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Edited Transcript of CGC.AX earnings conference call or presentation 23-Aug-19 12:00am GMT

Half Year 2019 Costa Group Holdings Ltd Earnings Presentation

Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Costa Group Holdings Ltd earnings conference call or presentation Friday, August 23, 2019 at 12:00:00am 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

* James Ferrier

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

* Jason Palmer

Taylor Collison Limited, Research Division - Equities Analyst

* John Purtell

Macquarie Research - 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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Thank you for standing by, and welcome to the Costa Group Holdings Limited First Half CY '19 Results Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Harry Debney, CEO and Director. 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's Results Presentation for the Calendar Year First Half 2019. My name is Harry Debney, and I'm the CEO, Managing Director of Costa. Joining me in this presentation is Linda Kow, Costa's Chief Financial Officer; and Sean Hallahan, Costa's Chief Operating Officer.

At the outset, let me strongly state that successful agri business is focused on long-term strategy and value creation. To this end, Costa is meeting short-term challenges head-on, whilst executing strategic priorities for the long-term growth. Fundamentals of this business are strong. The investments we are making across the strategic priorities, that I'll talk to in more detail later, means we are confident of meeting current challenges, but more importantly, building a stronger and more resilient company as a result.

The current business overview and snapshot shows that our domestic technology and production footprint is well advanced in our core produce pillars. Although we have encountered what are short-term marketing cost issues in mushrooms and raspberries, the establishment of our fifth core growth pillar of avocados is progressing to plan. Whilst unusual weather events impacted calendar 2019 Morocco earnings, our global diversification of earnings is underpinned by strong ongoing investment in genetics development, Morocco and China. Perhaps most importantly, I want to assure you that the company will continue to invest ahead of the curve as it builds and enhances its agricultural produce platform.

Moving to the key headlines. With respect to the half just gone, I would like to start by focusing on the key highlights of the period. Firstly, at the half year, the business was tracking broadly in line with the lower end of the revised target range outlined at the company's May AGM. Our second half calendar 2019 results will be supported by strong citrus crop, with 75% to be harvested from July to November. Adverse conditions during the Moroccan blueberry season, low mushroom demand, raspberry quality and the impact of citrus water costs and fruit fly at our Sunraysia, Impi farm have culminated in a difficult first half of '19.

The trade environment across tomatoes, avocados and berries has been favorable. And as mentioned in the outlook for the 2019, citrus season is strong, although it is late in timing. At this time, challenges and uncertainties remain with market conditions in mushrooms and berries in the second half of the year.

With respect to our senior debt facilities, refinancing has been completed with extension of term to 2 -- to 3 to 4-year tenors and upsizing facilities to $500 million.

I'd like to now move to the highlights of our growth program. Our China expansion is on track to achieve a 5-year rollout by 2020 with planning underway for further expansion beyond that in 2021. A 45 hectare expansion undertaken at Agadir in the south of Morocco has been completed and will provide for earlier season production.

The Phase 2 and 3 compost and growing complex has been completed at our Monarto South Australian mushroom facility, with the Phase 1 compost compound expected to be completed late in 2019. The 10 hectares of tomato glasshouse and nursery expansion are progressing to plan. And in berries, the focus is on expansion of our premium Arana blueberry production and long cane raspberry and blackberry plantings.

I also note that under our current long-term growth agenda, pre-harvest costs will continue to increase ahead of future earnings.

I now turn to our key financial results for the period. Revenue of $573 million translate to growth of 11.8% on the prior comparative period of CY 2018. Statutory NPAT was $41.1 million, and this being inclusive of material items and amortization of intangibles relating to the African Blue acquisition and adoption of IFRS 16 from January 2019.

EBITDA before SGARA, leasing and material items at $82.4 million was 8.4% lower than the prior comparative period. NPAT before SGARA and leasing was $40.9 million. This is $7.2 million lower than the prior comparative period. As at June '19, our leverage was 2.59x EBITDA-SL. I also advise that the Board has approved a dividend of $0.035 per share, fully franked, recognizing major growth initiatives currently in train.

I'd like to look at our sustainable commercial farming and major strategic initiatives. Those of you who have followed our company for a number of years are well aware of the strategic priorities and advantages that underpin our business model. These are fundamental to our success. And I ensure that we are able to navigate through any challenges and deliver on medium to long-term growth. These include operating a diversified category portfolio and a market spread based on geographic footprint, both domestic and international, facilitating multiple sales channels across different markets.

Our protected cropping mitigates environmental risk and enhances our ability to optimize yield and quality. The IP we have and continue to develop gives us the advantage of superior product genetics, and our focus on technology is part of our low-cost mindset. Very importantly, underpinning this is a workforce that boasts some of the finest horticulture and agronomic thinkers and practitioners, not only in this country, but also the world. For evidence of this, you only have to look at what we've been able to achieve in China in such a short period of time.

Finally, our year-round production capability sets us apart from our competitors. It means we have the commercial advantage, especially outside of the main growing seasons during the shoulder periods. Indeed, I'll take this opportunity to remind you that only Costa achieves year-end production of supply of blueberries and raspberries. With this strategic framework firmly in place, we are markedly focused on major strategic initiatives and squarely placing the business in a solid position to ensure strong delivery over the next number of years.

In our berry category, we continue with our Variety Improvement Program, developing both subtropical and tropical varieties, and I'll talk in more detail later in the presentation. Premiumization through Arana blueberry variety is all about enhancing margins, and we will soon see a growing presence with respect to our new premium Elvira and Victoria blackberry varieties.

In our citrus category, we have a best-in-class export market reputation, from which we can continue to spring board into major markets, including those which we have opened up through free trade agreements. All of the investment and hard work that has gone into the development of our Sun World proprietary table grape program is now starting to pay dividends and this growth will only continue. Trialing of protected citrus cropping continues to develop positive results, particularly with respect to fruit quality and reduced water usage.

In avocados, which is our newest vertically integrated category, trialing of high density, trellised and protected cropping has shown early promising results. Export development through our Lovacado brand is firmly on the horizon with key markets also being supplied with some product. With Lovacado brand, we are seeking to enhance customer experience through consistent product quality.

The international segment, including our royalty program, will benefit from a varietal breeding program and seasonal extension is well underway in Morocco, with plantings in the south of the country delivering tonnage from next season. Our China footprint continues to grow with jumbo blueberries proving highly popular and delivering a price premium. Our eyes remain firmly on the main prize of the 150 million and growing Chinese middle class.

In tomatoes, we are very much about adding capacity to grow our supply of snacking and cocktail varieties. We're also opening up other sales channels. The new and larger nursery we're building will enhance our ability to develop such varieties at lower cost. And last but not least, in the mushroom category, where we have faced a challenging period, our expanding Monarto South is the most state-of-the-art mushroom production facility in Australia and also our lowest cost. This means we are well placed to capitalize when the market rebounds. Ladies and gentlemen, please be assured that we are not standing still. We are working as hard and as smart as we can to improve the business performance.

I'll now hand over to Sean Hallahan, the 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. Good morning, everyone. Starting with tomatoes. There was good earnings recovery from a challenging start to the year, the category exceeded financial targets for the period with production across all 3 glasshouses above expectations. Truss pricing, which was most affected over early summer, recovered strongly from February and has since traded within expectations. The snacking and specialty tomato segments have both traded solidly.

Moving on to berries. We can report improving final Queensland production and Arana premium blueberry delivery, while we've also been focused on raspberry crumble mitigation. The Far North Queensland blueberry production and shoulder season contribution continues to improve. Ongoing refinement in agronomic practices in addition to new varieties will see continued improvement from this region. The performance of raspberries was mixed with the raspberry crumble issue, which became apparent over May 2019, adversely impacting quarter 2, with increased fruit waste and higher production costs, particularly at the Corindi New South Wales farm. There was an increased volume of blackberries from Tasmania with good market uptake.

Mushrooms. The mushroom category has seen a challenging short-term demand and supply pricing dynamic, with category performance driven by an extended period of unexpected low demand and unfavorable channel mix. The largest impact has been on wholesale pricing, with current pricing still lagging behind historically normal levels. Delays in the commissioning of the Monarto South Australia facility expansion, as previously advised, also negatively impacted category performance.

Moving on to avocados. Avocado crop maturity continues to ramp up, and we're focused on changing the agronomic and market paradigms. Despite an excellent fruit set, smaller fruit sizing across the Far North Queensland avocado farms has resulted in lower yields from this region. This issue was experienced by all growers across the region, which also impacted our marketing revenue in the first half. Central Queensland is in harvest through to August and is looking stronger in terms of yield and quality. Overall, farm production is on track to achieve circa 1 million trays this year and is expected to reach circa 2 million trays over the next 5 years with ongoing farm maturity.

Next is citrus. A large citrus crop will see 75% of the harvest to be picked in the second half of CY '19, and we're seeing a strong season with excellent export demand. The season is shaping up well, but was running a few weeks later than usual, with only 25% harvested to the end of June. The fruit fly situation is now being dealt with using a dipping tank solution, enabling fruit to be treated on-site and for it to be packed at Costa's Riverland packing sheds. No further fruit fly incidents have been detected since the original incident in late May.

Table and wine grape yield and profit contribution from the new Colignan citrus and grape farm was ahead of the business case expectations. I'm also pleased to advise that Costa's table grape marketing program, underpinned by license proprietary varieties, is now a meaningful earnings contributor. Water costs for the citrus category are being actively managed through a number of hedging and prepurchase instruments, but temporary water pricing is high and future allocation levels, although uncertain, are improving.

Finally, CF&L. Cost of funds and logistics has been a solid performer, developing new channels and delivering a solid first half result with all 3 wholesale operations in South Australia, Victoria and Queensland, trading well across the core produce lines. Contract warehousing activities also continued to improve with further optimization of facilities.

I'll 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 the international segment. And this encompasses berry growing operations in Morocco and China. In Morocco, we had a second difficult season, but we see improving prospects for 2020. Although the season held initial promise with a good crop set, low overnight temperatures delayed maturity with the harvest commencing a few weeks late. Initial harvest volumes were low, and they did not ramp up until late April when the Spanish season was in full swing. Only 1/3 of the harvest was completed by the end of April compared to an average of 50% in a normal season. Importantly, the 66 hectares of new plantings at Agadir, 720 kilometers south of our northern farms, will commence their first harvest in 2020. And also deeper business integrations proceeding ahead of the full buyout of the existing African Blue local shareholders in calendar 2020.

In China, this region is showing great promise, with earnings now beginning to ramp up. The 2019 season was the third harvest from Yunnan Province berry plantings, with market demand continuing to be strong on blueberries and we are seeing some improvement in the raspberry demand. Blueberry yield was impacted somewhat by some pest pressure and smaller fruit size. Rapid commercialization of new varieties benefited these regions and ongoing refinement of agronomic practices is therefore our key focus.

I'll now hand over to Linda Kow, Costa's Chief Financial Officer, to talk through our financials.

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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 with the application of the new lease accounting standard to Costa from the 1st of January this year, we have presented our financials before and after the adoption of the new standard in order to provide comparative information to the prior year. Year-on-year comparative quoted in the presentation reference pre-leasing numbers with EBITDA-S and NPAT-S metrics updated to exclude the impact of the change. These are referenced as EBITDA-SL and NPAT-SL.

Revenue for the period was $573 million, $61 million or 11.8% above last year. Revenue growth was led by the new Colignan farm sales and increased table grape marketing volumes in the produce segment and International segment revenue growth from China and Morocco.

EBITDA-SL was $82.4 million, $7.5 million or 8.4% below last year. This was due to low earnings across the produce segment. NPAT-SL was $40.9 million, $7.2 million lower than prior year. Included in the results are higher interest and depreciation charges, reflective of the recent CapEx investments and increase in deposition.

Biological assets increased by $10.2 million, and this reflects the large citrus hanging crop balance at June, with the majority of the season still to be harvested, offset by reduction in berry hanging crop from December, following the harvest of berries across all regions over the first half.

Material items and amortization expense of $4.5 million relate to the African Blue acquisition. This includes the amortization of acquired intangibles and integration expenses. The impact to the profit and loss from the adoption of the lease accounting standard has resulted in an uplift to EBITDA of $24 million. Additional right of use interest and amortization expenses of $28 million and an overall net profit after-tax impact of $2.7 million for the half year.

In the produce segment. Produce segment revenue was $444 million, up 11.4% on the prior year. EBITDA-SL was $48.1 million, $11.3 million lower than last year, and EBITDA margin was 10.8%. Mushroom revenue reduced by 5.2% due to unfavorable channel mix and lower wholesale pricing. Berry revenue increased 12.4%, with new blackberry sales being the largest driver of the increase. In raspberries, increased sales from Tasmania were tempered by lower Corindi sales due to the crumbly fruit issue. In blueberry, a lower volume of modified atmosphere fruit carried over from December reduced margin opportunity this half.

The tomato category had a solid half year with continued growth and solid performance from the snacking and cocktail segments. Overall truss sales were in line with last year. Citrus category revenue increased by 54.6%, driven by table grape sales from the new Colignan farm as well as growth in the marketing program. Actual citrus product sales reflect the late season with a major uplift to come in H2. Avocado revenue reduced by 10.5% due to lower Far North Queensland season's marketing volumes and trading a larger portion of third-party fruit through agency arrangements this year.

Increase in our revenue was $72.9 million, a decrease of 4.2% against prior year. Costa Farms revenue decreased by 7.4%, with lower revenue on core avocado and mushroom produce lines due to lower wholesale pricing. Logistics revenue grew by 8.7% due to additional Sydney services leveraging the Eastern Creek facility.

Seasonal EBITDA before -- EBITDA-SL was $2.9 million, up $0.6 million from last year. The Costa Farm site achieved strong margin capture and trading outcomes despite the lower revenues. And logistics sites continued to show ongoing improvement year-on-year.

In the International segment, revenue was $83.5 million, up 17.9% from last year. EBITDA-SL was $31.4 million, an increase of 11% against last year. China achieved revenue growth of 63.4%, with China now being a meaningful profit contributor to the group. Hectares under production increased from 50 hectares last season to 110 hectares this season. Demand and price support for blueberries has remained strong, with pricing slightly below last year, but ahead of our expectations.

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% against last season. Therefore, African Blue earnings contribution was significantly shorter than expectations due to the softer pricing. Royalty income increased by 17% against last year with initial licensing income from China and further growth in U.S.-based royalties.

Now moving on to the cash flow. Cash flow for the first half was adversely impacted by significant seasonal working capital movements from H1. The impact of which will largely be released over coming months with harvest proceeds. Key drivers include, firstly, the citrus export program ramp up with most sales [to date] still in debtors; secondly, the light African Blue season resulting in higher debtors at June, as is the increase in Far North Queensland blueberry sales this season; finally, the first half movement also reflects the carry over impact from the timing benefit that we saw last December.

Joint venture cash conversion reduced this half due to the Driscoll's marketing joint venture, retaining cash for the industry development. Operating CapEx for the half year was $12.4 million and was in line with expectations. Productivity and growth CapEx for the half year was $53.5 million, with Monarto being the largest component as noted in the chart.

In terms of balance sheet and net debt. Net leverage at June was 2.59x EBITDA-SL with all covenants at June comfortably met. We have just completed refinancing the senior debt facilities with an upsize facilities to $500 million on 3- and 4-year tenors. There has been no change to covenants or material commercial terms. In conjunction, we have established, or are in the process of establishing, modest local financing facilities for each of China and Morocco, for seasonal working capital and CapEx requirements. The balance sheet now also incorporates operating leases with a right-of-use asset at $297 million and liability of $300 million recognized.

I will now hand back to Harry, for the 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, Lisa. I now move on to the our

(technical difficulty)

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Operator [7]

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Ladies and gentlemen, we have lost the speaker line, please continue to hold, and the conference will recommence shortly.

We now have Harry back on the line. Please go ahead.

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

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Look, thank you, ladies and gentlemen. I apologize, we had a breakdown in the line. So look, I was just about to move on to the growth plan update. I wanted to address our blueberry variety improvement program, first. This is now approaching its 26th year, and we're now globally post development of leading subtropical varieties. Significant investment has been made over recent years to further improve and expand the program and also develop tropical varieties. The adoption of substrate production systems for our breeding program is aimed at shortening the development of commercialization time frames, providing the ability to fast track commercialization programs for elite selections and develop variety to substrate growing systems. In recent years, we've also expanded this program to Far North Queensland, with a focus on developing low latitude tropical varieties to capitalize on the early season window, which also enables application not only to Far North Queensland, also to China, Morocco and Central Mexico with in-situ testing in each region.

We've had pleasing progress on a raft of new, game-changing selections. This includes a new pipeline focused on early season, tropical, premium-sized fruit varieties. The first commercial planting of fast tracked topical varieties is also planned for Far North Queensland in calendar 2021 and new jumbo varieties to extend the premium/jumbo season, including generating new flagship varieties.

If I move to Australian berry expansion, the 2019 berry program is focusing on further optimization of the existing footprint, including Far North Queensland replanting. Expansion of premium blueberry plantings is occurring with a further 30 hectares of Arana planted, taking total plantings of Arana to 89 hectares across 3 regions. The blackberry program is building in quantum, with the first meaningful harvest and 52 weeks reach to be achieved in calendar 2020. Progressive soil to substrate conversion of raspberries in Tasmania is occurring with 7.1 hectares converted in 2019.

If I go to the international, China situation, moving to our international growth program there. Plantings currently total 174 hectares, comprising 144 of blueberries, 22 of raspberries and 8 hectares of blackberries.

The 2020 planting program will involve 62 hectares of blueberries at Guangmen, also in Southern Yunnan Province. Ground preparation work is well progressed ahead of the wet season with planting to commence early next year. A pipeline is to be built from a nearby reservoir for water supply, with these works completing Costa's original 5-year plan.

Land options for future expansion are currently being assessed. These will be in a new region in order to spread of labor supply and climate conditions. A preferred site will be selected later this year to support a planting in 2021. And I'm pleased to report the local and provincial governments have been very supportive of Costa's expansion and have assisted with site selection.

Total China capital investment by the cost of digital joint venture will be circa AUD 55 million by the end of 2019, with solid returns being achieved to date. Expansion is now funded from China cash flow and on-shore external debt.

Moving to Morocco. With the 2019 expansion of 45 hectares of Agadir now completed, the total Moroccan footprint is 314 hectares. The total footprint in Agadir is now 66 hectares. This will provide for early season extension, with a further 23 hectares was planned in Agadir, as part of the 2020 expansion program. Despite a second challenging season, the outlook for African Blue is positive, with approximately 30% to 40% of the northern farm production is carrying outside the competing Spanish season. The Spanish health and productivity of the oldest African blue plants, which are now 12 years old remains excellent. Future replanting will leverage new early season varieties.

As mentioned, the Costa's berry VIP program is targeting early season drivers, including berries with larger sized fruit attributes. Our further 2.67% share acquisition of African Blue is scheduled to occur in late '19 and '20, taking Costa's total ownership to 90%.

In mushrooms, Costa's overall production network has been rebalanced, including the mothballing of the Glen Aplin Queensland site. All growing rooms at the expanded Monarto facility are now operational, with production to progressively ramp up. Additional labor is also being brought on progressively, including technical support with training programs progressing well. Phase 2 and 3 compost and growing rooms and office and staff amenities have been completed with the certificate of occupancy issued for these areas. The new technology Phase 1 compost bunker construction is progressing with scheduled completion by the end of calendar '19.

Moving to glasshouse tomatoes. The new 10 hectare of high-tech glasshouse project announced in August '18, includes an expanded nursery facility and enhanced packing and post-harvest facilities. This additional 10 hectares is required to provide further capacity to grow Costa's snacking and specialty tomato offering. This segment has continued to grow consistently and is now almost the same size of the truss tomato market. The glasshouse built incorporates new technology for improved yield and energy efficiency, and the site will be self-sufficient for water through water capture and recycling, with the backup bore available in the event of dry conditions. Progress on construction work includes the construction tender having been awarded. The 2.5 hectare nursery pad and 2, 5 hectares glasshouse pads completed, and the overall program of work is on schedule.

I'll now move to the outlook. Despite current trading challenges, the business fundamentals remain strong. Challenges and uncertainties remain in light of continued lower-than-expected pricing of mushrooms; raspberry crumble, proving to be more significant and taking time to mitigate; and potential blueberry pricing pressure due to significantly higher-than-anticipated estimated Northern New South Wales blueberry industry crop, with some mitigation being achieved from Arana premium returns.

Whilst their results to date have been broadly in line with the lower end of the latest guidance, trading and forecasting remains challenging with potential further downside risk depending on the impact of the above factors.

Ladies and gentlemen, that concludes our presentation, and we are now 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 today comes from Richard Woolford with Citigroup.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [2]

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It's Craig Woolford here. Don't know where my brother, Richard's gone. So just on mushrooms, obviously, been a really challenging first half.

Got a few, sort of, parts of the question here. Firstly, what did the unfavorable channel mix relate to? And you keep talking about demand, but surely by June and July, the demand issues should should've eased off. And probably the most important one in my mind is, if current pricing prevails, what does it mean to the return on capital for the Monarto expansion?

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

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I'm going to ask Sean to cover this -- the first part of it.

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Sean Hallahan, Costa Group Holdings Limited - COO [4]

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Hi, Craig. Okay. If we start with the facts. Only 1 year ago, mushrooms were growing as the category in major retail at 4%. They were the fourth fastest-growing category in overall fruit and vegetable. And only 1 year later, they're now in decline of 2%. So that's a pretty significant shift. What that's meant, therefore, is that there's less retail volume being sold, which has pushed more volume into the wholesale markets. And that's the channel mix data that we've referred to. Our response, both with Monarto and our entire network, is essentially to optimize our network across the current market demand situation so that we can maximize our profitability in, obviously, what is a very challenging situation overall.

Back to the final part of the question on return on investment. We're building very high quality, very low cost, high-tech assets, Craig, for the long term. We have no doubt about the return on investment. This is an unexpected short-term situation, but it will return very well, we think, over the forthcoming years.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [5]

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Yes. But there is more so -- yes, the issue I have is, there is more supply coming in, the laws of supply and demand should still apply here. So there's risk there [with further ramp-up].

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Sean Hallahan, Costa Group Holdings Limited - COO [6]

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Sorry to interrupt, but where is the more supply coming?

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [7]

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From the ramp-up of Monarto.

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Sean Hallahan, Costa Group Holdings Limited - COO [8]

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Oh, yes. But look, what we've seen in the past several years is a demand growth, typically, of 40 to 60 tonnes a week. We're only adding 120 tonnes capacity. We just got, in our view, this dip in demand, but the whole cycle, if you look out several years, that 120 tonnes won't be sufficient to satisfy the demand. So someone's got to put in capacity. We're the only ones that have done it. There's no one else on the horizon. So I suggest you look at it. You're looking at a very short window and not what the reality is of the trajectory.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [9]

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Okay. Understood. And then 2 quick ones. Just on some of the issues outlined in May. What is your expectation for water costs in the second half? And do you think South Australia will return to fruit fly free status?

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

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Well, I'll deal with the water one first. It's very brave predicting water, but it's improving slowly. We've -- just for this year, we're taking out a number of instruments, as I think we've previously reported, both in hedges and forward buying. The allocations in South Australia have been improving, if you like, week-by-week, and they're now saying there is about a 95% probability there'll be full allocation by the end of December, and we're up to a pretty high number already now. So I think the general feeling is with the snowfalls and all of the rain in the South -- (inaudible) sadly not in New South Wales, it's in the south (inaudible) is in reasonably good health. So I don't think there's a current big issue, but certainly spot water pricing is very high. We factored in -- that into our numbers, but I think we're looking at quite a few million dollars of extra cost this year. We sort of referenced that in May. It's probably not changed a lot since then, but certainly, it's added a number of millions of dollars to our cost base.

And back on fruit fly, 1 female fruit fly was discovered at the Orchard Impi, none sighting since. And I think we've also set about $5 million or maybe a bit more. Sterile male fruit flies were released right around the perimeter of the Riverland and more are planned to do so. So we -- 2 things. We're expecting the fruit fly status to continue. It's currently available for most of the Riverland. We've also said 70% of our production is affected by the, if you like, the zone, they've declared infected. But on that basis, the authorities have provided us an ability to (inaudible) dip, and we've installed rapidly 2 dipping tanks, one at Impi and one at our large [Kangara] orchard, where we're dipping on site, which allows us to process that fruit in our large packing shed. So we've mitigated quite a considerable part of the costing [parts]. I don't know if that answers your question or not.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [11]

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Yes, it does. So I mean, that cost that you were concerned about in May, might be a little bit less than expected there?

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

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Yes, that's correct, about half of what we initially expected.

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Operator [13]

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Your next question comes from Larry Gandler with Crédit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [14]

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A couple of questions. Linda, perhaps, delving into the accounts. I'm just looking at salaries and wages. And it was up about $25 million. The reason I want to just delve on it is, when I was trying to predict your revenue, that actually came in close to where I was modeling, but the profit was lower. So that's a pretty big move. I'm just wondering if -- I'm sure there's explainable factors, if you can help me understand the growth there, some of it might be increased plantings or maybe change in labor laws.

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Linda Kow, Costa Group Holdings Limited - CFO [15]

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No, there is no underlying change in labor laws that would be driving that. I think it's really the reflection of the growth in corporate [booking] of the business. I mean, as you're aware, we own (inaudible) Monarto. We've got rolling out expansion through (inaudible) lower wage rates, but there's nothing unusual going on there. I probably would call that, we had shared that, in the case of berries, for example, we are deploying extra labor to try and address the crumbly fruit issue. And so that's part of where the labor increase in that category has [stayed], but just across the board, I think the increase in labor just reflects the growing footprint, [albeit], you're not seeing it through the profit numbers because of the yield that we're having.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [16]

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Just to add. Linda has answered that question very well, but just to add to that. The crumbly fruit issue, we are absolutely committed not to send any substandard fruit to the market. So we're including that double the harvesting cost on that raft of areas, where we've seen crumbly raspberries so. We have to make sure we maintain our reputation in terms of product quality, but it's a [big in] cost short term. The other issue, as Linda said, we've got a ramp of a lot of growth programs, which you're going to see major uplift in '20 and '21 and beyond. And there's a lot of pre-harvest labor cost and other cost associated with ramping up. So that's part of the...

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Linda Kow, Costa Group Holdings Limited - CFO [17]

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The other one, I can call out is Colignan, as an acquisition year-on-year that we...

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [18]

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(inaudible), yes.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [19]

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Okay. Great. And Harry, just referring to the anticipation that berry prices might be soft, just being the analyst I'm, I'm just trying to think you're going to have a fairly fixed cost base. And then you're anticipating perhaps softer pricing resulting in maybe lower margin, that's probably the way to think about it? Can you maybe put some numbers around it or give us a feel for what sort of profit impact that might have?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [20]

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Yes, broadly based, but look, what -- Larry, we're not going to segment it because we said forecasting is very difficult. I mean, sometimes maybe we say too much, but basically, we don't know yet. We haven't modeled, we're modeling, but we haven't got a definite model because these things are very variable and also some weather conditions, particularly on our blueberries can speed up or slow down production. What we're also thinking is that there's a big flush coming through at the moment, which is early, from our competitors in Northern South Wales. We're relatively in a low-ish growth place, but our big flush is going to come several months later. So that may be advantageous, but it may not. So there's a whole lot of moving piece to it.

But we've also said, we've got a very big Arana crop coming through. And we're hoping that almost all of that now will be at premium prices because we've released into the wholesale market a new jumbo pack, which will sit alongside the Woolworths' premium pack. And we're getting very big premiums on both, but there's a whole lot of moving parts. But back to your point, there's a reason they're at a fixed cost but variable cost in blueberries are very high with harvest cost. And we're not going to harvest under the cost of production. We're not under the cost of production. I guess, we're just calling out a potential risk.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [21]

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Okay. That helps. And last question, I wanted to talk on -- talk about is grapes. I get that the Autumn Crisp varieties are sort of a hot variety in China. I think that's -- there's Sun World variety you're referring to. Can you just walk us through your exposure to that? And what your disposition is there, whether you think it's worthy of maybe expanding the grape footprint?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [22]

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Yes. Look, there's a raft of Sun World variety, but Autumn Crisp is a very exciting new variety, but we've got Midnight Beauty and we have about 4 other varieties which are very wide. Apparently, we've got 116, I think, at the latest count growers growing under the Sun World program nationally, growing very rapidly of that, just under 40% of our total local and export sales are Sun World varieties, and we're also importing in the off-season. So becoming increasingly important. The Autumn Crisp, I think, will become the predominant white light grape, but -- and the plan is, we're going as fast as we can do it, but it will take some time. A lot of the public varieties are going to drop out, Larry. We're probably in a transition phase at the moment. So these things, as you know, take -- anything with proprietary grapes takes several years to ramp up, and we are in a ramp-up phase. Then it will also -- but you look, the appeal here and the U.S. and Europe and Asia has been very good to that variety.

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Operator [23]

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Your next question comes from Ben Gilbert with UBS Investment Bank.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [24]

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The first one for me. Just interested in what you think is -- obviously, there's a lot of moving parts through this year. But what you'd like to highlight as sort of one-off? And specifically, I suppose I'm thinking about the tracking of composts. The fruit fly sounds like (inaudible) that doesn't come through and then water, hopefully, that normalizes. Is that sort of to the tune of sort of $10 million to $12 million that you'd hope comes back next year? I'm just trying to think of what's a more normal figure.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [25]

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We've got a lot of one-offs. We've had one-offs. The Morocco was -- it has been the second year. But those unusual weather conditions we don't think are going to be replicated. And we've also got the southern planters coming in. So I'd say Morocco was a big one. Mushrooms is a very big one. Currently, raspberry season is really significant in terms of a big loss in yield, but also this extra labor that I mentioned, and that will be largely taken up in '19. It will take several years to totally run through the system. We've got a lot of mitigation going through. So there'll be a modest impact in '20, but we won't be [heavily] through it. And the fruit fly, we think is -- we hope is a one-off. So there's been a raft of those things, it's almost like a -- the old perfect storm.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [26]

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And then just on -- I know you answered that question on berries before, but I don't know, it's always just good to know exactly what's coming, but it's -- it does obviously seem in that peak period now there's a lot more competition. And I'm just interested in how you see your competitive advantage in blueberries in Australia now, say, versus where it was 3 to 5 years ago? And then also interested in any update you can give us on the ability in terms of the China progress in terms of getting the ability to export into that market and also Japan as well.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [27]

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Okay. Look, we first saw and we've been talking about it for several years, not just this year, structural changes emerging in both blueberries and raspberries, the large plantings of blueberries in [North and South] Wales and I also referenced competitive offerings in raspberries. We're still by far the dominant, but we've also got some competition there. So we've got -- I'll talk about the whole berry category, if I can, but also emphasize blueberries. We've got a 4-tiered, if you like, response to that, which -- so the basic structural change, (inaudible) instituting another structural change, but has taken a few years to run through. If you take blueberries first, premiumization is hugely important.

Tell me another category where you get a 24% to 25% price premium on what looks like a similar product. We are getting that with Arana. We've got it 2 years running here. It's happening globally. In fact, it's bigger in China. So that's not just a flight of fancy and then we're building more new Aranas in the system. No one else has any of that quality. And no one else has been able to exploit it. There are competing products, but they're nothing like the quality, and they're not getting the premium. And we also, with that variety, have a 10-month window.

Back to shoulder periods, and this takes time then to roll through. But we're now getting some significant success in North Queensland, but we won't really know nail that big time until we get these new tropical varieties. Now we've got a very exciting first selection and more coming behind it. But the commercial plantings won't be from '21. So it's just a little bit of a lag between '18, '19 and into '20 and -- but beyond that in North Queensland that will be a massive contributor as it will to Central Mexico and to China and Morocco.

So no one -- because it's so hard to do, we still see clear air in that April-to-July period. And that will be a very big -- I won't give you numbers, but they are very big numbers, implications there.

If I could -- just humor me and allow me to talk about blackberries. We saw blackberries as the next raspberry. We created the raspberry industry. We're going to create the blackberry industry. It's taken time, but in '20, we've got some production this year. The '20 would have significant year-round, 52-week production of premium variety, and we're going to have premium offerings like Arana in blueberries. No one else has that.

And the third -- the fourth one is really significant. And that is long cane. If you look at the production and sales peaks of raspberries and also blackberries, they're terribly peaky and troughy. So we can't supply the market, but neither can have competitors at certain times, and we massively oversupplied others. Long cane with storage allows you to basically store that and chill the product and then put out the long canes in a very concentrated production period, get a high-quality, low-cost harvest, and you can dial up your production time.

So we're going to give a much more normal curve and take away the peaks and the troughs. That is revolutionary for both raspberries and blackberries that's costing ourselves and the JV about $10 million to $12 million to set up in capital. But once that's set up and when we'll start to see that significant volumes in '20 and big volumes in '21 and '22, a game changer and good luck to anyone following us on that. So there are structural changes in the berry industry. We're aware of them. We've been working on them for several years, and they're flowing through. Some of them are here like Arana, others will be a little bit later.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [28]

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So can you -- with that long cane piece -- that's quite interesting. Will you be out of -- you'd be looking to pull volume then out of that peak sort of September through...

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

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Absolutely...

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [30]

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I can't see if there's more volume out...

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [31]

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If I take you back to, like, late November through to February -- September is actually a relatively low month. But yes, the answer is our modeling -- there's different varieties we use as well. But basically, those -- some of those gaps are terrible. I mean, we're just leaving money on the table. So we'll fill those, but we'll take the peaks off and it will be windy primarily to do all of the autumn, winter and spring production and Tasmania for the summer production and early autumn production.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [32]

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Okay. And just on China and Japan, is there any updates there?

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

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On the market access, we are working furiously. In fact, I had a meeting with the new administrator of (inaudible) last week, and we've got nothing more coming up. Look, it's sort of bulked down. Unfortunately, the bilateral relationships, if you can call them that, are not exactly wonderful at the moment with both countries, not just China. But we're trying to get minister-to-minister discussion going to break through the impasses which we've seen with the bureaucracies. But sorry, nothing new to report.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [34]

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No problem. And just final one for me. I'm just interested in just the caveat sort of you put at the end of guidance around the downside risk. Is that specifically referencing berries? Or is it also something to do with that increased waiting to citrus in the second half? Or is it something else that you're flagging it down or is it mushrooms?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [35]

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No, there's not downside in citrus. No, they -- what we said there was specific to mushrooms and berries. And it's really, we -- the mushroom situation is not sustainable. We are going to see a change in that dynamic, but we don't know when. And simply, there is a lot of moving parts in berries. And I guess, we're just being cautious. So we don't know. So those are the 2 variables, and we're just calling them out as variables. But it would be negligent of us to sort of throw numbers around because they would be -- could be [off the mark] on the upside as well as the downside.

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Operator [36]

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Your next question comes from Michael Peet with Goldman Sachs.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [37]

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Question just on the cash flow and the balance sheet, if I may. Obviously, you've called out on the cash flow. It looks like there's a little bit of a buildup on CapEx which should release. But just interested also on the CapEx side for the second half. And what I'm trying to get to is, your net debt currently around, I think, $305 million, where would you see that sort of peaking in the short term?

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

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Yes. Look, I do expect our net debt to continue to build through to the end of December and that is reflecting of the CapEx position. I think, I previously guided full year CapEx. And I think broadly we're still around there, give or take $10 million. So I'm thinking on a full year basis, our growth CapEx will be circa, call that, $135 million, that encompasses Monarto as you're aware, that's the first good portion of the new glass house. Now obviously, timing will impact, where it should fall between this year and next year and on done developments around berry domestically and in China and Morocco. So I do expect that to continue to build. And then as we go through the first half next year that should come off.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [39]

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Okay. Just to Harry, maybe on -- or Sean on the raspberry side. I mean, just to think what's the worst-case scenario here with this crumbly situation, pulling them out, starting again? And just trying to gauge the recovery and production over the next couple of years.

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

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Yes. Look, the -- this has come out of left field, as I said to Ben earlier, but a lot of action's being taken by the JV as well as ourselves. So we've isolated the affected blocks. What we've done is rush through some new plantings, taken out some blocks. Fortunately, we've got some early long cane, so there's almost 20 hectares of long cane now up at Corindi is planted. So the worst affected blocks have been taken -- the pots have been taken out. It's one of the substrates. So it's easier to switch over. And they're now being replanted with long cane, which is really fortuitous. And those long canes have been carefully reviewed and selected from the nursery. We believe they're clean.

The second thing is we're in replant mode in a number of blocks, and we're increasing the plantings of the other varieties. But that 56% of our total (inaudible) East Maravilla. So it's the biggest single product, not the only product we grow. So other varieties are now being substituting as we've got nursery stocks available. And the third element is that the JV is doing very strong work on monitoring and selecting, if you like on a red, amber and green basis, the nursery materials. Take out the affected -- what they believe will be affected areas. So a lot of mitigation work is being done. It's costly.

But I think it's -- I think we're through the worst of it, but it's still going to have some impact for the rest of this year. But I think the worst of it has already been taken up. But there will be some further, as the rest of the blocks are harvested, double the harvest cost and significant reduction in yield. So it's not through yet totally. There'll be some influence in '20. I think it will be '21 before we're fully behind it. But I think -- expect to have a very modest impact next year.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [41]

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And Harry, the percentage of your plantings that are affected here or maybe the reduction in production that's resulted?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [42]

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Gee. It's only -- it's taking up to 30% of the yield in affected blocks currently in Maravilla. And it's probably a little bit over half of the Maravilla plant in Corindi. And in Tasmania, fortunately, it's there, but it's not as affected. It's about -- call it 10% impact on the yield. So in Tasmania, the temperature range is not as significant. By the way, the worst globally that Driscoll's have found that is sadly in North New Wales, Southern Queensland. It's not just the cost of the plant, but [where there are] the biggest. It's also present in China and the U.S. So there is an issue with that variety, but they're working on changing the clients.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [43]

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Okay. And just on mushrooms, you've mentioned, obviously, a bit already. But just could you remind us the ramp-up that you are expecting on Monarto with production?

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Sean Hallahan, Costa Group Holdings Limited - COO [44]

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Sure. So we're aiming for the overhead bunker facility, which we'll be doing the Phase 1 compost. That should be completed by the end of this calendar year, and then we can progressively ramp up into full production from that point.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [45]

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So how many tonnes are we talking here to get -- and how long to get to the full production?

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Sean Hallahan, Costa Group Holdings Limited - COO [46]

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Yes. So it's -- obviously, we're going to have to judge that according to both the market and the season. Mushrooms are seasonal as you know, and it wouldn't make sense to be ramped up at complete capacity within the summer season. So we'll progressively ramp it up according to the external conditions.

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Michael Peet, Goldman Sachs Group Inc., Research Division - Executive Director [47]

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Understood. Final one from me, Harry, just on the dividend. It's cut to $0.035. Can you just -- where do you see the payout ratio being? Is there any change to you -- to the board's thoughts on that?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [48]

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Well, can I just say, when you say cut, don't forget we switched from financial to calendar year. So it's an interim dividend, right? So maybe that's been a bit difficult, misinterpreted, where it's an interim rather than the final and our interim is always smaller. But yes, it's a little bit less. So look, we expect the next one to be a different size. But we are mindful. We've got a very large growth program with 2 major CapExes rolling through overlapping and a lot of other work we're doing on CapEx. So growth companies tend to have a lower dividend, but I think you'll see, as we roll through, depending on our growth ambitions, that will change. But yes, it's an interim. I don't know if you want to add to it?

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

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Exactly that. If you look at this as an interim and not a final dividend. Last year, we're talking final dividend at this point in time. And the fact that we have a significant pipeline of growth projects, which you are well aware of and we're balancing those various stakeholder requirements.

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Operator [50]

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Your next question comes from John Purtell with Macquarie Group.

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John Purtell, Macquarie Research - Analyst [51]

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Just had a few questions, if I can. Starting with mushrooms. Sean, just in terms of your early comment there, what do you put the demand decline down to? I know you mentioned warmer weather back in May, but it is quite a big change. So is there something more structural there?

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Sean Hallahan, Costa Group Holdings Limited - COO [52]

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Honestly, John, there's several hypotheses floating around at the moment, but it would be really presumptive to say that anybody, including the industry or ourselves, actually has a definitive answer to that. I can describe the fact that some households have stopped purchasing for a while, frequency's gone down a little bit. There's a little bit of a drop in penetration. But what really is causing that, we're not too sure at the moment.

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John Purtell, Macquarie Research - Analyst [53]

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Okay. Just a couple of others. I know, Harry, you made some remarks there on the water situation there in terms of citrus. But just to clarify that the sort of expectation regarding water allocation and maybe sort of costs going into next year. And also the water status at Guyra, please.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [54]

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Okay, we'll deal with Murray first. As I've said, we've -- all the advice we're getting is that we're back to full allocation. We weren't full allocation till June 30, and we're ramping up rapidly to full allocation, we think, from all the indications we're getting for the end of the year. And the indications are that next year we'll be okay. I think we've got a modest cut planned, we're just doing early projections for next year, but we don't think it's going to be a significant hit for next year -- but to really be specific about that.

If I can move to Guyra, the New England [pipeline] down the Granite Belt, that matter in Southern Queensland, this is regular stuff, it's unbelievable. We are okay and will be okay, we believe. Just to give you some insights. The new glass house and its sister, which is being built now, GH4, GH3 is fully self-sufficient. It's heavily invested in technology, which harvests for everything, not just the glass house, but all the ancillaries in the nearby, all around the site, we process all that water, and we recycle a huge amount. So it's in very good shape. We have a standby bore, which we're not using. So it's not running out of water and won't run out of water. The older glass house, the 20-hectare glass house, that we call 1 and 2, are under a lot of pressure, but we've been able to -- we've increased the recycling rate last year with a new CapEx, which was fortuitous.

We're okay. We're managing. We have been supplied -- that largely draws its water apart from what we do recycle and collect from the site from the town. We've been getting allocations from the town. And importantly, the new Malpas pipeline was connected, I think, last week or the week before. It's, anyways, connected now and functioning. Prior to that, the New South Wales government was tankering from the Malpas up to Guyra at their cost. And so we've been supplied with water as if it was coming out of the pipe. And we think we've got an allocation which is okay. Now I just need to say, though, if there's no rain between now and the end of the year, this has got big implications for the whole New England pipeline. But at the moment, we're in good shape. There's been no impact on the crop -- any of the crops, but we don't expect to be no rain between now. We get a little bit of snowfalls and the odd shower, but we're not getting significant rain. But I can't give you any more insights than that.

I'm sorry, one other thing we're doing, I should have added. We've got one bore we've got access to, and we're getting -- we're processing the water, and we're just negotiating another 2 bores from properties in the region. One will be piped in and one will be tankered in and where this water quality issue we're putting in processing gear. So we're putting in, if you like -- as you'd expect, risk mitigation there. So I don't believe we're going to run out of water one way or the other.

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John Purtell, Macquarie Research - Analyst [55]

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And last question for Linda. Just in terms of the gearing, the 2.59x there. So that doesn't appear to include the right-of-use assets. I just wanted to confirm that. And also the gearing presumably is higher if you do include right-of-use, but the banks are essentially looking through that from a gearing point of view.

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Linda Kow, Costa Group Holdings Limited - CFO [56]

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Absolutely. So that is preleasing. So the EBITDA-SL as we call that and also the banks look through that.

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Operator [57]

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

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [58]

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My question is on the demand side. And I guess, what Costa is doing to help that. So you talked to an uncertain mushroom environment. You've got an uncertain blueberry environment for the second half, your Aranas are ramping up. What can Costa do to drive demand across your key categories?

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Sean Hallahan, Costa Group Holdings Limited - COO [59]

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Scott, it's Sean. It's a good question. I think we called out a couple of things. One is that we do, and we have invested in category insights and research, particularly over the last 1.5 years, and we're fundamentally building a much better view on what exactly is driving categories. And we've brought that insight increasingly to bear with the retailers themselves. And we're starting the early stages of formulating category plans with them. I think that's part of the answer. One of the challenges we've got, particularly with the mushroom side of things is the levy that we pay on mushrooms.

We're obviously the biggest producer of mushrooms and the biggest purchaser of spawn. So therefore, we pay the largest amount of the levy. That then goes to, if you like, a government bureaucracy called HIA and, essentially, they formulate the plans in terms of spending that money, both towards research and development, but crucially, also towards marketing programs that should drive demand. So essentially, we have to work through a bureaucracy there to try and influence the marketing programs. And plainly, from the results at the moment, you'd have to say that, that marketing has not been as effective as we in the industry would have liked. Let me talk things like the blueberry area or Arana, et cetera.

Finally, we're in a global joint venture with Driscoll's. Driscoll's are the branded property in that area. And Driscoll's already have a very high understanding of the berry categories, both from overseas and here in Australia. And I'd say they're really quite advanced actually with the retailers in terms of understanding the category drivers. With this, I guess, particularly the specialty program that they do with all works around Arana, which is what's been delivering that price premium with still a hell of a lot of demand behind it. There's plenty of times we can't supply enough Arana to what their consumers are wanting. So I hope that explained a little bit of the way we look at demand.

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

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Maybe sort of -- just I think Sean summed it up on where we are at the moment. But just on the premium side, we found this with Perino tomatoes, there is a very big latent demand for really good quality -- exceptional quality and product, and Perino has been the stand-out success of their tomatoes. But just over to Arana, this is the first -- there are plenty of large berries around, but this is the first large berry that is crunchy and sweet and has very good shelf-life and is really attractive. There are plenty of competitors, but they're nothing in that ballpark. We cannot supply that market. We're supplying it adequately at certain times and not others.

So we're doing a lot of work to build that up. And the real issue is you got to be there for the whole period. You can't go to a retailer and say, I've got this wonderful product, and I've got it for 2 months and then you haven't got anything for 2 months. So part of the answer is to get consistent supply. And that's not easy with blueberries. And we are in 5 regions with blueberries, the only ones that are, and we've got 12-month supply, but it's very peak and troughy. So if we're going to be successful -- and I think premiumization is really critical across the raft of products. We've got to be able to do it in North Queensland, in Corindi, in Tasmania, in WA and those sort of places. And watch next year what we do with blackberry -- we'd be cost around Driscoll's with Elvira and Victoria because that will be the next test case, and we get out of the commodity cycle with blackberries with these very high-quality blackberries.

But again, we can't do it if we're in the market for 1 month and we're out of the market the next month. So we're trying in multi regions. And with this long canes -- long canes is incredibly important to this because you get concentrated high-quality crop, low cost of harvest, and you can get a successive planting and you can get away -- if you somewhere find what the peaks and troughs are now in the raspberry industry, you will be very shocked. It's massively high and massively low. So you can't build a proper marketing program with the retailers on that basis. So a lot of work has got to be done in those areas.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [61]

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Okay. Great. So we should expect more -- given the work you've been doing over the last couple of years in terms of understanding the category, we should expect more out of costs over the next couple of years in this area?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [62]

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Yes, we believe so.

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Operator [63]

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Your next question comes from James Ferrier with Wilsons Advisory.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [64]

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First question is about the international segment. Linda, I know, in the past, you've talked about the fact that the seasonality of that business means that it will record EBITDA losses in the second half of the calendar year, and those losses are likely to increase year-on-year for the time being. Is that still the case?

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Linda Kow, Costa Group Holdings Limited - CFO [65]

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Yes, that's right. I mean, I don't like calling it losses, but I mean, that's what you guys say it. It's maybe the EBITDA but really is preharvest investments for the next season. So that's still continuing.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [66]

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Yes. Okay. And Harry, the guidance or your outlook commentary for this calendar year, how have you approached the December month in a general sense? I'm not looking for numbers, but we're cycling a period where you saw a far weaker trading than what you are originally expecting. So how you are approaching your expectations for December this year?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [67]

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Well, we've done a lot of planning on how we're going to go to market with different products, but you can only do so much. But look, it was an exceptional period of December, January, February, as we all know, and we will not shut it down. We're doing a lot of work to try to change. Again, part of that is this -- in berries is this long cane, but there are a lot of other things we're doing. But you can't dictate to the market, but -- I mean, for example, Arana, we're planning on having -- our biggest volume in Arana will be November and with MA December into early January. We're very confident that we'll do a lot of mitigation against the rubbish that's available. And I'll use that term rubbish that's available on blueberries at that time with the other competing products. So there's things like that, which we planned ahead, which will, I'm sure, mitigate, but we can't dictate beyond that.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [68]

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Yes. Okay. And one of the 2 items you called out for the remainder of the year being -- mushrooms being one, but the other was the blueberries in Northern New South Wales. And I'm just thinking, last year we saw some frost damage in the industry and some stronger pricing in September as a result of that. So I'm just trying to understand, are you saying what you've said today as a reminder to the market? Or is this sort of catching you by surprise? Because I would have thought you'd be well aware of the fact that the production should recover year-on-year in that region.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [69]

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We expected the production to recover. And look, there's been a little bit of frost around but nothing like last year, but it's actually caught not just us, but the whole industry by surprise with the -- the volume growth has been higher than anyone predicted. Now the question is -- so yes, we -- of course, we expected and we modeled it and so did all our competitors, but they weren't being caught by surprise. Now the question is, is this current flush sustainable? I have doubts about that. I think we're seeing probably a 4- or 5-week big flush. And I think we might see some gaps in those later, which, if we do, will be good because there are big flushes coming later, but we -- it's over what we expected to see. So I think we had to pull it out.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [70]

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Yes. Okay. Fair enough. Fair enough. And then last question, Linda, I know you answered earlier a question about CapEx for calendar year '19. Could you give us a rough estimate? Appreciate it's still a fair way out, but a rough estimate of what the commitments are, the plans are for calendar '20.

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Linda Kow, Costa Group Holdings Limited - CFO [71]

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Yes, sure. And just to be clear, when I was speaking to market before that was in reference to growth CapEx, obviously, over and above that we allowed in our operating CapEx of the year as well. The reality is what we've got committed right now is whatever it takes to finish the tomato glass house in Monarto, but they are really just phasing between calendar '19 and calendar '20. And then on top of that, obviously continue to allow a program to China, given our intention to continue to grow that. Our program for Morocco, because we'll continue to add this new expansion and something for the domestic there. So it's very similar to the things that I've shared previously.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [72]

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Yes, I understood. Okay. And sorry, just one last one. The refinancing and the upsizing the facility to 500 compared to your draw down now at about 350 or so. You mentioned you're well within your covenants at this point in time. Is the size of the facility a good indication of where your covenants are?

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Linda Kow, Costa Group Holdings Limited - CFO [73]

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I mean, obviously, that is an interesting question because we'll be (inaudible) because obviously, as we grow and our EBITDA increases, we can always carry more debt. What I've really done here is to position us for the next couple of years and provide headroom for us to continue growing and have a significant liquidity whatever it sets us up. So it's clearly a combination of both.

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Operator [74]

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Your next question comes from Jason Palmer with Taylor Collison.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [75]

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I've 2 questions. Just firstly, in respect to the citrus category, I think you called out 75% to be harvested in the second half of calendar year '19. Can you maybe give us a sense to the fruit set sizing and potential price realization? And export -- or any contracts that you can potentially have in place in respect to that category.

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [76]

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Okay. It's a bit later, but normally, it's about 1/3 prior to June 30, and that's what we called out to 25-75, but it's of no concern to us here. It was just a few weeks later, so we should call that out. The fruit sizing being an on-year crop is lower than last year, that happens, I think you'd be well aware of that. So it's about where you'd expect. In terms of the market, as you know, circa 3/4 of our product is exported. The market demand remains strong. We don't have contracts per se, we have commitments made, if you like, right across Japan, Korea, China, U.S., et cetera, and all the other smaller countries, so they're all very strong. But we basically -- I think it will be like last year. I don't think we'll supply all of those demands, if you like. So it's really a strong market. Pricing is good and you would be aware, FX is good. FX is better than we expected. But we've got water costs, which are higher than we expected. So they probably wash each other out.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [77]

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Okay. And just the last question I have in respect to the long cane raspberry program that you've spoken to. Has there been any major impact to that from the crumbly raspberry issue?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [78]

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No.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [79]

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Maybe talk to sort of what you have to do if you're going to build up that head stock and the prices to actually implement that...

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [80]

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It's a very expensive thing. It's -- you've got to actually grow them in a very concentrated nursery environment as we do in Tasmania. And in that process, we're able to do a lot of evaluation on the material, which is why we've got confidence that we've got the crumbly fruit minimized, if not eliminated. And then we've then got to take it up to where -- in our case, Corindi, and we store it for certain periods at low temperatures to give the right chilling. So it's about, as I said, a $10 million to $12 million CapEx, which is likely shared -- largely taken up by the JV, which is why we get a lower dividend from them. But basically, it's quite a complex situation. And you just [dole] it up. But in fact, it's crumbly fruit, I'm not saying it's eliminated by that process, but certainly largely mitigated. By the way, it's not just raspberries, it's also blackberries. We've got an ambitious long cane program of blackberries as well as raspberries.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [81]

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Okay. Just kind of one follow-up question on that. How do you get confidence over the demand profile in that out-of-season supply period for the raspberries, in particular?

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Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [82]

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Very strong. I mean, Driscoll's has the advantage of being the major supplier of these products by a country mile. So they'll engage with what was called now the other players very intensely. And they know exactly what the demand is. And we go subdemand very regularly. So they might have demanded 120,000, 130,000 trays as an example. And we might have 40,000 trays in a week. So there's very clear evidence that we're missing a lot of sales out because we've got big gaps.

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Operator [83]

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There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.