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Edited Transcript of CGC.AX earnings conference call or presentation 21-Feb-21 11:00pm GMT

·68 min read

Full Year 2020 Costa Group Holdings Ltd Earnings Presentation Feb 22, 2021 (Thomson StreetEvents) -- Edited Transcript of Costa Group Holdings Ltd earnings conference call or presentation Sunday, February 21, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Harry George Debney Costa Group Holdings Limited - CEO, MD & Executive Director * Sean Hallahan Costa Group Holdings Limited - COO * Wayne Kenneth Johnston Costa Group Holdings Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Aryan Norozi UBS Investment Bank, Research Division - Associate Analyst * Ben Gilbert Jarden Limited, Research Division - Head of Australian Research * Craig John Woolford Citigroup Inc., Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst * David Pobucky Macquarie Research - Analyst * Jason Palmer Taylor Collison Limited, Research Division - Equities Analyst * Kurt Gelsomino Morgans Financial Limited, Research Division - Analyst * Larry Gandler Crédit Suisse AG, Research Division - Director * Michael Peet Goldman Sachs Group, Inc., Research Division - Executive Director * Piers Flanagan CLSA Limited, Research Division - Research Analyst * Rod Sleath Rimor Equity Research Pty Ltd - Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Costa Group CY '20 Results Presentation. (Operator Instructions) I would now like to hand the conference over to Mr. Harry Debney, CEO. Please go ahead. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [2] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the Costa Group Holdings results presentation for the full year CY '20. My name is Harry Debney, and I'm the CEO and Managing Director of Costa. Joining me in this presentation is Sean Hallahan, Chief Operating Officer; and Wayne Johnston, Costa's Chief Financial Officer. This will be my last results presentation before I retire from my role as CEO on the 31st of March, 2021, at which time Sean will commence on the role of CEO. I'd like to begin with the key messages covering the period. Firstly, the company delivered a strong full year result for the CY '20 year. It was a year in which we recovered from the drought challenges of 2019 and early 2020. The performance of our International segment was well up on the previous year as flagged at the half year. There was sustained Australian category momentum through the second half, driving increased earnings. Our balance sheet strength and strong cash flow position highlights our resilience, and this was underpinned by the successful execution of business fundamentals, including yield, quality, cost and COVID-19 management. There were also favorable market conditions supported by positive demand and pricing, especially in the citrus, berry and avocado categories. We leveraged our market-leading position by realizing the benefits of our fully vertically integrated produce categories; a diversified portfolio; and in berries, our Costa blueberry IP, namely the Arana variety, which delivered clear product differentiation and premium pricing during peak periods. Acquisition of quality citrus assets is a priority to build on category scale, growth and export opportunities. We are also clearly focused on improving yield and realizing production efficiencies. And today we announce the commencement in CY '21 of the commercialization of the growing of protected, substrate/trellised avocados. With respect to COVID-19, the company continued to supply quality produce without disruption during lockdowns and in so doing, did not claim any JobKeeper funds. It should be noted that labor supply is an ongoing risk. However, it is one that we have managed to date. We have a strong cash position and balance sheet with leverage at 0.99x. This is ahead of plan, demonstrating the company's deleveraging ability over the short term. As we head into CY '21, the company will continue to manage for the long term, which is key to success for a business such as ours, operating within agricultural production time cycles and multi-seasonal weather and market influences. I now move to the financial headlines for the year. Revenue of $1.164 billion saw growth of 11.2% on CY '19. EBITDA-SL was $144.8 million compared to $98.3 million in CY '19. This was an improvement of 47.2%. NPAT-SL came in at $59.4 million, an increase of 108.4% on CY '19. Statutory NPAT was $60.8 million. Our net debt was $143.9 million and leverage of 0.99x, as I previously mentioned. This is not only ahead of plan, but also demonstrates the company's deleveraging ability over the short term. Finally, a dividend of $0.05 per share fully franked will be paid in April. Ladies and gentlemen, as noted at the release of our half year CY '20 results, the company was expecting increased earnings over the second half to be underpinned by momentum within our categories supported by Australian market conditions across our portfolio. I'm happy to report that this did occur. We saw citrus pricing remaining strong throughout the season, primarily the result of higher export and domestic demand. We also enjoyed sustained premium pricing for our Arana blueberry variety and doubling of production volumes over the previous year. Our long-term raspberry and blackberry strategy is showing promising developments with improved seasonality, coupled with production and harvest efficiencies. In the avocado category, retail and wholesale prices were well ahead of the previous year, helped by increasing volumes from Costa-operated farms to fruit sizing better than industry average. There also continue -- was also continued high demand for prepacked mushrooms versus bulk product, reflecting consumer preferences during COVID-19. Although our International segment is more of a first half story, it is worth noting the overall contribution of this segment to our full year performance. Earnings growth was significantly up on the previous year, supported by higher yields and volumes, improvement in sales and an increased production and footprint at Agadir in Morocco and from the Manhong farm in China. It should be noted that this performance was somewhat countered by negative pricing impacts due to COVID-19 in Europe. I will now provide some commentary around the impact of COVID-19 on our operations and how we have successfully managed it. Addressing labor issues first. Border closures and ongoing travel restrictions have caused some impact with the availability of seasonal workers for summer berry crops. In response, we have managed crop priorities and have also been assisted by milder weather with respect to more favorable harvest scheduling. We have also provided local employment through a targeted social media recruitment campaign with a degree of success. Planning is well progressed to ensure workforce requirements are met for our first half CY '21 crops, with some challenges being addressed to ensure our labor demands are met. I also note again for the record that the company did not claim any JobKeeper funds. The health and safety of our workforce remains a priority at all times. And over CY '20, a comprehensive COVID-19 action plan remained in place across our entire business. All sites continue to have in place a temperature testing regime and observe strict social distancing measures, enhanced emphasis on hygiene and contingency plans in the event of a case impacting a specific site. With reference to our operations, yield and supply were not severely affected by COVID-19 due to the strong protocols I have just referenced as well as the work of our committed workforce. Indeed, I want to acknowledge the outstanding efforts of our entire workforce, both domestic and international, in ensuring that the company was not only able to successfully deal with the COVID pandemic, but also maintain production and supply. As mentioned at the half year, the early season challenges in China were largely resolved before the main season. And the situation in Europe and the U.K. resulted in higher freight costs and some demand and pricing challenges. I also note that we're expecting some challenges in the first half of CY '21. Finally, from a cost perspective, CY '20 directly attributable COVID-19 costs were $5.4 million, which include predominantly expenses covering cleaning and sanitizing, use of PPE, labor, travel and accommodation. The COVID-19 Morocco market disruption earnings impact was circa $5 million for the year. Ladies and gentlemen, I now hand over to Sean Hallahan, our Chief Operating Officer; and Wayne Johnston, our CFO, to continue with the presentation. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [3] -------------------------------------------------------------------------------- Thank you, Harry. The experiences of the last 18 months to 2 years have reinforced the importance of sustainable commercial farming to our long-term growth and success. The effects of the drought and climate change would have undoubtedly been far worse for the company if it had not prioritized and invested in activities and projects which helped to significantly mitigate the effects. This includes protected cropping, in particular, its use in our berry crops; and the geographical diversification of our production footprint, where we were able to benefit from growing crops in regions where there was minimal to no drought impact. Our focus on technology and innovation also proved crucial, in particular, our ongoing investment in water efficiency and security, meaning we were able to make this resource go further and last longer than it otherwise might have. In addition, our investment in water storage infrastructure also proved its worth when it finally did rain, with the result being that our berry and tomato category water storages are both at 100% capacity. Importantly, this meant we were in an excellent position to capitalize on the upswing in momentum that inevitably comes after such challenging conditions as things return to a more normal setting. The company is committed to not only continuously identifying and investing in initiatives that mitigate risks but also to seek out opportunities that improve our productivity, increase yield, reduce costs and drive earnings growth. The commercialization of protected avocado substrate plantings is an excellent example of this and one I will talk to in more detail later in the presentation. As we continue to work on and invest in sustainability and innovation to address key issues, including climate change, improving our yields, refining and maximizing our water use efficiency, developing new premium varieties, researching and adopting new farming technologies and utilizing alternative energy sources, our Board has recognized the importance of this activity and established a Horticultural Innovation and Technology Committee. The Committee, along with management, will assist and provide the Board with oversight on strategy, policies and procedures that relate to Costa's assessment and adoption of technology and its approach to horticultural innovation. Specific areas of focus include adaptation to the impacts of climate change, identification and development of superior varietal genetics, continued refinement of protected cropping techniques and technologies and innovation in growing techniques. In summary, the Committee has been established to play a key role in driving our pathway to future success. I now turn to segment performance for the period, and we start with produce. In the mushroom category, retail sales volumes remained relatively strong over the second half of calendar year '20, with pricing firm over the period. Prepacked sales continue to perform well versus bulk product, reflective of continuing consumer preferences during COVID-19. Volumes were down versus the previous year, reflecting a number of factors, namely the closure of multiple production sites at the end of quarter 4 CY '19; short-term compost issues at Mernda, our Victorian farm; and although our Monarto South Australia expansion is now fully commissioned, there have been ongoing challenges in consistently achieving desired production levels. In October '20, a new mushroom mince prepack product was launched exclusively with a major retailer, with continued rollout of this product in CY '21. A new brand, Mush-Boom, was launched in nonretail channels in December '20 with branding display on all bulk boxes and a dedicated online presence. In the berry category, there was favorable blueberry pricing, which was particularly supported by premium pricing received for our Arana variety through the main blueberry growing season, which occurs from July through to December. In CY '20, Arana production volume doubled versus CY '19 to circa 1,700 tonnes, with 90% of this total volume sold at a price premium. The new long-cane raspberry and blackberry crops saw improved seasonality, coupled with production and harvest efficiencies. The Tasmania blueberry harvest commenced in early CY '21, with strong quality and volume in line with maturing substrate crop expectations. Our blackberry crop volume and quality were also well ahead of the previous year. In the citrus category, pricing remained strong throughout the season, the result of higher export and domestic demand. There was particularly strong export and domestic demand for navel oranges and mandarins. As the season progressed, there was some further improvement in our Riverland yield, with volume totaling circa 86,000 tonnes for the season. It should be noted that China trade tensions are having a minimal impact on our citrus exports, with less than 5% of our total citrus exports going to China. A new year's day '21 hailstorm at our Colignan Victorian farm caused damage to table and wine grape crops, with our early season grape variety protected by rain covers. Although there is citrus on the Colignan farm, it makes only a minor citrus contribution to the overall citrus category. The Mundubbera table grape harvest in Queensland was completed in early January '21. There was strong quality in the crop, benefiting from 100% of the crop being covered by permanent netting. There were large volumes in all regions, resulting in price deflation compared to budget and versus prior seasons. In the tomato category, we saw truss pricing for the second half of CY '20 above expectation. However, cocktail tomato pricing was weaker than forecast. Improved pricing for snacking varieties was not sustained, being ultimately impacted by higher market volumes and continued impact through the year on demand from COVID-19, which was mostly reflective of school, café and restaurant closures. Poor light conditions at our glasshouses experienced over the second half of CY '20 unfortunately impacted yields. However, our water security situation improved significantly, where the glasshouse stands now at 100% capacity and additional storage infrastructure being developed. Last, but not least, in the avocado category, higher pricing contributed to positive performance versus budget, with both retail and wholesale pricing over the second half of CY '20 well up on the prior year. Fruit sizing from Costa-operated farms was also better than the industry average, which contributed to positive pricing. There were increased volumes from Costa-operated farms, particularly in Far North Queensland and Northern New South Wales, with third-party volumes significantly lower, in line with industry production expectations, contributing to a strong pricing benefit to Costa's own farming operations. We have also provided key CY '20 avocado production data, noting that there was 1.3 million trays of Lovacado brand marketed, 37,000 avocado trays exported and 2.8 million marketed trays in total. Some of you will note the export volumes were down on the previous year. This reflects the impact of COVID-19 on trade access but also the better domestic pricing and demand. Moving to the International segment, where revenue increased by 49% on the previous year. The African Blue Morocco CY '20 performance was greatly improved on CY '19, although there was some impact from lower volumes and pricing due to COVID-19 volatility in the U.K. and Europe in particular. This pared back the final outcome. We also saw initial commercial volumes in CY '20 from our blueberry variety program Partner growers in South Africa and Zimbabwe, and these were, of course, marketed by African Blue. The 2020/'21 Agadir crop, which is over 700 kilometers south of our Northern farms, is producing a crop of good size and quality, with small volumes sold into Asia from as early as November '20. In China, as previously reported, although the early CY '20 harvest was affected by supply chain restrictions and demand due to COVID-19, the full year volumes were exceptionally positive versus budget and contributed to another enhanced performance. Ahead of the CY '21 harvest, there has been a focus on maintaining effective pest and disease control and climate management. The CY '21 crop is expected to be slightly later. However, initial market conditions are strong. Moving on to the Costa Farms & Logistics segment. The farms' market trading performance was steady with solid performance in berry trading, driving revenue growth. This was partially offset by lower servicing revenue, particularly driven by tomato and berry product lines. There was a positive performance from logistics sites on the back of strong volume from the Jandakot and Devonport DCs and third-party customers at Eastern Creek. However, revenue was down versus the previous year, with completion of a contract in first half CY '20 contributing to lower overall segment EBITDA before SL versus the previous period. Of note was the signing of a 5-year renewal of the warehousing contract for the Devonport, Tasmania DC in December '20. I now hand over to Wayne to talk through our financials. -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [4] -------------------------------------------------------------------------------- Thanks, Sean, and good morning to everyone on this call. Before we move into the group financial slides, as you would have noted in the earlier slide, the company has continued to disclose our financial performance data based upon pre-AASB 16 changes to lease accounting. Whilst the new standard is relatively new and we are only in our second year of the new reporting regime, we believe that the reporting under this old method provides readers a better comparison against historical trading for the CY '20 financial period. Financial debt per the new leasing standards are also disclosed in the various slides and are clearly marked as to whether they are pre or post the new standards. As previously flagged to the market, it's likely for the calendar year 2021 and beyond we will no longer provide financials under the old method given we had 2 full years of historical trading under the new methodology. As Sean has already covered the various segment performances, I will briefly concentrate on the consolidated group result. Revenue for the 12 months ending 25th of December was $1.165 billion, $117 million or just above 11% improvement over calendar year 2019. As whole -- as the half year result, the International segment reported a significantly improved result for the year with a 49% increase in sales versus prior year, with China being the most significantly improved with sales up over 100% on 2019. Pleasingly, the second half of the year also delivered a very strong result for the Australian produce segment with revenues year-on-year up 7%, with the standout performance being citrus, avocado and berry segments. Citrus and avocado both achieved double-digit growth in 2020. EBITDA before SGARA and leasing impacts was up 47% versus last year. As highlighted today, the strong first half result of the International business was complemented by a solid positive momentum in the Australian produce segment. This is incredibly pleasing given the difficulty the company experienced in 2019. The improved revenue in International also led to strong improvements in the EBITDA result. And likewise, the revenue in the Australian produce segment showed a significant improvement in its bottom line versus the second half of last year. Given significant growth projects in the last 24 months, amortization and depreciation expense increased year-on-year by $7.1 million. This includes the incremental depreciation relating to the go-live of Monarto mushroom facility expansion in the second half of calendar year 2020. Interest expense of $7.7 million was $2 million below last year. The benefit was largely driven by lower base rates, improved margin on our Australian facilities and also lower average debt. I will discuss cash flow performance shortly. Similar to prior years, tax expense of $15.5 million for the group represents a relatively low effective tax rate of around 14.8%. The group continues to receive the benefit of tax concessions in both China and Morocco for agricultural companies. Net profit before SGARA, the leasing standard changes in material items of $59.4 million, was 108% improvement over prior year. No material significant items are reported this year as compared to a post-tax sum of $62 million in CY '19, which stemmed largely from impairments and site closure costs in our mushroom segment. Finally, before I move up the slide, included in the appendices to the presentation slides is the foreign exchange rates used in CY '20 to translate our International segment into Australian dollars. If the Australian dollar maintains its existing levels or strengthens further against these key currencies, our International results will translate into Australian dollars at an unfavorable rate as compared to CY '20. In relation to cash flow for the year, we're pleased to report an outstanding result for the year, with all categories within the group performing exceptionally in relation to cash conversion. Free cash flow for the year of $116.5 million was an improvement of nearly $48 million over the prior year. Final working capital inflow of $5.4 million equates to a strong second half performance that confirms previous statements. The company had a working capital outflow in the first half of the year and an inflow in the second half due to the timing of the various harvest programs across the company. As a result of the lower profit result in CY '19, the group paid minimal tax in CY '20. Given the improvements in financials, tax payments will return to normal levels in CY '21 and should approximate our tax expense. Operating CapEx of $28.6 million, although it was largely in line with prior year and met expectation, was lower than a normal level, as we managed expenditure tightly for that early stages of COVID-19. We expect calendar year '21 to be circa $44 million as we return to a stable level of maintenance routine capital expenditure. Growth CapEx of $50 million in CY '20 included the continuation of an international expansion plant that progressed as envisaged, with AUD 26 million spent in the full year in those regions. Additionally, $17.5 million of progress payments were made for Glasshouse 4. As we expect the site to be operational in the second half of this year, the final payments of approximately $27 million will be incurred primarily in the first half CY '21. In relation to international growth plans, we plan to spend approximately AUD 40 million of growth CapEx during the course of the next 12 months. Approximately 70% of this amount relates to the development of our farming locations in the Baoshan district in Yunnan Province, China. Briefly with regard to the balance sheet. Due to the improvement in profit, the net equity of the group increased by almost $40 million. Net working capital of negative $7 million was an improvement of $10 million over the prior year despite higher activity this year versus CY '19. This reflects tight management of these balances. As highlighted previously, given the strong operating cash flow result, we saw net debt reduce significantly over the prior year. Free cash was used to repay debt facilities in the period. Given such a strong free cash flow performance for the year, the net debt reduced from $178 million last year to just under $144 million this year. This, combined with the improvement in earnings, saw our leverage ratio at the end of the period at just below 1x, which is a significant improvement over -- on last year of 1.8x. Additionally, our interest cover ratio improved 2 points to 7.7 from 5.3x. Our debt facilities for the group continue to have significant headroom, with over AUD 300 million capacity at the end of the period. Our international businesses utilize local facilities to fund not only the harvest period but also support growth CapEx. Headroom at our banking facilities and overall strength of the balance sheet provide excellent capacity in relation to future expansion. Refinancing of or part of the existing facilities will be considered over the next 12 months. As mentioned by Harry earlier, the company declared a fully franked $0.05 per share final dividend. This equates to an aggregate payout of $0.09 per share for the year or 64% increase over CY '19, and this also represents a net profit after tax payout ratio of approximately 65%. I'll now pass back to Sean for a business and growth plan update. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [5] -------------------------------------------------------------------------------- Thank you, Wayne. Ladies and gentlemen, today, we are announcing 2 major new initiatives, which complement our existing growth priorities. Firstly, the company is actively engaged in a citrus acquisition program to increase its Sunraysia footprint to at least 700 hectares over CY '21. Secondly, Board approval has been given for the commercialization of protected, trellised, high-density substrate avocado trees. Addressing our citrus growth plans first. We're actively engaged in a citrus acquisition program to increase our footprint in the Sunraysia region. As mentioned, the aim over CY '21 is to increase this footprint to at least 700 hectares. We should have more details to provide on this over the coming weeks. In recognition of this growing footprint, planning for the development of a large-scale packing facility to be sited in Mildura, Victoria has also commenced. New sites have also been acquired in the Riverland to undertake extensive, high-density, netted citrus plantings during CY '21. These properties will host the most progressive citrus-growing techniques across the citrus category. We also continue to plant proprietary table grape genetics in Sunraysia. Our partner grower network is expected to plant circa 110 hectares in CY '21 and Costa, 40 hectares. On to the other major growth initiative we are announcing today, with the Costa Board approving a commercialization program for the planting of 40 hectares of protected, trellised, high-density substrate avocado trees across a number of regions aligned to existing avocado plantings. This commercialization will represent a springboard to further expansion in 2023/'24. This decision is a result of the success of our protected, high-density substrate avocado trial results from original small plantings undertaken in late 2017. This has delivered global leading results, including faster tree maturity, higher yield, better fruit quality and greater efficiency of water use versus conventional plantings. The high-density commercial plantings will encompass a minimum of 1,000 trees per hectare planted in substrate with trellising and permanent netting cover. Our other major growth project currently underway is the construction of 10 hectares of tomato glasshouse and a 2.5-hectare nursery. As announced in late May '20, due to improved ongoing water security, including plans to build further water-capture capacity, the decision was made to recommence the new glasshouse for build and the 2.5 hectare nursery project. Works are proceeding to the revised schedule, with commissioning of the glasshouse and nursery anticipated to be completed by end of August '21 whilst acknowledging suboptimal scheduling due to COVID-19 impacting availability of international contractors. First production is expected prior to the start of CY '22. In the International segment, land is being sought for a further 14 hectares to be planted at Agadir, Morocco in CY '21, taking total Southern region plantings to circa 102 hectares. Benchmarking and deep-dive analysis into farm fertigation programs has identified improvement opportunity for CY '21, and this should drive better yield and timing performance. There is a focus on continuous improvement and redevelopment of our Northern farms through in-soil and substrate plantings. Commencing CY '21, the Northern farms will be progressively replanted with Costa VIP purpose-bred, superior genetic blueberry varieties. You will note we provided a breakdown of forecast plantings and production footprint through to 2023. In China, an additional 7.2 hectares of blueberry plantings have been completed at the Guangmen farm, bringing total planted hectares at that farm to 69. The Baoshan development of an initial circa 50 hectares is progressing well, with completion scheduled by end of March '21. The inaugural harvest is on target for CY '22. Our joint venture partner, Driscoll's, Inc., has plans to expand and improve fruit-handling capacity as total farm production increases. They've also commenced servicing Southwest China, where the population of this region is circa 220 million people. As per Morocco, you will note we've also provided a breakdown of forecast plantings and production footprint for China. We also thought it important to provide an update on our blueberry varietal breeding program. The subtropical program at Corindi, New South Wales is focused on further season extension, enhanced yield flavor and fruit size to develop the future beyond Arana. Our tropical breeding program based in Far North Queensland is developing a new generation of varieties, purpose-developed for low latitudes and as a response to the challenges presented by climate change. Planning is also to occur in CY '21 of our purpose-bred tropical variety 051 in Far North Queensland. A range of advanced selections are currently under evaluation in Australia; U.S.; Mexico; Morocco, sorry; and China. As you are aware, we withdrew quantitative guidance in April last year due to the uncertainty relating to COVID-19. We had also announced previous to that date our intention to only provide qualitative guidance commencing CY '21. With that in mind, I now come to what we still refer to, for ease of reference, as the outlook. Demand and pricing across our produce categories generally remain strong into CY '21, and there is a continued focus on our competitive advantages in yield, geographic spread, quality and cost of production. Favorable conditions in the Riverland over the summer months means early to mid-season naval crops are looking promising at this stage, with CY '21 season an on year. At new year's day '21, hailstorm damaged the Colignan grape crop, while citrus contribution to the overall category from this farm is minor. Early season performance from the International segment has been positive, including strong pricing in China. There is uncertainty as to the extent of COVID-19 impacts, particularly given U.K./Europe situation. The translation of International segment results are likely to be impacted by the recent strengthening in the Australian dollar. Finally, a strong balance sheet and operating cash flow provides opportunity to continue to invest in quality bolt-on opportunities, international expansion and domestic innovation projects to drive growth. Before I conclude, Harry has mentioned this is his last results presentation. Many of you listening to this call have had dealings with Harry over the last 5.5 years since Costa became a public company, and I'm sure you would agree that it is appropriate for me to take a moment to acknowledge Harry's time as Costa's CEO. Above all else, Harry has brought with him a disciplined and clear vision of what was needed to establish Costa as the #1 player in the fresh produce industry. Indeed, we are a company that is somewhat unique in the world of agriculture and certainly, publicly listed agricultural companies. Harry's leadership has seen the company achieve significant growth and financial returns for shareholders. There have certainly been some challenging times, especially the recent drought. But as I said in the presentation, I think the work we have done to mitigate such risk and also develop new opportunities has placed us in good standing to deal with such challenges and become a better company for it. That is largely down to Harry's leadership. I hope you can all join with me in wishing him the very best for the future. Ladies and gentlemen, that concludes our presentation, and we are now happy to take any questions that you may have. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Ben Gilbert with Jarden. -------------------------------------------------------------------------------- Ben Gilbert, Jarden Limited, Research Division - Head of Australian Research [2] -------------------------------------------------------------------------------- Congratulations on the result. Just interested if you can help us understand just the margin improvement and what sort of drove the margin lift in the produce category through the first half, where you sort of saw the most significant increase in margin -- sorry, in the December half. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [3] -------------------------------------------------------------------------------- So I think -- Ben, it's Sean. Ben, I think what we saw was, as we called out, we did have the improved demand. We had improved pricing across several of our categories. And the benefit of an operation like Costa is once that top line revenue starts to move, then our margins improve along with that. So we grew profit faster than revenue, as you pointed out. -------------------------------------------------------------------------------- Ben Gilbert, Jarden Limited, Research Division - Head of Australian Research [4] -------------------------------------------------------------------------------- So just within -- I'm just -- I suppose I'm just trying to understand all of the Arana side of things. It is how big a contributor that is to berries and how much of a driver that is to margin within the category as well. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [5] -------------------------------------------------------------------------------- Yes, sure. So from our point of view, for that main season, July to December, Arana turned out to be about 35% of our berry revenue. And of that 35%, about 90% of it is being sold at a premium price. -------------------------------------------------------------------------------- Ben Gilbert, Jarden Limited, Research Division - Head of Australian Research [6] -------------------------------------------------------------------------------- Okay. And obviously, the incremental cost of production for Arana, it's not necessarily that much more, is it? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [7] -------------------------------------------------------------------------------- Actually, our cost for production on Arana are actually a bit lower, particularly harvest costs to bigger berry and faster to pick. -------------------------------------------------------------------------------- Ben Gilbert, Jarden Limited, Research Division - Head of Australian Research [8] -------------------------------------------------------------------------------- Okay. And then just the final one for me. Just interested in -- just on the international side of things, particularly around the royalty side. How many regions you're in and how you're just seeing the outlook for planting. For that kind of I think you've got South Africa now, Southeast Asia as well. Just trying to get a bit of an understanding on how we should think about the trajectory of growth for the royalties. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [9] -------------------------------------------------------------------------------- Yes. You'll see South Africa had a modest contribution in '20, and Zimbabwe is just a very small amount, but that will grow quite substantially, particularly South Africa in '21 and beyond. And you'll see the increase in contributions from China, obviously, as of our footprint from third-party production kicks in as well. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Your next question comes from Larry Gandler with Crédit Suisse. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [11] -------------------------------------------------------------------------------- Harry, congratulations on the retirement from Costa, but I'm sure not retirement overall. So just a couple of questions, I guess, on China. Can you -- it looks like you've got a planting program that will take you out a couple more years with 100 new hectares for the next few years. Can you talk about whether the land is acquired and CapEx requirements for that expansion? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [12] -------------------------------------------------------------------------------- The land is acquired -- Sean mentioned the Baoshan 50 hectares. That's almost -- planting is almost done. The 100 hectares for the next tranche is acquired, and we're just doing all the early preparation. And we haven't acquired the following 100 hectares, but that's in development, and it's being scoped at the moment, Larry. So as you know, we usually work 2 years ahead. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [13] -------------------------------------------------------------------------------- Okay, great. And do you expect material CapEx? Is there any sort of CapEx expectation we should have for those plantings? -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [14] -------------------------------------------------------------------------------- Yes. It's Wayne, Larry. So as mentioned in the slides, we expect around $28 million in relation to China in CY '21. Given that expansion that Harry just mentioned, it'd probably be a similar number the following year. And I guess subject to the availability of land, it might be a similar number the year after. So it's a reasonable amount of CapEx. But clearly, a very exciting project. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [15] -------------------------------------------------------------------------------- Larry, about the risk and return. If you look at the international results, there are about -- the margins are about 3x the Australian industry. Now that is very consistent. You should not be operating, in our view, an agricultural offshore unless you get a very significant reward for the risk you take. So we're happy with 3:1. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [16] -------------------------------------------------------------------------------- Yes. Okay. Fantastic. And on Morocco, while on international, last year's season had some ups and downs. And I think one of the characteristics of last year's season was this sort of long tail. Can you just talk to maybe how this season is shaping up? I know it's difficult to predict agriculture, but in what way is the shape of this season going to be different? So we can get a feel for timing as we observe this current season. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [17] -------------------------------------------------------------------------------- You're right about it being very variable. But look, if you asked me that question 5 weeks ago, I would have said we were slightly late. But we've had very good conditions -- growing conditions in the last 5 weeks. And at the moment, we're slightly early but, call it, on time, Larry. So the Agadir segment is in -- see very significant harvest, and we've got some very early picking happening in the Northern farm. So we'd say we're pretty much on time in Morocco. Now you mentioned the tail. We normally go through until mid- to late June, and I would expect that would be... -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [18] -------------------------------------------------------------------------------- Okay. Last question for me, guys. Just in terms of Agadir, is there revenue in that December half? I imagine there would be. But when you think about that Agadir revenue, is more of it weighted into the June '21 half or in the December '20 half? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [19] -------------------------------------------------------------------------------- No. Just a very small volume. We start picking late November, but it's a very modest volume in December. We're really aiming at Agadir to have very significant crop January, February, March. There's a little bit carrying over to April. But basically, 80% to 85% of our crop off by the end of March, which is really the -- it's a very attractive window, and that's what we're anticipating this year. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question comes from Aryan Norozi with UBS. -------------------------------------------------------------------------------- Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [21] -------------------------------------------------------------------------------- Just the first one for me. I mean looking at the calendar year '20 versus calendar -- sorry, calendar year '21 versus calendar '20, can you just call out from -- or remind us of some of the costs or negative impacts incurred in calendar '20 that won't repeat? Just so we can get an idea around underlying versus sort of one-off growth, please. -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [22] -------------------------------------------------------------------------------- Yes. It's Wayne. So at the half year, we called out various issues related to -- for example, in berries, we had the removal of a variety crop, which we called around including issues in tomato at Glasshouse 4. So we called around $15 million. So that's largely played out as occurred. During the year, we had COVID costs of about $5.4 million. To be frank, it's very hard for us to make a call-out on what they expect COVID costs will be in CY '21. It largely depends obviously what happens in particularly Europe. But certainly, we'd expect to have some costs moving into CY '21. Other than that, I think they're probably the major call-outs that we called out. I mean, obviously, we did call out the half year -- the disruption costs in Morocco. At this stage, as we've sort of highlighted, there is still uncertainty in relation to how COVID will play out in Europe. But other than that, we're probably not -- no major call-outs. -------------------------------------------------------------------------------- Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [23] -------------------------------------------------------------------------------- And the raspberry crumble and the mushroom -- trucking of the compost, were they significant in calendar year '20 that won't obviously repeat in '21? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [24] -------------------------------------------------------------------------------- I think what we'd say, Ary, is that the crumble was not significant in '20 and no expectation of any further impact in '21. The mushroom compost pit, it -- I mean, it did turn out to be one of 3 things that were significant in mushroom. So we had the closure of the sites, as you know, in quarter 4 '19. And then we had Morocco -- not Morocco, Monarto being progressively commissioned. And as we highlighted in the presentation, we're not entirely happy with how progress is going on that, although it is improving. So those things were key, and the compost issues that we had at Mernda also contributed a little bit. Expectations for this year, that certainly, we would expect Monarto to be an improved performer. And we never anticipate that we'll get compost issues again, but it is one of those things in the industry that certainly needs careful management. But no, we're not anticipating it. -------------------------------------------------------------------------------- Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [25] -------------------------------------------------------------------------------- Yes. And just around the $15 million of drought-related costs, does that include the impact from water costs? Or is that an extra impact? And if so, what's the -- what -- can you just quantify what water -- headwind water was in calendar '20, please? -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [26] -------------------------------------------------------------------------------- Yes. So it's Wayne again. So water costs in CY '20 were around $6 million, and that largely reflects -- is in our citrus category. With improved pricing, you're probably aware that you can buy on spot rates significantly lower this year than last year. We would expect some improvement -- significant improvement. We're not calling that out exactly, but it'll certainly be lower than $6 million in CY '21. -------------------------------------------------------------------------------- Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [27] -------------------------------------------------------------------------------- Perfect. And just second one in terms of your long-term incentive. You retained your target for low double-digit earnings -- EPS growth, but it's not the calendar '19 base, which obviously, included a lot of negative impact. How do you -- my question is whether the target does -- will adjust for drought impact sort of when you're building the bridge from calendar '19 to '22 or for incentives. -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [28] -------------------------------------------------------------------------------- From memory -- sorry, it's Wayne again. The -- we haven't used CY '19 as the base for LTI given it was a low year. So our -- the CY '20 program is actually based off a base of CY '18. So I think, yes, actually, it's probably not -- what you're saying is not quite right. -------------------------------------------------------------------------------- Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [29] -------------------------------------------------------------------------------- That's perfect. And sorry, last one, if I can sneak in. Just around the 2 new growth projects. Can you give us an idea around the capital expected to be employed for the ventures? And I'm just trying to get an idea around how to think about the earnings uplift over the next few years from those projects, please. -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [30] -------------------------------------------------------------------------------- In relation to capital around the growth projects, I did sort of mention it in my speech, but I'm certainly happy to go over those again. -------------------------------------------------------------------------------- Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [31] -------------------------------------------------------------------------------- No, the 2 -- sorry, not growth CapEx. Just in terms of the -- or does the growth CapEx include the avocado and the citrus, the 700 hectares in the citrus space or... -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [32] -------------------------------------------------------------------------------- In relation to the avocado project, that will be an expenditure of around $12 million over a couple of years. In relation to the citrus program, whilst we are announcing our intentions to expand further, we're not in a position to announce what number is associated with that at this stage. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Your next question comes from Craig Woolford with Citi. -------------------------------------------------------------------------------- Craig John Woolford, Citigroup Inc., Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [34] -------------------------------------------------------------------------------- Yes. Congratulations, Harry. Great way to finish your career at Costa. Great result. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [35] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Craig John Woolford, Citigroup Inc., Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [36] -------------------------------------------------------------------------------- Yes, it's good to see. Good to see things improved. So the -- there's lots of moving parts which I feel the other questions have obviously highlighted, and some of them are things that should improve in '21. But can we just -- can I just ask on 3 particular areas where you think things will land in '21 and/or what happened in '20? So firstly -- first of them is China. I know it had an excellent yield. Do you think you can maintain similar yields in China? The second is, any color you can provide on -- of the 13% revenue growth avocado, how much of that was price? And then similarly, for citrus, trying to get a feel for the 12% revenue growth that you reported. How much price contributed there? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [37] -------------------------------------------------------------------------------- I'll just cover the China ones, and Sean will do the 2. Craig, look, China, we've stressed very strongly last year was an exceptional year. We've got a lot of agronomic work around pollination and pruning and pest and disease control. And that carries through even with a little bit more impetus into 2021. So we're confident that's sustainable. We did get a [collection] or, if you like, an aggregation of very, very favorable weather conditions, which we hadn't seen before in '20. It's pretty good weather out there this year, although a little bit cooler. But I would say we probably won't get quite the yield we got last year, but we'll get, I think, fairly close to it. And don't forget, we've got another very big farm, Guangmen, 69 hectares, coming in this year as well. So I would think yield will be, per hectare, a little down than last year, but not substantially. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [38] -------------------------------------------------------------------------------- And Craig, it's Sean. So addressing your other 2 points. First of all, I think there's a few things going on in pricing, as always. There's a mix between retail and wholesale, and there's also in the -- particularly in the case of avocado, the fact that we were, on average, achieving sizing of our avocados that was 5 sizes bigger than the rest of the industry, which we know factually because we're a much bigger packer and marketer of avocados, as you know, from the numbers than grower ourselves. But if you want just simple headline numbers, if you like. So overall, avocado CY '20 versus CY '19, we saw an increase of 12%. And from a citrus point of view, average it out between domestic and export, we saw an increase of about 18%. -------------------------------------------------------------------------------- Craig John Woolford, Citigroup Inc., Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [39] -------------------------------------------------------------------------------- Okay. And I guess, it's obviously our debate in our minds as to whether that carries through into '21. That improved sizing in avocado sounds very impressive. Do you think that's something that can be sustained? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [40] -------------------------------------------------------------------------------- Yes. We certainly hope so. We attribute it to other farmers, if you like, cutting back on fertigation processes during the drought or as a result of financial stress under the drought. We plainly didn't, and we benefited from that. We're only in very early season indications at the moment in FNQ, but we're certainly seeing some encouraging signs. So I would hope that we would continue to have an advantage versus the industry. From a citrus point of view, and I guess, really from fresh produce overall, I think we've seen a response from consumers to healthy fresh food given the COVID situation, and I think that's driven demand and pricing. I would say, though, that undoubtedly, the citrus pricing, in particular, domestically, as we called out at the half year, has been fairly exceptional. So I don't think we would continue to see such great demand and pricing domestically. But export, for us, we've got such a broad customer base that it seems to be very resilient. So hard to say, I guess, in other words. But no, we wouldn't be predicting an 18% pricing increase in '21. -------------------------------------------------------------------------------- Craig John Woolford, Citigroup Inc., Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [41] -------------------------------------------------------------------------------- Sure. I appreciate it. It's been good, the transparency you provided in the release and the answer there. Just one other question on the avocado high-density planting project. So the -- you called out, Wayne, you said $12 million. Is that for the 40 hectares? -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [42] -------------------------------------------------------------------------------- That's right, yes. So that includes acquisition of land but also, obviously, significant amount of infrastructure and also planting. -------------------------------------------------------------------------------- Craig John Woolford, Citigroup Inc., Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [43] -------------------------------------------------------------------------------- And if this proceeds to plan, you've got 756 hectares of avocados. Would you look at replanting existing trees? Or is it only going to be for new hectares going forward? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [44] -------------------------------------------------------------------------------- It's a good question, Craig. A lot of our farms we've set over the journey, we've bought fairly immature orchards with a view of getting us ramping up. So we'll probably stick with certainly the younger conventional plantings, but some of the older blocks certainly could be candidates. But I would think for the next -- if this goes according to plan -- this is quite a radical departure, by the way, in agronomic practice. So it's taken us 3 years of intensive trialing to get to this point, but we have a high degree of confidence. So if we do expand dramatically in '23, '24 and beyond, I suspect a lot of it will be greenfield, but there could be some old blocks we might get as well. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [45] -------------------------------------------------------------------------------- Just to add to that, Craig. Rough numbers, if you do the math, with only 150 hectares of high density, we can basically replicate the footprint, if you like, of our current. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Your next question comes from Jason Palmer with Taylor Collison. -------------------------------------------------------------------------------- Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [47] -------------------------------------------------------------------------------- Yes. Congratulations, Harry, on what you've done at Costa. It's been remarkable. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [48] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [49] -------------------------------------------------------------------------------- Two questions, if I can. I apologize for going over old ground on the CapEx. The line here in Adelaide is a little bit muffled. But I just want to double check, Wayne, on the growth CapEx for next year again, sorry. -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [50] -------------------------------------------------------------------------------- Yes, that's fine. So what we've talked about was the first half of the year would be the completion of Glasshouse 4 in Guyra. We currently envisage around $27 million of payments in the year, primarily first half, given that the site will go operational in the second half. In relation to international, so around $28 million of expenditure in China and $12 million in Morocco. And as sort of discussed in the last few minutes, the other major project would be relating to the avocado trellis trial, which is around $12 million. So if you do the sums of all that, you could be around $80 million in the year. -------------------------------------------------------------------------------- Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [51] -------------------------------------------------------------------------------- Okay. Apologies for going over that. And then just 2 more, sorry, if I could. Harry, I was cognizant that there was a -- in the prospectus some time ago, there was an agreement with Driscoll's that was up for renewal on the international royalties. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [52] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [53] -------------------------------------------------------------------------------- And they're around the renegotiation and just how aligned Driscoll's seems to be globally to the Arana product, in particular, in South America now and Central America. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [54] -------------------------------------------------------------------------------- Yes. Yes, Jason. That negotiation did take a while, but it has been successfully concluded, and I think both parties are satisfied with the results. We've had a nice, if you like, recognition -- financial recognition in view of the renegotiation. Driscoll's is really excited about our new Arana variety of both the subtropical and tropical regime. So they're looking forward to having access to those in the plain, particularly in South America and also Central Mexico. They've been very successful with Arana, by the way. They're getting very substantial premiums right through the U.S. on Arana and have done for several years. So basically -- so short answer is yes, renegotiated positive, and we are aligned, both parties. There's no change to the long-standing 12-year local joint venture. And as we've said earlier, we aren't totally happy with not having direct ownership of the Chinese marketing side, but we've been given very direct access and a significant say in what happens but no equity arrangements. So overall, I think the relationship is pretty solid. -------------------------------------------------------------------------------- Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [55] -------------------------------------------------------------------------------- Great. And the last one from me was just around the replacement cycle that you flagged in Morocco with some of those earlier plantings. Could you maybe just help us understand the -- sort of the net yield impact with the replantings versus sort of what you take out? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [56] -------------------------------------------------------------------------------- It'll be staggered over about 5 years? But basically, just go back in normal cycles, these are mainly soil plantings in the North or planting, if you like, in the deep sands. We only have 7 to 8 years in Australia. We're now changing our 12- and 13-year-old plantings. So one of the advantages in Morocco we've all long said is we get a very long production cycle over that particularly relative thing. So part of it is because we're taking older plants out. But also, we've got some varieties now which are the new ones coming through we've been evaluating for 3 years in Morocco, both in the North and more likely at Agadir, which is showing very strong improvement over the current variety. So it's a 2-tier thing. One is to take out the very old planting but also to take out some subpar, older varieties and putting new varieties. Now because it's phased over 5 years, broadly, there'll be a similar volume of production over that period. So essentially a ramp-up, like you've seen in the last, say, 5 years. We should maintain relative static production as we take out some and put in new varieties because some of it's going to substrate, where we get a new crop in 1 year. In those sands, we really get a new crop in 2 to 3 years. So look for a pretty static, if you like -- it'll go up a bit, but purely flat production over the next 5 years out of Morocco. -------------------------------------------------------------------------------- Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [57] -------------------------------------------------------------------------------- Okay. Great. So just to confirm that for me because being simplistic on this, if were would, for example, doing 5,000 tonnes of production in Morocco, just pick a number now, what you're saying is that over the next 5 years of the replanting cycle, that's going to stay broadly in line with that number, 5,000 tonnes. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [58] -------------------------------------------------------------------------------- It's a bit over 6,000. We're on about 6,000 at the moment. -------------------------------------------------------------------------------- Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [59] -------------------------------------------------------------------------------- No, it's hypothetical. So you're saying you're at 6,000. But let's say, with the recent plantings, that 6,000 tonnes will remain static for the next 5 years? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [60] -------------------------------------------------------------------------------- Probably. They don't -- so as the new ones kick in, it'll ramp up again. But yes, call it, for want of a better -- next 4 years, it's static. -------------------------------------------------------------------------------- Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [61] -------------------------------------------------------------------------------- Okay. But the benefit is going to be -- the quality is going to be better and the timing is going to be better? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [62] -------------------------------------------------------------------------------- Yes. Correct. There'd be better crop timing and significant uplift in quality. So these things are never just the volume. You can see with Arana. So it's not just the volume. It's the quality of the product. Now -- so I would think we'll get a better margin, if you like, than we would expect if we just stuck with the existing varieties. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Your next question comes from Kurt Gelsomino with Morgans. -------------------------------------------------------------------------------- Kurt Gelsomino, Morgans Financial Limited, Research Division - Analyst [64] -------------------------------------------------------------------------------- It's positive, I guess, that the Morocco crop timing's tracking to sort of normal expectations. Can you just provide an update on how the Spanish season crop timing is also progressing? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [65] -------------------------------------------------------------------------------- Look, it's a moving piece, Kurt. As I said to an earlier question, if you go back 5 or 6 weeks ago, both Morocco -- the Northern Farms and Morocco and Spain were looking a little bit late, a couple of weeks, 3 weeks. We've now firmed up as being on time or slightly earlier. Spain, we don't have really good visibility, but we suspect they probably have had similar weather, although we think we might be a little bit ahead. But just call it even-steven. I think you can say that we're both in similar situation. Agadir, of course, is a different beast. It's -- as we also referred earlier, again, which is why we're in that Southern region. -------------------------------------------------------------------------------- Kurt Gelsomino, Morgans Financial Limited, Research Division - Analyst [66] -------------------------------------------------------------------------------- Yes. That's great. And I guess, you've also called out, I guess, some potential ongoing challenges in Morocco in this CY '21. But do you think there's probably the scope to recover some of the $5 million in market disruption you incurred this year in FY '20? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [67] -------------------------------------------------------------------------------- Well, we hope not. But look, we are striving to get a very good result there. We're pretty confident. And by the way, we've got a very competent General Manager over there. He's oversold the crop, which is a very good, smart tactic, if you like, when you've got uncertainty. So we believe that by having oversold the crop, he's got options if there are disruptions. So we're not saying we'll do -- we'll have a problem like last year in terms of disruption. But if there is disruption, we know for sure there'll be freight costs and freight disruption, and there'll be retailers switching in and out of orders. But we just call it out as a watching brief there rather than a hard call. -------------------------------------------------------------------------------- Kurt Gelsomino, Morgans Financial Limited, Research Division - Analyst [68] -------------------------------------------------------------------------------- Yes. Sorry, my question was whether or not you should actually be able to do better than the $5 million in costs you incurred in the pcp. So I guess... -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [69] -------------------------------------------------------------------------------- Well, that's the expectation. -------------------------------------------------------------------------------- Kurt Gelsomino, Morgans Financial Limited, Research Division - Analyst [70] -------------------------------------------------------------------------------- Yes. No, that's great. And maybe just a final one. Just on -- can you just remind me, I guess, what the on-crop citrus crop looks like from a volume perspective? I think in the past, we sort of talked about volumes being in excess of 100,000 tonnes. But you've also had ongoing maturity and footprint growth, too, over the last few years. So I guess, what does sort of an on-crop look like to the business now? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [71] -------------------------------------------------------------------------------- Yes. I think -- Kurt, it's Sean here. We're -- expectations very early in the season, as you know, and these forecasts are fraught. But we're expecting around 11 -- 100,000, sorry, out of the Riverland area and around 12,000 out of the Sunraysia area. -------------------------------------------------------------------------------- Kurt Gelsomino, Morgans Financial Limited, Research Division - Analyst [72] -------------------------------------------------------------------------------- And so when you sort of balance up that pretty strong volume growth outlook across those 2 regions, water costs obviously coming down to a low in the spot market, and I guess maybe the negatives would be sort of price and FX impacts. But, I guess, do you still expect to grow that citrus category contribution in FY '21? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [73] -------------------------------------------------------------------------------- Yes. We always aim to grow it, yes. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- Your next question comes from Piers Flanagan with CLSA. -------------------------------------------------------------------------------- Piers Flanagan, CLSA Limited, Research Division - Research Analyst [75] -------------------------------------------------------------------------------- Just a couple of quick ones for me. Firstly, just going back to the sort of the CY '20 ag cost. And just to clarify, I think at the half year, you called out maybe $8 million at the EBITDA line for hail on citrus. Did that eventuate to that $8 million mark? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [76] -------------------------------------------------------------------------------- Yes, it did. -------------------------------------------------------------------------------- Piers Flanagan, CLSA Limited, Research Division - Research Analyst [77] -------------------------------------------------------------------------------- Yes. And then maybe just on Arana production sort of at 1,700 tonnes at the moment. I mean the sort of expectations to grow that going forward and sort of if it can hold its pricing premium at these levels. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [78] -------------------------------------------------------------------------------- Yes. So the really pleasing thing was we doubled it in CY '20, and we had the same question about holding the price premium, and we grew it a little bit. So we came in at an average 25% price premium in CY '20. For this year, we're looking at taking that 1,700 tonnes to up to about 2,100 tonnes. And yes, we would anticipate that we would still hold the premium. -------------------------------------------------------------------------------- Piers Flanagan, CLSA Limited, Research Division - Research Analyst [79] -------------------------------------------------------------------------------- And then just finally, just, I guess, on broader demand. It looks pretty strong here, and you've spoken to it briefly. But I mean, are you able to give us sort of your views on what's been increased consumption and what's potentially sustainable or what's been just sort of a result of COVID and people being at home more? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [80] -------------------------------------------------------------------------------- Yes. It's almost impossible to definitively answer. Sorry, Piers. But what we would say and what certainly our consumer research has shown is that as a result of COVID, people and households have become more conscious of consuming healthy fresh food. So that absolutely happened. How sustainable that is, I guess, is anyone's question but certainly continuing at the moment. So we think the carefully chosen categories that we're in were already high-demand produce categories and are now being given further impetus, if you like, by that health consciousness. So -- and I think you'd have to say factually at the moment that things should continue the way they are. -------------------------------------------------------------------------------- Piers Flanagan, CLSA Limited, Research Division - Research Analyst [81] -------------------------------------------------------------------------------- Sure. And actually maybe just one quick one, if I can. Just on Monarto and sort of ramping up production to sort of a full run rate. Is that something that can occur over this first half? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [82] -------------------------------------------------------------------------------- Yes. Yes. To put it in perspective, it's really the combination of volume and quality that we're looking for at Monarto. We've tended to hit our higher volumes but drop the quality. And then the reverse has also been true when we've had smaller volumes. We've had a higher quality mix. It's that actually -- it's the mix of both that really drives the performance. But the team has been working very hard on getting that consistency. We've started to see good signs at the moment. And so yes, the expectation should be that by the half year, Monarto is running at full till. -------------------------------------------------------------------------------- Operator [83] -------------------------------------------------------------------------------- Your next question comes from David Pobucky with Macquarie. -------------------------------------------------------------------------------- David Pobucky, Macquarie Research - Analyst [84] -------------------------------------------------------------------------------- Again, congratulations, Harry, and all the best going forward. Just first question. I think your typical first half/second half earnings skew is around 80-20. This year, it was 65-35. And you've touched on the key drivers in the second half, citrus, avocado, berry. But is there anything to suggest that, that traditional skew has changed going forward? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [85] -------------------------------------------------------------------------------- Look, I think certainly, we continue our expansion in international, and we've given very fulsome detail on that in the pack. But at the same time, from a citrus point of view, we continue to build out our network there. So a bit of extra plantings in berry. Look, David, it's a good question. I don't have a definitive view on it at the moment to say that it should be any different so I think roughly 60-40 would be a fair assumption. -------------------------------------------------------------------------------- David Pobucky, Macquarie Research - Analyst [86] -------------------------------------------------------------------------------- Okay. And just one last one. Sorry if I missed it before. But just on tax, effective rate of 15% to the Morocco and China this year, is that expected to go back to traditional levels of closer to that 30% in '21? -------------------------------------------------------------------------------- Wayne Kenneth Johnston, Costa Group Holdings Limited - CFO [87] -------------------------------------------------------------------------------- It's Wayne. No. In China, the concessions are evergreen, and there's no -- not aware of any change on that. In relation to Morocco, which is more around export concessions, we -- in part, we expect that to drop out in CY '23. So at least another 2 full years of those concessions in the international business. -------------------------------------------------------------------------------- Operator [88] -------------------------------------------------------------------------------- Your next question comes from Michael Peet with Goldman Sachs. -------------------------------------------------------------------------------- Michael Peet, Goldman Sachs Group, Inc., Research Division - Executive Director [89] -------------------------------------------------------------------------------- First question, just on weather in Spain. There was some rather severe weather a month or 2 back. Did you know whether that's had any impact on the berry growers in that region? And just trying to think about how -- what sort of headwind you might face, if any. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [90] -------------------------------------------------------------------------------- Yes. Michael, it's Harry. That extreme weather around Madrid and in Central and further North, less so in the Southern regions, where the berries are growing. So it had some impact, but not the dramatic impact it had in the other parts of -- more elevated parts of Spain. But certainly, it did delay the crop. I don't think it did any physical damage from the information we've got. -------------------------------------------------------------------------------- Michael Peet, Goldman Sachs Group, Inc., Research Division - Executive Director [91] -------------------------------------------------------------------------------- And there was some talk a month or so back in the U.S. about a potential tariff coming on imports into that market, which I imagine may have impacted your royalty income in regions like South America or Central America, Mexico. That seems to be off the agenda. Is that the right way to read it? And would that have been a risk? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [92] -------------------------------------------------------------------------------- It would have been risk. And it's not the agenda as far as we're concerned as for the launch. -------------------------------------------------------------------------------- Michael Peet, Goldman Sachs Group, Inc., Research Division - Executive Director [93] -------------------------------------------------------------------------------- Just on precut mushrooms. You mentioned that's been a trend for a while. And I guess, with COVID, I can see why it would have exacerbated it. But could you give us a sense of maybe what percentage coming from cut versus loose mushrooms at the moment and where that was prior? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [94] -------------------------------------------------------------------------------- Yes, sure. The percentage in CY '19 was, for us, prepacked was about 47%. And during CY '20, that moved up to about 58%. We would see that -- those rough proportions, if you like, continuing in CY '21, hopefully. -------------------------------------------------------------------------------- Michael Peet, Goldman Sachs Group, Inc., Research Division - Executive Director [95] -------------------------------------------------------------------------------- And you get a premium for those prepacked? You get a better margin on those? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [96] -------------------------------------------------------------------------------- Yes. They're certainly more profitable to us. -------------------------------------------------------------------------------- Michael Peet, Goldman Sachs Group, Inc., Research Division - Executive Director [97] -------------------------------------------------------------------------------- Excellent. I heard the potential for the crop -- citrus crop this year, 100,000 plus 12,000. But just to confirm what was the tonnage that you reported in '20? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [98] -------------------------------------------------------------------------------- '20, I think we said 6,000 in the Riverland. Yes. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [99] -------------------------------------------------------------------------------- And it was about 9,000 or 10,000 in the... -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [100] -------------------------------------------------------------------------------- Was it? Yes. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [101] -------------------------------------------------------------------------------- In Sunraysia. -------------------------------------------------------------------------------- Michael Peet, Goldman Sachs Group, Inc., Research Division - Executive Director [102] -------------------------------------------------------------------------------- Excellent. All right. That's all I had, Harry. All the best to the future. Sean, all the best to you in the new role. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [103] -------------------------------------------------------------------------------- Thanks, Michael. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [104] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [105] -------------------------------------------------------------------------------- Your next question comes from Rod Sleath with Rimor Equity Research. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [106] -------------------------------------------------------------------------------- Well done on the results. And Harry, I'm very happy for you that 2020 was a better year than 2019. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [107] -------------------------------------------------------------------------------- Thank you. As are we. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [108] -------------------------------------------------------------------------------- As are we as well. I think I'd like to start by just focusing on the new avocado trellising, I'll call it, technology. I just want to clarify, where you have 4x the tree density per hectare, is your expectation that, that leads to 4x the yield density per hectare? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [109] -------------------------------------------------------------------------------- No. Not exactly. Not 4x, but certainly a lot more. Probably on the order of double. By the way, these are not just trellis. They're in substrate, very large substrate bag. Basically, we're getting yield, which, from the last 3 years, we would say, is around about double the per hectare rate that you would get out of a high-quality conventional planting -- an average conventional planting. So work on double. But also the real -- the many benefits, earlier crop timing, significantly better crop quality -- leading quality and significantly lower water use per kilo of harvest as well as, of course, protection from hail and lower temperature regime under the permanent netting. But the other one -- and this is the potential benefit, not one we're claiming at the moment. But by trellising, we're setting up those trees low -- smaller trees to enable mechanical harvesting to take place in the future, a little bit like what the apple industry is doing. And there's another big benefit in health and safety. If anyone have been -- any one of you have been on traditional avocado farms, including ours, you'll see that we have to harvest a lot of the crop on cherry picker type platforms, which, whilst they operate under strict safety regimes, they do have an element of risk. So we're dealing with a very low height tree and you pretty much can pick most of the crop from the ground. So the whole route of issues there. It's taken us 3 years to get to this brave move, and I think it's going to be very significant for the future. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [110] -------------------------------------------------------------------------------- That sounds great. Can I just perhaps just focus on the demand side for avocados? Because, obviously, Australia is a large consumer of avocados per capita, lower than some countries but higher than the average -- or higher than the average. and There's still a lot of supply coming on as previous plantations are maturing. Very clearly, it is a sensible strategy to have the lowest-priced -- lowest cost of production for the best quality crop, which is the way this looks like where it's heading. But are you relying on opening up export markets to be able to absorb the additional production that you will ultimately be able to have? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [111] -------------------------------------------------------------------------------- Yes. Look, I think that's a good question. And I remember, we called this out probably a couple of years ago that we certainly saw the future for probably Australian avocados, but definitely our own would have to weight more towards export given the amount of trees that were planted and the ongoing maturity that you correctly pointed out. So for the last couple of years, in particular, we've been steadily exporting into those Asian markets, at the same time, as those Asian markets mature in their own understanding of avocados and the consumption. So yes, it's a sort of medium- to long-term plan, and we would certainly see our mix steadily getting weighted more towards export. And once again, you're exactly right by saying that's where the cost of production comes into that, definitely. So these 2 things are coming together. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [112] -------------------------------------------------------------------------------- That's great. And just the last thing on avocados. Sorry, just wanted to confirm. When you say that the Lovacado brand was 1.3 million trays, is that -- should I infer that as Costa own production or growth from own -- harvest from own farms is 1.3 million trays? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [113] -------------------------------------------------------------------------------- Yes. Yes. That's the way to read it. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [114] -------------------------------------------------------------------------------- Yes, that's great. Can I just touch on the table grapes? So my memory -- and I haven't got that in check. So this -- from the prospectus that, actually, there have been some table grape holdings that had been sold or converted historically. And then with the Sunraysia acquisition last year, 2019, that you then effectively got a relatively large acreage of table grapes and you said you were continuing with them. But now -- so you're stepping up in table grape. I'm just interested in the rationale. And I do note your comment that you're comfortable with the genetic variety that you have. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [115] -------------------------------------------------------------------------------- Yes. So essentially, if you think about the grape story, domestically and export, it's had a lot of strong momentum behind it, particularly in the last couple of years, and that's essentially been driven through genetic superiority. We've been closely aligned with the Sun World genetic program and so we've enjoyed that growth. With the acquisition of Colignan, as you correctly pointed out, we then got access to another breeding program, which is called Sheehan, and they also have some really good genetics there. Essentially, what we're trying to do is we're trying to fill 6 time slots for every season, if you like. So I think early to mid- to main and then late. So those 6 time slots across each of the varieties of grape. So the 3, so red, black and green. So there's about 18 different opportunities, if you like, to have a really great genetic variety, and that's what we're steadily trying to fill. From an acreage point of view now, we have about 91 hectares of our own farm in table grape. And through our partner grower network, we've got access to about another 643. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [116] -------------------------------------------------------------------------------- Great. Okay. And the last question, I guess, on Sunraysia was just with regard to the new packing infrastructure. Is the -- do you expect that your own production will account for the majority of the packing infrastructure capacity? Or will you be looking for third-party business? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [117] -------------------------------------------------------------------------------- Look, we will have some third party, no doubt. But essentially, the tipping point for us getting serious about planning and building that pack shape is because we believe that our own volume will be enough to justify it. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [118] -------------------------------------------------------------------------------- Okay. Great. And then, sorry, just one quick question on Morocco just with regard to the 5-year plan to replace all the plants. Can I just -- is that likely to be a set number of hectares per annum, roughly? And are you able to disclose that? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [119] -------------------------------------------------------------------------------- It'll -- this is just actually disclosed in the... -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [120] -------------------------------------------------------------------------------- In the presentation. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [121] -------------------------------------------------------------------------------- In the presentation. We tried to be fairly prescriptive on that for the first time, actually. I suppose you've seen that. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [122] -------------------------------------------------------------------------------- There's a difference between calendar year '22 and calendar year '21, 347 versus 332? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [123] -------------------------------------------------------------------------------- Yes. Slide 32. So there is a mixture there of -- what we tried to say is what is currently planted, what we forecast, what we we're removing. So we're taking out some, we're putting in new product. And then you also look at what we're going to be harvesting on the productive area for harvesting. So it will be progressive. It won't be a straight line because you're taking out various blocks in various farms. But that's -- as we get access to new varieties, we'll be sampling those ahead of time. If we've got the plants evolved, it'll be a gradation over that period. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [124] -------------------------------------------------------------------------------- No. That's perfect. Sorry, I hadn't looked through that table probably. Can I just check, redevelopment removed after harvest, that's a cumulative number, is it, over those 3 years? -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [125] -------------------------------------------------------------------------------- No. That's each year. -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [126] -------------------------------------------------------------------------------- Each year. Okay. -------------------------------------------------------------------------------- Sean Hallahan, Costa Group Holdings Limited - COO [127] -------------------------------------------------------------------------------- There's quite -- there's a new total each year that carries on to the next year. You can see that. -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [128] -------------------------------------------------------------------------------- (inaudible) -------------------------------------------------------------------------------- Rod Sleath, Rimor Equity Research Pty Ltd - Equity Analyst [129] -------------------------------------------------------------------------------- That's great. Okay. And did I understand correctly that you said for the new plantings that it should be 2 to 3 years before they are producing similar yields to what the older trees were on full maturity? -------------------------------------------------------------------------------- Harry George Debney, Costa Group Holdings Limited - CEO, MD & Executive Director [130] -------------------------------------------------------------------------------- The soil-planted varieties in Morocco, we get a faster performance out of those things than we do in Australia. So 2 to 3 years for soil-planted. But there will be a significant proportion of substrate plantings, where you get a commercial crop in 1 year. So it'll be a bit of a mix. And the other one is we will be expecting a higher yield out of some of the new varieties. So there's a number of moving parts in that. -------------------------------------------------------------------------------- Operator [131] -------------------------------------------------------------------------------- There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.