising, with strong yields and good timing. Crop timing will be the key to determining to delivering on the main season crop. Customer interest and support for Costa varieties from the EU and U.K. remains positive, and the CY '20 marketing program is all agreed and in place.

I now conclude with our outlook statement. Despite recent challenges, the business fundamentals remain strong and initial trading in calendar 2020 has been positive. Pricing levels have improved considerably across most categories, particularly in berries and mushrooms, and the outlook for the upcoming Far North Queensland berry season is favorable. Early season performance from the International segment has also been positive. The impact from last year's citrus hailstorm is expected to be at the higher end of previous estimates. In addition, early season yields suggest a lighter crop due to both density and sizing. However, rainfall and moderating climate over the next few months may improve the situation. The impact from the coronavirus outbreak is currently unknown, with peak volumes in China to be harvested from March. Subject to an infection from the coronavirus and allowing for the above impacts from citrus. The balance of the portfolio is expected to perform in line with previous guidance for calendar year 2020. The company remains focused on delivering value-accretive growth. However, given the industry's inherent forecasting challenges, the company intends to transition to qualitative earnings guidance for future earning period, commencing in calendar 2021.

Ladies and gentlemen, that concludes our presentation, and we're now very happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Your first question comes from Larry Gandler from Crédit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [2]

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A few questions from me. First, on coronavirus, if I can. Harry, where exactly are you seeing the risk? Is it, primarily logistics? Or also are there concerns around demand perhaps in the HoReCa channel? What's Costa -- what's Driscoll's telling you there?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [3]

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Okay. Larry, there were 3 areas we've been working on. One is getting enough pickers to harvest -- to actually produce the crop and harvest the crop. And I'm pleased to say that the teams are doing outstanding job. We currently have about anywhere between 500 and 700 harvesting crew and a couple of hundred on production every day, and that's due to ramp-up as the crop ramps up from March. So the team has done a very good job on that, unlike some of our competition.

The second area is logistics. As you correctly deduced. And that is actually getting the crop, the harvested crop through to the various market destinations. Driscoll's has done a very good job there. They've made a lot of checkpoints and other issues, but we've been able to get the crop through to the destinations till now.

And thirdly, what is happening with demand and pricing. Up until the last 8 or 9 days, there was subdued demand in all of the major markets, but I'm pleased to report we've seen a significant uptick starting early last week and is continuing on a growing capacity as the government sort of frees up a lot of the industry. So we're now seeing a good uptick in demand, and that's correlating with a good uptick in pricing, so we're getting a bit more buoyant about that. You're going to have problems. By the way, 2 days ago it was reduced from medium- to low-risk. And a lot of the checkpoints throughout lot of rest of the country, they have relaxed it. The real risk is heavily moving the main crop. Are we going to be able to get harvest crews? We think we're pretty confident we'll do that. On logistics, we're getting increasingly confident there won't be any blockages there, and we're quietly confident the market uptake will be good with a good uptick. Now initially, it was March through May as our main period.

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Operator [4]

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We'll continue with the next question. And your next question comes from Ben Gilbert from UBS.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [5]

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Just wanted to just clarify just on the guidance commentary. So you obviously put out $150 million of NPAT-SL previously. So you're still comfortable with that number because it sounds like -- I'm just trying to weigh out, you've got, I presume, water costs are tracking a bit low from what we can see, obviously, as you said, mushrooms and berries a bit stronger, but citrus sounds like it's a bit more challenging. Just could you talk to that $150 million number in terms of the -- how things are tracking relative?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [6]

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Yes. We're always having it this early in the year, we're only very early in the period. But at this stage, there are significant positives, and we've got -- we put 2 watchouts. And One is, we think it might be a lot of citrus crop, and what -- we have some concerns below that bridge, the number on the bars. So -- but yes, we are continually saying that we should achieve that level. Bear in mind, we've already called out at the upper end of the hail damage of about $4 million. So that's actually what's all equal now, $56 million in terms of NPAT, means that thereabout, rather than initial $60 million, but that's already been called out previously. So yes, we are reiterating that. We've tried to be transparent today and call out the positives, so it all starts hitting. We're monitoring 2 issues, one being the citrus crop, which is still unfolding in terms of impact and the other one is the virus. There's still some unknowns there.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [7]

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That's clear. And just a second one from me. Just interested around the Driscoll's agreement that you've got around both the licensing of your IP?

And then secondly, also just the joint marketing arrangements you've got. What is that negotiation up to in terms of extending? How do you see that unfolding? And I appreciate it's probably pretty sensitive issue, but just what you can talk to us around about that and where you see that heading?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [8]

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Yes. We're not talking about Australia and China. I think you're referring to U.S., the Americas value?

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [9]

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Yes. And then just I suppose in time, and I know Australia is open-ended. But do you see that changing in time as well?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [10]

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Look, Australia is now in its 10th year of a very successful joint venture, where both partners are very happy with what's been unfolding. When you have circa $500 million of sales because of that JV. No, there's no change anticipated from us, and I don't believe, from our partner in Australia. Just ongoing discussions about how we might work together more closely in China, but that's sort of got hopefully more positive than negative associated with it. It is true, the Americas agreement is due for renewal later this year. And we are about to enter some discussions with our partner on that and how that might be renewed.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [11]

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And is there any visibility or any comment? Or is that sort of a bit of a wait and see around where that unfolds? Because you are obviously becoming a pretty integral part of that business now, particularly sort of through mix, et cetera?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [12]

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Yes. I believe it's pretty common knowledge that our varieties are, since superior, should be Americas, that's California, Mexico and South America. So they are stored out there. Their pipeline is particularly impressive, now that's North Queensland with the new tropical variables, Guyra tomato at Corindi. So I think we'll become increasingly important to them over time. But yes, it's subject to discussion, which we shouldn't really get public about today. But certainly, I think we need to make sure, if you like, desire to move ahead.

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Operator [13]

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Your next question comes from Michael Peet from Goldman Sachs.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [14]

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Harry, Linda and Sean, just on the mushroom category. Maybe if you could make some comments just on 2019 in terms of the mix, and how that changed through the different channels, as a starting point?

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Sean Hallahan, Costa Group Holdings Limited - COO [15]

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Sure, Michael. It's Sean here. Essentially, I think what we saw was a drop-off in consumer demand through the retail channels. And then, as we highlighted at the time, essentially, volume that would have been sold through those retail channels ended up being diverted into the wholesale markets. And that -- there, we saw the significant price declines from 1 year to the other. Is that what you're referring to?

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [16]

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Yes. And I'm just wondering if you could roughly quantify maybe the percentage mix that normally you're going through retail versus wholesale, and what that mix was last year?

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Sean Hallahan, Costa Group Holdings Limited - COO [17]

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Right. I think normally, we would aim for about 15% of our volume heading into the wholesale markets. And I think last year, we were more around the 20%.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [18]

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And then looking forward, can you just give us a bit of color on the capacity? Obviously, switching off Queensland and Tasmania, but Monarto starting up. I'm just wondering what your net capacity is going to be in 2020 and probably '21?

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Sean Hallahan, Costa Group Holdings Limited - COO [19]

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Yes. So we've taken out sort of circa 60 to 65 tonnes a week for those facilities that we've closed down. Monarto will, at full production, should be averaging around 240 tonnes a week from its current phase of 120 tonnes. Mernda is a facility that normally delivers around 250 tonnes of this variation oversight of that. It's our pre-pack -- it's our preeminent pre-pack facility, so it tends to be our more responsive facility. And then we have our Casuarina site in WA, which is sort of circa 70 tonne a week. So I think that's our production footprint now for this year, and we're not anticipating any significant changes to that for next year other than ongoing optimization.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [20]

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Okay. And just on citrus, obviously, early days, and you've called the risk maybe on the downside. But just in a normal year, can you just -- with the acquisitions that sort of come in, where would you expect, in a normal year, your tonnage to be in an off year, and maybe what was it last year?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [21]

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Normal year, it fluctuates typically between 100,000 tonnes in normal year instead of 80,000 circa in an off-year. We have some new growth in replanting program in the Riverland and, of course, Colignan. It's a site of 240 hectares of citrus coming into bigger production. So normally, expect something on the 80,000 up. We think it will be a little bit tough. That, as I say, might be too early to call. To offset that, we've got very favorable demand. So everything we've had will be sold profitably, and we've got favorable effects. And as some point, pretty attractive -- relatively attractive water cost, and we have secured water. So it's a bit of a mix there, but we don't anticipate will be at 80,000 this year. So -- but we can't be definitive at this point in time.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [22]

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And just finally, on citrus pricing. I mentioned currency may be helping at the moment, but any comments around what you negotiated this year with pricing?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [23]

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We ended up on a very good note last year, the third consecutive year. So Costa have seen high demand in Japan, Korea, China, and the U.S. and the subsidiary markets. So we're in a very favorable situation. A lot of the preordering is in train. So people typically are putting allocation orders. And I think it's safe to say, we're in an attractive negotiated position at this point in time. But that -- it's too early to sort of give you any more clarity there.

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Operator [24]

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Your next question comes from Craig Woolford from Citigroup.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [25]

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Harry, Linda and Sean, maybe the first one, just a clarification on that -- the mushroom situation. So what kind of production we're seeing out of Monarto at the moment? The reason to ask that is just to get a feel for the supply into the market, given you have shut Tasmania and Queensland?

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Sean Hallahan, Costa Group Holdings Limited - COO [26]

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Yes, Craig, we've been sort of averaging around 150 tonnes a week out of Monarto at the moment. And we progressively ramp up to the full 240 as the overhead bunker filler comes online from a composting point of view.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [27]

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Okay. Great. Now the cost growth in the producing, I heard there's been a difference between revenue and EBITDA. Cost growth was about 10% versus revenue growth of 5%. Just want to get a feel for what are the key drivers of the cost growth. At a group level, employee costs were up over 10%. Now some of it must be Colignan, but just trying to get a feel for underlying cost growth in the Australian produce business?

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Linda Kow, Costa Group Holdings Limited - CFO [28]

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Yes. So you're right there. The biggest driver would be the salary wages on the addition of Colignan. We did also see increases through the cost of the mushroom, some of that -- the mix, which obviously gotten for by being issued with your facilities coming off and Monarto doing a bit more. And then on top of that, we also got additional cost through berries -- through the raspberry crumble issue, which also keep that cost line, but transport back -- and we also saw some volume growth in blackberry through...

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [29]

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Is that necessarily our throughput?

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Sean Hallahan, Costa Group Holdings Limited - COO [30]

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Yes.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [31]

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Sorry, what's that last part?

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Linda Kow, Costa Group Holdings Limited - CFO [32]

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Blackberry growth.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [33]

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Blackberries are growing rapidly for over 52 weeks, so that's a -- it's just raspberry and blackberries, Craig, on wait and test it. So there's disproportionately high costs there but we do get a return there -- above that.

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Linda Kow, Costa Group Holdings Limited - CFO [34]

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And the other point to call out, which you'd be well aware of, this cost is more this year in (inaudible)

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [35]

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Yes. So that -- just thinking through some of those as they -- we move into FY '20, the raspberry crumble issue should be behind you. Can you give us a feel for how significant that was as a cost item?

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Linda Kow, Costa Group Holdings Limited - CFO [36]

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It's a combination. We don't range -- okay, it's $8 million to $10 million, and we were there in that range. But that's a combination of cost as well as top line because of sales impact. So that's broadly how much with that cost issue.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [37]

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Closer to 10, last year.

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Linda Kow, Costa Group Holdings Limited - CFO [38]

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Okay, closer to 10.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [39]

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Okay. And I say hard for it's remote, but did you see any risk from coronavirus on citrus exports at all?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [40]

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I think anyone, just giving you a definitive comment that the virus today is a bit same. No, we don't. I mean I've got to say I'm impressed with the way our team and our joint-venture partner in China, Driscoll's, has manage the process so far. But going to question on citrus, no, we don't. We've got -- our prominent market is Japan, our next biggest market is U.S., and then we go into China and Korea have their own subsidiary markets. We've got a lot of optionality there, Craig. So all of the China market was not available to us in citrus, that would not be a disaster for us coming into the season. If it spreads globally, every economy is going to have to manage it, albeit with some risk. But right now, we don't anticipate any major call at this stage in citrus.

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Operator [41]

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Your next question comes from James Ferrier from Wilsons.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [42]

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First question is on mushrooms. Obviously, pricing has improved, as you referred to, Harry. If that improved pricing was to remain through the balance of the year, and particularly, through the cooler months of the year, how do you think profitability of mushrooms compares maybe to sort of calendar '17, '18 levels? Does it get back to that level? Or is there something happening in the cost line that might prevent that recovery?

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Sean Hallahan, Costa Group Holdings Limited - COO [43]

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I think, James, the correct answer there is that we don't really talk too much to the underlying profitability by segment, as you know. And I couldn't really refer it back to those years that you referenced. We don't have any major call outs from the cost line. It's a more streamlined network now at a lower overall cost base. It's what we'd anticipate. The pricing levels have been up about 17%. I mean wholesale market pricing versus same period last year, so that's really pleasing. And as you say, we're heading into the sort of winter demand season. All of those things are positive. I think that the area of conjecture is always going to be about the industry response. Obviously, it was a problematic year for us last year, but it was also a very problematic year for all the other industry players. There's a high degree of flexibility in terms of what extra production they bring on or not, and that will probably be one of the key influences for -- to this year.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [44]

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Okay. So just in terms of that flexibility of the industry to respond with supply on the basis that prices have improved of late, are you seeing any signs of that supply responding?

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Sean Hallahan, Costa Group Holdings Limited - COO [45]

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I think that some of our more significant competitors are in New South Wales, Queensland, and one of the big impacts to them has been the very high store costs, which, as you know, is a key cost component into comp cost. So that has got to play out. I guess the more actual answer to your question is we haven't really seen anything materially other than we're aware of a little bit of capacity coming out of the industry.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [46]

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Okay. That's helpful. Second question is around the growth plans. Harry, you were talking to the plants -- the plantings in China, I think it was 50 hectares for FY '21. We saw some media reports out of China, suggesting that costs are committed to something like 300-odd hectares as part of a second 5-year plan, is that the case?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [47]

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There's been no formal commitments, where we've talked a lot, I don't know what that report -- that was. But now we have -- with the Guangmen planting. By the way, we're through this process. We're now 70% through the planting in Guangmen, and we're truly ahead of schedule. Let's just give you some insight on how well our team is functioning over there, but that brings up our 5-year plan. To come back to your question, we're doing a circa of another 50 hectares of a new sub-region called (inaudible) and we're searching out other areas. We haven't formally agreed, and we haven't formally approved with our minority partner on a new 5-year plan, but we would anticipate, all things being equal, continue to ramp up. So the numbers you suggest is not outside the balance of possibility. But simple answer is, no, we haven't committed beyond another 50 hectares, which adds us up to circa 300.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [48]

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Yes, understood. Linda's comments earlier just about the blueberry category within berries. If I heard you right, Linda, volume down a little bit year-on-year, pricing up a little bit year-on-year. So collectively, blueberry contribution looked quite robust in calendar '19?

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Linda Kow, Costa Group Holdings Limited - CFO [49]

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Net masses was still challenging because some of the volume that we were short on very valuable volume -- sorry, very valuable, current, particularly around things like DNA and where we felt short. So overall, yes, I mean it was challenging year for us in blueberry.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [50]

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Okay, understood. And last question, maybe Linda, while you do have the floor. To the extent that you've got committed growth projects in place, can you give us some insight into the CapEx expectations for calendar year '20?

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Linda Kow, Costa Group Holdings Limited - CFO [51]

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Absolutely. So what we've got in play at the moment, ongoing rollout in China, I've touched on. We have an increment plant in each year for Morocco. We've got a little bit to complete in terms of cash going [$20 million] from the Mainlai facility. And then we've got the Guyra glasshouse which is -- we've got some fixed point kind of $20 million and at the moment looking at sort of spending more -- most of that money into the new year. But at the moment, somewhere between $55 million and $60 million on growth perspective, and then operating will be around $35 million.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [52]

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Sorry, $35 million, was it?

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Linda Kow, Costa Group Holdings Limited - CFO [53]

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Yes.

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Operator [54]

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Your next question comes from Jason Palmer from Taylor Collison.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [55]

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Just a couple of questions, if I could. Can I just start with the Riverland water figures that you've quoted. Am I correct in saying that you are fully hedged on a 100% determination basis?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [56]

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Yes. Well, we're fully covered. But just to give you the specifics, we have 55% of our order requirements and our high security water. And in the Riverland, for the current year, there was a 100% allocation. We have another 15% with the multiyear hedges covered. And the balance, Jason, we have pre-bought water right through to December this year to both the Riverland and also for Colignan in Victoria.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [57]

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Right. So you said the 100% determinations or allocations for the financial year '21, water year, then you're completely covered. And if there is, say, 70% allocations, then you have to buy another 30% on the spot market. Is that how we should think about it?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [58]

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No. We've got another 15%, as I said, hedged. But then beyond that, we've been a bit conservative in our budgeting, so we haven't taken it to the 100%. So we -- I will not disclose the exact numbers, but we've been conservative, we think, in all or beyond July. So we believe with our 9,600 mega liters circa pre-bought, we've absolutely covered in both Riverland and Sunraysia for the balance of the year.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [59]

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Okay. Great. Thanks for just clearing that up. And then my last 2 questions can probably combined into 1. Just in respect of the pricing improvement in mushrooms and blueberries, could you maybe talk to the supply component of that? And whether you saw a drop off in any industry supply over that period of time?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [60]

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I'll do the blueberry first, and I'll let Sean cover mushrooms. The blueberries, the whole of New South Wales was incredibly challenged as you would be aware with the drought. And a lot of province ran out of water, or when closed streaming of the water, a lot of them kneecap their blueberry crops. So we saw a drop-off towards the end of the season. Now that will be translated through '20, we believe. And we think there's considerable reduction in the potential crop, both in the southern highbush and in the lower Riverland coming into the end of 2020 calendar year. A bit hard to get exact numbers, but we wouldn't be surprised collectively if this is probably a drop of about 2,000 tonnes of what might have been in this year coming forward. Bearing in mind, there's been increasing production, but that will be a net production, we think in what -- year-on-year. But it's a little bit subjective.

In terms of Tasmania, we've got a very good crop there. We're just finishing the harvest in the soil, more product you'll see in stores, and we were looking forward to a very good price realization between March and April. And we're very confident that, that is a very good year in North Queensland. And in North Queensland, we can run late. So if we follow in the New South Wales, it starts a bit slower, we'll continue ramping at a -- obviously at our North Queensland. But the forward outlook for blueberries, I think, is a little bit subdued. But with hundreds of growers, Jason, it's very hard to get definitive numbers. But our best market intelligence from ourselves, we have ourselves precisely from Driscoll's network and from discussions with the industry broadly, we think it will be more subdued than we've otherwise been. On mushrooms, Sean.

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Sean Hallahan, Costa Group Holdings Limited - COO [61]

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Yes. Jason, I guess, the simple answer really is that the major retailers, which are the core of our business started this year with strong demand for mushrooms. And therefore, we've been able to service that demand that, therefore, means that there's been less volume, hitting the wholesale markets, and therefore, the prices have responded as we all seen.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [62]

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Okay. Harry, if I can just ask one more question. Excuse my ignorance, the 2,000 tonnes in blueberries that, I know, is your best estimate. What does that equate to in an industry percentage basis?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [63]

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Across the whole year, look, a lot of moving parts there. But this year could be talking between 10% and 12%, which is potentially a -- It's a bit hard, Jason, finding an order. But yes, that will be in quote. And I think it's a percent of moving parts around the rest of the industry, somewhere in that order between 10% and 12%.

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Operator [64]

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Your next question comes from Scott Ryall from Rimor Equity Research.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [65]

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I was wondering if you could talk firstly to the ability of the market to absorb mushroom supply increases and avocado supply increases in the medium term, please? And perhaps, when you address avocados, you could talk about the -- how you're progressing in developing export markets there, please?

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Sean Hallahan, Costa Group Holdings Limited - COO [66]

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So I guess the short answer with the mushroom question is we'll know more as the peak demand season, which is winter, unfolds. There's been a lot of activity from both ourselves and at a HIAL (sic) [HIA], which is the government body that administers, the levy, in terms of marketing programs. And we're expecting that there will be a diversion of funds towards major retail this year. And we think that all of that is going to resist demand. But like I said, we'll have to see what's happening.

From an avocado point of view, we've had an aim for a couple of years now to steadily build our avocado export volumes. But I think that in reality that is, that we have a key customer in each of the key geographies for us, and we're talking to the likes of Hong Kong, Malaysia, Singapore, Vietnam. But unfortunately, what's played out over the last year is that the pricing differential in those markets has been circa $4 to $5 lower than what we can achieve domestically. So in essence, we take a view that we will fund that differential as we steadily aim to at least hold on to those 4 customers and perhaps build over time. But at the moment, it's not a significant part of our business, which means in 2019, we did circa 60,000 trades. We would see a bit more in the future, but some of the pricing dynamics will probably need to change. There are -- I don't know what the other one was.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [67]

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No, no. That was -- you've answered my questions effectively. Could you comment what has to happen to water supply in Guyra to recommence the glasshouse expansion there, please?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [68]

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We've secured through the balance of calendar year in both glasshouse sites. But we just want to do some more work. We believe we probably should have saw another dam, and we're starting on that now and maybe (inaudible) with restoring the new site. We will construct a new dam. That requires government approval. So we're still in the process of discussing that now. And I would anticipate within the next 2 months, we should have clarification on that, and we'll probably make an announcement in the next 2 months advance from starting the project.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [69]

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Okay. But I mean the federal government, that's about the only thing they've done proactively in this space is look at dams and pipelines. So presumably, that's -- that you would be reasonably comfortable that you would have government support for such an issue, right?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [70]

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Just so to clarify, Scott. We're not seeking any government funding. Well, this will be all paid by our company. But the problem is it's a very convoluted situation, particularly in New South Wales in getting approvals. So it goes into as a government authority, and you can wait a long time. So what we're hoping to do is get government support above the federal and state level. They actually each provide approval for dam on that site, which should be good. I mean we've got world-class recycling, like everything, we're really about to close the chance in terms of what we do in terms of water conservation. But government talk and government action is sometimes not the same. So no money is being sought, what we're doing is trying to get approval.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [71]

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But the big issue, as you say, is aid government as opposed to federal, right?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [72]

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Yes, that's correct. You're so right.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [73]

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Okay. All right. And then, Harry, you spent good few slides on climate-related resilience and CapEx and those sorts of things, which I think it's very sensible in -- given the events of the last 12 months in particular. But could you -- how does -- how do you guys see your medium- to long-term CapEx requirements changing? And I guess, with respect to getting a return out of the CapEx, one of the areas, I -- clearly, I think that we'd all hope for is that there's some, I guess, consolidation of the supply side in addition coming with that. So can you just talk to, I guess, how you see your medium-term CapEx requirements changing? But also in an industry where the barriers to exit look fairly high, i.e., there's not a huge amount that's actually pushing people out of the industry at the moment, what does it take to actually see a bit more of a consolidation of supply so that the returns on your CapEx that you're spending for resilience actually are delivered?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [74]

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No, it's a very good question. Sometimes, these things take more time than others. But look, the last year, we put a sharp focus on things that we've been in the last 3 years, particularly very heavily focused on what we call sustainable commercial farming. So if you like, the last 12 months, in a struggling need for us to accelerate but rather just start nowhere. Look, it all comes back to [days] if I would get a writeback. I mean we are now bringing blueberries to a very extreme conditions, which should be high-yielding, lower water usage and better quality under very demanding conditions. Now anyone who thinks today will be driving to get us an excellent type, continuous type is kidding himself. And that applies to other areas where we're not the breeder primarily, we are doing R&D work with a lot of other suppliers along the similar line. So the whole thing -- the whole, if you like, landscape is changing dramatically to start the writeback with the right development. What our CapEx program is focused on is, obviously, protected cropping but more refined protected cropping, try to find the right diverse locations and anticipate where we might end up and trying to deal with much more variability. And to that extent, we're working with an agtech company called The Yield to try to measure and identify the 14 major variables in producing horticulture crops and then optimizing the yield.

Now this is very exciting. We're spending multimillion dollars on that project alone, and the CapEx on that will accelerate over time. So we have to change the whole way we produce our crops. Now there will be a lag factor, but we think we'll get a good return over multi-years going forward. But to answer your question, there will be people dropping out because people who won't achieve that and is taking as business as usual are kidding themselves. So we're trying to reshape that business for the future, and we've been very pragmatic about that. But it will be different, depending on which crop we're talking about. That doesn't relate to winter, but -- it's winter -- we're in a changed situation now. And I would say, anyone who wants to be in profitable business in 5 years' time, needs to be in the front end of that.

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Operator [75]

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Our final question comes from David Pobucky from Macquarie.

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David Pobucky, Macquarie Research - Analyst [76]

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Harry, Linda and Sean, I've just got a couple. Can you just confirm that citrus isn't tracking towards in current guidance for that category? And what exactly do you need to see in citrus for the remainder of the year, including rainfall to get to current assumptions or guidance for citrus?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [77]

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Well, we've already said that the high impact is at that higher end, the circa $4 million. That's been previously called out. Well, it's fairly early days, and that's why we're hedging. What we're saying at this stage, it probably starts at the whole industry, it's looking at probably a lighter crop. But we've really got another 7 to 8 weeks of approved site and to really play out. So we can probably give you a better hand on that at the AGM rather than today. What we have said is that we had some significant rainfall a few weeks ago, which helped, and if we get more rainfall and more moderate temperature condition, that will also help. But I can't give you any further information on that today.

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David Pobucky, Macquarie Research - Analyst [78]

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Okay. And just last one. I appreciate it's early in the season from Morocco, but you've mentioned that Morocco returns for a normal year of production yield and volume. But would you mind just making a comment on what you're seeing in terms of pricing this early in the season, and what you expect to be seeing when peak production comes on?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [79]

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Yes, pricing is very good at the moment. We're pleased with what we had in December, January and February. We are getting a premium, which we normally expect to get at crops, which is way ahead of last year. But put last year, that was never an issue. We're probably about 1 week ahead of what we call a normal year, so it's slightly early in, which is good. Our view is if we can get at least half that crop up, maybe a little bit more by the middle of April, we'll certainly achieve our targets in terms of pricing. We think Spain will come in about, in volume, mid- to late April. So we need to get at least half that crop up before them, and then we'll get a moderate pricing for the rest of the year. So at the moment, we believe we're on target. We've had a bonus from Agadir, which is achieving us yield and quality and price increases, which we always anticipate about introducing another, if you like, an earlier season of production. But that's only moderate volume at this stage. But so far, so good.

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David Pobucky, Macquarie Research - Analyst [80]

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And are you seeing any impact from exports from South America into Europe so far?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [81]

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The usual impact through, which basically finished and the last Chilean crop has landed in Europe. And as global, lower quality is the quality type that occurred dramatically in Chile from mid-January onwards. So we're seeing price is well below what we're appreciating, we're achieving and we're seeing retailers in the U.K. switching as soon as they can across 2 bodies. Now don't forget, we and our competition in Morocco are only ramping up. So they're still using some of the Chilean product, but they're switching across as and when they can.

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Operator [82]

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I will now hand the conference back to Harry. Please continue.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [83]

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Thank you.

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Linda Kow, Costa Group Holdings Limited - CFO [84]

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That concludes the call.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [85]

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Thank you. That concludes the call.

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Operator [86]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.