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Edited Transcript of MRG.AX earnings conference call or presentation 30-Aug-19 4:30am GMT

Full Year 2019 Murray River Organics Ltd Earnings Call

Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Murray River Organics Ltd earnings conference call or presentation Friday, August 30, 2019 at 4:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Albert Zago

Murray River Organics Group Limited - CFO

* Valentina Tripp

Murray River Organics Group Limited - MD, CEO & Executive Director

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Conference Call Participants

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* Danny Younis

Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Murray River Organics 30th of June 2019 Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to your first speaker today, Ms. Valentina Tripp, Managing Director for Murray River Organics. Thank you. Please go ahead.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [2]

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Thank you, and thank you to everyone for dialing in to our end of year results update. We're really pleased to be able to share with you some of the results over the last 12 months. There's an investor pack that I hope you all have access to. We'll be using this document to guide today's presentation.

So I'll draw your attention to Slide #4, company overview. This gives an overview of the context of the business that we're operating with. We're a $60 million business with nearly 5,000 hectares of farming land in the Sunraysia region, much of which has been developed, but we have significant portfolio still with a range of opportunities for development. Majority of our sales are in retail channels, 68% of our sales, and a significant portion of that is dried vine fruit sales and 24% overall.

Our overall tonnage that we achieved for dried vine fruit from our own properties this year was just over 2,000 tonnes, so a little less than last year given the conditions in the Sunraysia region. And our target over the next 3 years is to grow that off our existing planting, so over 5,000 tonnes by 2022.

Overall properties held and owned but are in land lease are close to $60 million now in that Sunraysia region, with over $100 million invested across the board in terms of our total assets and working capital.

Our highlights for FY '19 in our first year of a major transformation are very pleasing for the whole team given where we were 12 months ago. Whilst our revenues have come back slightly, our overall gross material margin has increased materially, from 9% this time last year to over 22% for the FY year. This was the biggest driver -- one of the biggest drivers of our turnaround of underlying performance, which saw a $10.7 million turnaround in EBITDA, excluding SGARA.

Overall, our cost reduction program with Project Muscat has reduced our cost structure by 17%, with net profit after loss being reduced by over 80% this year. So very pleasing results, and I would like to take you through some of the key achievements that led to this result.

We started the transformation program just over 12 months ago, with a focus to reset for the future, restructuring our teams and restructuring, operationally, how we organize ourselves; the $10 million -- $10.7 million turnaround in year 1 which has been the outcome of that, the significant margin improvement and new product development; as well as launching our working together -- or Growing Together program with our growers has been a key driver. The Growing Together program resulted in a 15% increase in our third-party fruit; a phenomenal result given the overall intake of fruit in the whole region was down by 18%, given the growing season.

We're also able to launch a number of new brands, our branded products across our portfolio, with a focus on products into the Asian region under the Taking Sunraysia to Asia growth strategy. Most pleasingly as well was the quality of the fruit that we're able to process and provide to many of our customers, particularly those in international export markets. Where previously, over a number of years, the company was plagued with various quality concerns and claims, we've been able to reduce those risks and improve the overall performance from farm through to processing, through to the end customer and significantly reduce the number of issues and complaints.

We also launched the Project Magnum this year. This is looking at the future of the 2,300 hectare property we have at Nangiloc that's currently available for development. We also secured our authority with the government to grow low-THC cannabis, and we have a program in place there to grow our first crop over the next 6 months.

The major commissioning improvements in the factories, both in Dandenong and in the Mourquong facility has enabled us to improve overall efficiency, overall service levels and (inaudible) and reduce the overall cost to operate for the group.

Most pleasingly, in the last month, we've been able to launch the new 5-year strategy with our teams to now accelerate our growth agenda given our strong operating backbone, enabling us to position as a leader in organics and leader in the food industry, both in Australia and the region. And of course, this was all enabled by the successful completion of the major recapitalization late last year, with $30.6 million of new equity and $63.9 million banking facility supporting that turnaround program over the next 3 years. And we thank all of our investors and banking partners for supporting us through that.

If you now just turn to Page 7, just a couple of key highlights that we did talk about there. The product development and putting new products in the market is a real focus for us and visuals there of the new products that have been launched. We'd also like to have some of these product launch in the Australian market, so we are working on that, but most of the Gobble range is very much targeted in the China and Southeast Asian markets, which are now available in Beijing and Shanghai and across a number of cities as well as online as well through a range of different platforms.

We also have launched a number of new products into the Australian market as well under the Pacific Organics brand, and we're continuing to develop the range for Pacific Organics with our partnership at Metcash.

On Slide 8, we have a successful ranging with our partners at Metcash of 22 SKUs from our Pacific Organics range. This is part of the acquisition that the group I think participated in 2 years ago. However, the brand needed a fair bit of rejuvenation and also relisting with major retail partners here in Australia. So we're delighted to see that brand back in the market, growing and a strong activation program planned over the next 12 months.

So go to Slide 9. We here go through the significant operational turnaround changes that have taken place over the first 12 months of our new team taking the leadership role. It all starts, of course, with people and being able to pull the right leadership team together. And I'm very fortunate and humbled to have an amazing team who've come to join me over the last 16 months.

As part of any restructure, there were some tough decisions and some structural changes and a number of roles were removed from the organization, some 28 roles specifically and a number of changes in line with corporate changes and the capability. So we did have a big turnover of staff, over 50% of staff have been refreshed; and then the stronger alignment of capability that the company needs to achieve, the executive strategy over the next 5 years.

Most important, a fundamental understanding of culture and capability and accountability has led to significant changes right from the shop floor to the executive team.

The last point there around OH&S. This has been our most high -- our highest of all priorities given the nature of the organization that we're in: safety first and a zero tolerance with behavior has been implemented right to our operations from farms through to factories, right to all of our team.

The capital restructure, as mentioned before, has enabled us to be able to build a new operating model, rebuild our business model and then reset our strategy.

Working with our customers to re-brand Murray River Organics, and then repositioning the market has been a key focus over the last 6 months, once our recap was completed. We've been able to arrange a range of new SKUs, attract a significant number of new talent on the marketing perspective and build a strong portfolio and pipeline of opportunities for growing our branded products.

Probably most importantly around customer is actually resetting strategic relationships with key customers, both domestically and in the international markets. That's been a strong focus for me personally in the last 6 months. I'm spending a significant amount of time with customers sharing our journey and our plan and building our relationships for long-term growth together.

Our farming operations has significant remediation work to complete, which has been done, particularly at our Colignan and Gol Gol properties and major infrastructure replacement programs at the Colignan property with significantly aged infrastructure, both pumps and the...

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Albert Zago, Murray River Organics Group Limited - CFO [3]

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Dripper lines.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [4]

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With the dripper lines. So it's great to see that program completed because it is a key enabler to turning around the performance of that property.

We launched Growing Together in the region in December. And of course, it's been challenging, given our history in the Sunraysia region. But what's been most delightful is to see that the growth supports Murray River Organics and the broader Mildura community support us after our turnaround phase. Our team also completed another 130 hectares of development at our greenfield site at the Colignan property.

Operationally, restructuring our South Park Drive and our Dandenong site has been key to enable service levels to improve and be able to deliver efficiently in the pick and pack operation. A key part of that is reducing the number of SKUs that we were holding and streamlining the overall performance of the business in that particular park. The key enabler there, and over the last 3 months, the teams worked hard to implement sales and operations planning and improve service delivery model. This is critical to enable the new product development and support that engagement to ensure that we can deliver and activate into market at a rapid rate.

On Slide 10, you will recall this was our program of works that we defined about 12 months ago, and we're pleased to say that we've achieved all of the focus goal areas for the first 12 months. We have a little work to do on the warehouse management systems, but we're also significantly on track to achieve our second and third year goals with our customers, our suppliers, our growers and our team.

This has led to enable us to reset and rethink about what the next 5 years look like and our growth projections. And I want to talk quite a bit about the new strategy and the way forward in the coming slides.

So we're on Slide 11 now. And moving to Slide 12, introducing the next 5 years. Our vision as a company hasn't changed, is to be the leader in organics and better for you brands and ingredients within Australia and in the Asia Pacific region. When we reflected as a team on where we are today, we actually are already a significant leader in many parts of the operations and in the industry that we operate in given our strong organic roots and our strong organic portfolio of products that we're able to supply into the Australian market. We want to build on that. We understand organics. We believe in organics and that will now form part of our rebrand and our vision going forward.

And ultimately, it comes back to why. Why do we want to do this? Why, as a team, are we all committed to this? It's because we want to make organics available to everybody. And everybody, meaning the mainstream consumers as well, both here in Australia and the region. Our belief is that everyone deserves access to organic, clean and sustainable food.

To enable that, we developed 5 key pillars to our strategy, and I'll just go through those on Page 13. The first is to leverage our agricultural footprint and the flexibility we have with our current processing capabilities. Our current portfolio is quite broad in terms of agricultural assets and there's significant upside. As I said earlier, at the moment, we have 2,000 tonnes coming off our existing planting for dried vine fruit. That will grow over 5,000 tonnes in the next couple of years as well as any potential of plantings at our Nangiloc property. We're looking at ways to collaborate and partner with other organizations and other partners within the region to bring that opportunity to bear.

Our second pillar is looking at building a global organic and better for you ingredients business. When we first took the acquisition of the Pacific Organics, a significant part of that was a wholesale trading business. On reflection and a number of work -- pieces of work we've done strategically around its capability, we've realized there's a gap in the market and a significant opportunity to help other manufacturers and other partners in the food industry to grow organic products on the shelf. We see our role as enabling that ecosystem to grow organic supply, both locally in Australia and from all parts of the world. Our sourcing capability extends to North America, South America, various parts of Asia and the Middle East and in various parts of Continental Europe. We're building that and strengthening that and enabling Australian companies to bring organic products to the shelf.

Our third pillar looks at developing our market-leading, purpose-driven organic brands. And we're doing this with exceptional product innovation and insight into the new and emerging consumers who are looking for the organic alternatives, who want to understand where the products are coming from.

As you'll see today, we'll launch our new Murray River Organics brand and our new logo and lockup to support that. Our portfolio of products that will then support that brand into market will be announced in the coming months. We look to make some announcements for early listing in Australia's retail in calendar year -- 2020 calendar year. We're working in partnership with our retail partners to bring these products to life. Our focus, again, is organic. Organic product innovation and how we make it accessible to mainstream consumers, both in Australia and in specialist markets in Asia.

The fourth pillar is about how we do this and how we take and transform categories within Australian market. We believe there's a critical opportunity to work differently with retail partners in the Australian market and beyond, and we've started all that already with our partnerships that we've established in China and also locally here with a number of major players in the retail space.

Our partnership model then really brings this through to our transparency in the way that we operate and brings the retailer into our business to understand our capability and how we can expand and work together. We're very excited about being able to engage with retailers in this transparent way to create opportunity both in the Australian market and our new markets overseas.

Our fifth pillar is always the key, is always driving towards process excellence and helping develop a best-in-class business and operating model. We're continuing to invest in our technology and in our processes, improving our products, improving efficiency, quality and enabling a sustainable supply.

So those 5 pillars we'll continue to talk through over the coming months as you see the projects come to life to bring our strategy to life and bring organics to the mainstream in Australia.

The next slide we'll continue, which is Slide 14 -- actually 15, gives you a visual of what the new branding represents. Of course, the M representing Murray River with the river flowing and the organics, which is the window to the possibilities of what we see possible over the next 5 years.

Slide 16 is there to build on what does all that mean. Our philosophy comes from our values, and it comes from being really truly authentic to our audiences, both internally and externally, with everyone operating across the value chain.

I'll just talk to each one of those very briefly, starting on Slide 17. The real fundamental pillar, our fundamental DNA of why we exist is because we choose organic, especially when we can because we're voting for a world where choices that we make, make a real difference. This is at the heart of why, particularly our staff and our suppliers and our customers want to be part of Murray River Organics. How do we bring healthy and tasty, nutritious, clean food that's better for all of us and better for the planet? By choosing organic, we say we're also wanting to get as close to organic as possible, but we don't discount that there's a journey to get to full organic status.

On Slide 18, we talk to our belief, which is about size does actually really matter. Enabling scale and building out scale is the critical key to be able to bring this to the mainstream consumers. So being big isn't a bad thing. Being big means we can make a real big impact both to our environment and to our value chain that we're operating in.

We already are the largest producer of organic dried vine fruit in the world that we're aware of and certainly in Australia. We're actually the largest producer of dried vine fruit in the (inaudible) Sunraysia region. We have over 1,100 hectares planted, close to 27%. So we want to use that scale for good and continue to innovate and find ways to get our food to be better, more nutritious, cleaner and more innovative in terms of how we bring it to market.

Slide 19 continues to build on those values, where we do put nature first. We do believe that nature actually has the power to provide, and we're looking at ways that our research, the work we've done in (inaudible). Looking at organic principles, an example for us would be the major mineral program that we've got going on right now throughout the region, enabling a huge level of nutrition to come back into our wonderful soil and produce significant yield improvements over the coming years.

The power that we're trying to harness here has been available for many, many years. It's just about really going back to basics and being able to do it on scale and do it economically.

Our next bullet there talks to our values in terms of how we operate. Our door is always open, and we have nothing to hide. Being organics really ensures that we've got full traceability, full quality, full certification totally integrated through from our farming right through to our customers in Australia and our offshore markets. Offering these assurances to our customers enables that they know that we've met all of our standards and consistently we'll meet those standards and continue to improve on those standards.

Slide 21, we innovate to regenerate. We're always striving to find ways that we can innovate and do better by ourselves for our customers, for our people and for the planet. Our [NTD] and branding and marketing team have always focused on looking at opportunities of how we can create value. Innovation is there to help us improve the product through taste or nutrition and also having a stronger environmental impact as well. That ensures that we do have a sustainable future for everyone.

And on Slide 22, our other final key pillar is we're stronger together. We strive to understand where the land, like our products and for more our farmers and growers is coming from and how we can push an organic movement. And of course, organic for us is the ultimate goal, but we know that will take time. So we do work with growers, but how do we take some of the products and innovate to get them as clean as possible in the interim.

We know that when we're working directly with growers, both locally and through our growing partners around the world, that we're stronger together, sharing information, having an alignment around our values and our goals, and the way that we work actually creates significant more value than not being transparent.

So if we move over to Slide 24 now. We'll talk about one about our pillars and the exciting projects that we've been working on, on leveraging our agricultural footprint. For those that are looking at Slide 24, that is an aerial shot of our Nangiloc property, the 3,000 hectare property that you can see is quite vacant in the middle pillar there -- at the middle pivot there is where we will be preparing the land now to grow our first hemp crop, our first organic hemp crop in Australia. Of course, the property is quite significant in size, so that's why we only show a small portion of it.

Slide 25 then gives you a bit of an overview of the total portfolio investment we have in our farming assets. As I've said before, we have nearly 5,000 hectares available -- invested. That's close to $60 million currently in our farming properties. Our property on the left, Nangiloc, is predominantly unplanted. Properties on the right on Slide 25, have significant plantings in place.

On Slide 26 you can see that total hectares available to be planted, still available on a number of the properties, but the biggest one is Nangiloc.

Slide 27, we've done some work to understand what our overall yield profile, theoretical yield profile will look like over the coming years, with our existing plants and services work we've done in consultation with our own specialist, with input from the Dried Fruits Australia and other experts.

Our current crops at just over 2,000 tonnes with our existing planting should grow to over 5,000 and potentially over 6,000 tonnes over the next couple of years. The theoretical estimates have been scaled back given that conventional farming would be significantly more, but we believe that with organic farming and the price premiums, that, that is actually a much stronger value proposition for the emerging consumers.

On Slide 28, we take you through Project Magnum, our very first introduction there into what our feasibility work has started to scope out in terms of broad opportunities. These are the property certified organic earlier this year and our first crop -- additional crops to come off will be the hemp crop that's now being in preparation.

As you can see there, there's a list of other attractive crops that we are considering, both the annual crops and for tree plant -- potential planting over the coming years. This is still work in progress, and we'll update you further on the next new divisions in the coming months. But you can see there is a number of crops that would be -- that would find the Nangiloc property quite an attractive place, both from an agronomy prospective and also from a market perspective.

So with that, I will probably hand over to Albert to take us through the financial overview and then we can come back to questions.

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Albert Zago, Murray River Organics Group Limited - CFO [5]

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Good afternoon, everybody. On Slide 30, just give you a feel of the $60 million in sales in FY '19, 24% of it came dried vine fruits, with 8% -- of that 24%, 8% coming from growers in the region. 63% of the mix, the biggest portion, is coming from our organic and conventional products and so there are a number of items, nuts, coconuts, rice, et cetera. So with a broad mix of dried vine fruit and other organic and conventional products that we're selling for the business, including fresh table grapes and citrus.

On Page 31, the highlights of the year. As Valentina mentioned, net sales were $60 million. Sales were impacted in the first half year pre the October 2018 raise and also the amount of time we have to spend in resetting the business to go forwards. Pleasingly, with that restructure in place, the retail team was rebuilt, the sales and marketing team were rebuilt and a significant focus on new product development and improving margins.

We spoke about the improvements in gross material margin by over 2x. And that came through, reducing the number of SKUs from approximately 700 to 300 and placing them on high-value categories, brand lines, and rather than just focusing on non-valued sales lines at very low margins it's reaching the base going forward.

In the second half, once the businesses stabilized, we also saw our fill rates significantly improve. And what I refer to those is our customer service, delivering to our customers on time and on full. More work to be done in that area, but we're moving in the right direction.

The other significant part of the business was resetting the Wholesale and Industrial business and launch of our Ingredients Business. We see that as a big opportunity going forward in the organic space. And we're looking for that part of the business to continue growing.

Export sales has been good, demand has been solid, however, constrained from the 2018 harvest crop and the quality of our clusters coming through.

One of the big pleasing turnarounds on our farms was our fresh table grape farm at Fifth Street. We saw sales increase by 165%. That was a significant turnaround and we're looking for that farm to improve in the coming season.

The other item of focus on the sales, we saw our citrus sales increase significantly. As explained, at the half year, our top line sales are very strong. However, through a legacy contract, the margins weren't as strong, but we have seen now through the sales in May and June, the new citrus harvest and with our new marketing partners that the sales volumes and margins have been -- have improved and are healthy.

As a snapshot, moving on to sales. Net profit after tax, you can see the turnaround there, a $47 million turnaround following last year's number of one-offs, including impairment of assets and one-off costs.

Now finance costs has slightly increased, improve the capital raising, bear in mind that our interest costs have gone up. And also the timing of the borrowing versus the capital raise coming through is impacting the interest cost. Pleasing this year, there -- we haven't called out any one-off or costs as what we've -- how we've performed has all been in the underlying results for the year.

So that brings us to a $3.6 million EBITDA loss but a $10.7 million improvement on last year. Still the year before, reported the $12 million loss after tax, but in the right direction to reduce that in the coming years.

On Page 32. Give you a breakdown of the costs. And really, the improvement in our margin, $10.7 million, has really been through driving costs down, better buying and pricing. And you can see from the waterfall chart there, the gross margin improvement coming through from 9.2% to 22%.

Our employee costs have come down, led by the Project Muscat initiative, where we took out -- or our evening shifts out of the business.

The other item, pleasing item, is with those costs coming down, we have also invested in upskilling our operational team, investing in marketing as well to continue driving the business forward.

The other area of Project Muscat that we saw costs coming down was around our warehouse and distribution costs. Sales have come down, so variable freight costs have come down, but we've seen, through better procurements, our freight rates, freight costs have come down and also better utilization of our warehouse space.

So the key focus has been and will continue for us in focusing on profitable margin lines. We exited a number of nonprofit lines in the last 12 months. And the focus is making sure the business generates commercial returns on its sales.

To take you over to Page 33, the balance sheet. Pleasing was the significant capital raising that our investors raised to support the business, and the National Australia Bank giving us a strong facility of $63.9 million. And the National Australia Bank continues to support us strongly.

In the balance sheet, in the working capital, the big change in the business, in resetting the business, has been an increase around working capital. Debt has increased driven mainly from an increase in sales in May and June. Going forward where we need to -- we're growing the business.

Inventory increased, and an increase on the back of our light harvest coming through and also an increase of our third-party dried vine fruit from our Mildura growers.

In the payables area, you can see there's significant change in payables in that we've increased our -- or aligned our supplier payments to move the business forward. In the first half, supplier payments were constrained through available facility to move it forwards. So we've rebalanced the business.

In the coming year, we see, as the business grow, the working capital will not grow -- won't grow as much, but there will be continuing investment in that area there.

As I said, the bank's fully supporting on us. We still have the 3-year multi-option facility in place. Excluding the equipment bank debts, we've got a $55 million call debt facility, of which we've got $17 million available on staged drawdowns.

What we've also done is brought some of that staged drawdowns forward, of that $17 million. And the main reason behind that has been addressing the adverse weather conditions from the FY '19 harvest and which lead into reducing sales of dried vine fruit in the coming year, additional farm remediation investments and also increase in working capital to support our Fifth Street farm.

The farm is still under review. It's performed well. But to keep that farm, we need additional working -- seasonal working capital, where we build up the crop for the 8 months of the year and then sell through.

And the last one, as I've touched on, is increasing supplier payments to better align supplier terms to meet the needs of our customers.

Moving on Page 34, around cash flows, touching on some of these items around working capital. You can see the increase in receivables, payables and inventory on the back of, as I explained, supplier payments, increase in the value of inventory from our dried vine fruits and increase in third-party fruit, which we saw a significant increase in supporting our growers in the region and now having more fruits for the strong demand we have in dried vine fruit.

We had significant capital investments, ongoing investment in our vineyard developments. So I spoke about the target of increasing the tonnage coming through from 2,000 tonnes to 5,000 tonnes as we continue to complete the vineyard development around water, nutrition and labor around our Colignan and Yatpool and Nangiloc property. We spent $4.3 million in the year in that area.

And then we had important capital investments around commissioning new infrastructure around blast freezer, color sorter and water treatments. And to give you just a feel how important those projects are and the sort of time frame we're looking at paybacks, these paybacks are less than 2 years. So around the blast freezer, what that means to us is that we can turn around dried vine fruit coming off the vines from 3 weeks to 2 days and eliminating all the transport costs between external third-party refrigeration and freezing facilities to being done all in-house. So that's all in place and being utilized with our new crop now.

Val, over to you.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [6]

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Okay. Thank you, Albert. That's great. Great summary.

And so on Slide 36, really now looking at the future and what the next 12 months looks like. So just to recap, a $10.7 million turnaround, we're really pleased to be on track with our 3-year plan. The rebuild of our people, our processors, our whole business model and how we operate, improved all of our service levels, reengaged with our customers, these are all the foundations to aiding now the growth going forward.

And of course, making that significant improvement in margin and the mix of the business, product, the portfolio, accelerating a lot of that new product innovation with much higher margin has been critical, and now it's about really driving that forward over the next 5 years with our new strategy and focus.

Our outlook is very positive, continuing with the growth of organics both offshore, Australia is a little later in the cycle in terms of coming on to organics, but we see that, that catch-up over the next 5 years is going to be material. The broader retail markets, including the Ingredients Business, will help to support that growth as well.

Targeting organic dried vine fruit off our own properties, to reach over 5,000 tonnes in 2022 and, of course, we've got the grower program (inaudible) our major growers that will support the overall tonnage available through our Mourquong facility and available for particularly export growth opportunities.

Now of course, despite that lesser harvest that we did have this year from those tough weather conditions and some of the irrigation replacements that we have to go through, we're still being able to maintain a further improvement in that EBITDA loss. And this year, we're guiding to $1 million to $3 million range.

So with that, I will hand over for any questions from the callers. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Danny Younis from Shaw and Partners.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [2]

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Val, Albert, just a couple of questions if I can. The first one around the gross margins. That looks like to be a pretty strong result in the first year of a 3-year transformation. You've gone from 9% to 23%. I understand the cost-out, the increased pricing and the exit of low-margin or profitless SKUs. Can you maybe talk about how that looks in the context of the future, the next 12 to 18 months versus industry standards, that 23% mark?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [3]

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Sure. Thanks, Danny. Look, we're very pleased with the gross margin performance and getting it from 9% to 23% is a -- was a bit of challenge. But there was significant work done this year, and we want to obviously hold that position and continue to grow that position. Private label work is already an important part of the overall mix, so that tends to bring that margin slightly down and the branded portfolio will bring that up and even it out. We think that holding is not strengthening over the coming years. If we look at sort of benchmark performance, mid to high 2s would be a great outcome for us. And that's what we're aiming for.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [4]

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Okay. And in terms of inventories and the impact on working capital, obviously, as your sales growth increases, you need to support that. Where should an optimal level of inventories be? Currently, you're running at about $22 million. And what will that mean to working capital in FY '20?

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Albert Zago, Murray River Organics Group Limited - CFO [5]

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If I can talk about that. So with the inventory, the increase made up of 2 key components, being dried vine fruits and products that we source. And in this year, with the harvest late coming through, but also the increase in third-party fruit, that we're looking to increase significantly over the growing yield, that inventory number, as at being the June position, because that's when all the crop comes off, off the farms will -- is likely to increase. The value of the dried vine fruits as it comes off our farms, the volume will increase. The overall dollars will stay relatively stable in that we've -- it's coming through -- vines that are coming from immature to full maturity.

As we're growing the non-dried vine fruit business and value-add products, there's a focus of increasing our stock turns in that area. And so we see the inventory number growing not significantly more, but growing as we grow both sides of the business in that dried vine area and third-party sourced products coming through.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [6]

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Okay. No, that was helpful. In regards to Fifth Street, I know that's been an asset that's held -- being held for sale. If I read between the lines, it seemed to have had a good performance in FY '19. How big could that business be if you were to further add some investment? If you -- ideally, if you were to keep that asset rather than selling it, how big could it be compared to the $2.5 million-odd revenues you did in FY '19?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [7]

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Thanks, Danny. Look, that being one of our lower-grade (inaudible) in obviously a capability we do have, which is turning around farm. And Fifth Street is a great example of that, in partnering with the right folks, to be honest, and then also find really valuable markets for that product.

Most of the product that came off the Fifth Street property this year was sent into the Chinese market. And we know that's a growing market and continuing to boom. So we are rethinking our position on Fifth Street and considering what else we could do. What we also know, though, we're only partway through that turnaround on that property as well. And we see the yields for next year to further grow on top of what we achieved this year.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [8]

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Okay. And maybe just one last one, if I can. You launched 15 new SKUs in the last 6 months. What does the new product development pipeline look like going into FY '20? Will there be a similar amount of new SKUs you released? Or it's still too early to know?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [9]

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We'll discuss, probably the most exciting part, which is really about the future and the work that the marketing, the NPD and the whole team actually, have been doing. It's -- I can't give you a number, but it's materially more, the SKUs planned for next year. And as soon as we have that information available for the market, we'll update you. But there is a range of programs, 5 big ones in particular, that are focused on key categories in the supermarket for areas that we cross over, both here domestically and in international markets.

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Operator [10]

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(Operator Instructions) Your next question today comes from the line of (inaudible) [Infinitus].

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Unidentified Analyst, [11]

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I want a few questions around the hemp business. So I know -- I mean, just I can rattle them off if you want, or I can go one by one.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [12]

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Sure.

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Unidentified Analyst, [13]

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Basically, what margins are you like forecasting there in that part of the business? And how does that compare with the DVF segment? I guess first question.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [14]

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Why don't you give us all the questions (inaudible).

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Unidentified Analyst, [15]

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Okay. And then 3 years out, what kind of volumes are you forecasting from that hemp business? And based on those forecasts, where -- what percentage of the organic hemp crop in Australia do you think you'll be? And do you process hemp seed internally? Or do you outsource that? And what variant of hemp do you actually produce? So those are the few questions there.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [16]

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Brilliant. Well, thank you for putting them all together, I think that's probably actually we'll answer that way.

So we looked at the hemp market. And the hemp market in Australia is still relatively new because we only really had that legalized in November of 2017. There's a significant amount of imports that have started slowing through. From our numbers, we're probably seeing about 900 tonnes through. But that's just looking at total with hemp rather than organic.

What we understand in Australia, there's probably about 100 tonne grown at the moment, again through conventional. We don't have data on exactly how much organic is growing, although we believe it's really quite not material, quite small.

So when we looked at our hemp program and what that will look like as our pivot or our first year program, it's about 30 hectares that we're planting out on that (inaudible) in Nangiloc. And we believe at this stage that should give us possibly about 30 tonnes from the variance or the varieties that we're looking at. We look somewhere between 20 tonnes and 30 tonnes, to just give you a bit of a range there.

In terms of what percentage of the Australian organic market that would be, I'd say we'd probably be the majority of this organic market at this stage, so unless others have new information. And of the total hemp grown, there's 100 tonnes, we'll probably contribute an additional 30 tonnes. We'll have a significant share of Australian organic hemp here. So we're pretty excited.

And in terms of what that grows to post the pilot, we should be looking at potentially doing 2 rotations on that property, so -- sorry, on that pivot. But we also have 2 other pivots that are right next to it. So if we see a huge growth of demand, which we're anticipating, we've got the capacity to very quickly put on more seed and more crop.

In terms of the partners we're working with. We have a range of them who are working with us both on the seed and on processing. So we won't be doing the processing. We've got some partners that we're working on that.

Our variety or the line that we're looking to grow is, obviously, develop the food. So we're looking for the best, clearly that will help us get the most -- best variety give us the most speed and for food grade purposes rather than the fiber and the fiber component, will both be developed through partners.

So there's some of the idea. Did that sort of answer your question? The margin question is a little harder. Obviously, there's significant margins in hemp, but we probably won't be talking specifically to numbers.

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Unidentified Analyst, [17]

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Okay. Sorry. Last one?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [18]

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Yes, absolutely.

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Unidentified Analyst, [19]

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Yes. But so are you -- I mean, so basically, is the hemp seed and hemp oil, that you're focusing on? Or is it just clearly hemp seed?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [20]

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Look, we're looking -- well, obviously, if it's easier to make the oils as well, that's a project that both the marketing and the farming team are looking at what's the best configuration in terms of optimal outcome given what we will see from that first crop. But it will be a range across a range of variants of what we can do with the seed.

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Unidentified Analyst, [21]

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So you're not going to -- are you going to go multiple suppliers? Or are you going to like sign a long-term supply contract with one partner out of Canada or something like that? Or what's your business model regarding the hemp business?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [22]

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So the (inaudible), we're going to be the grower, so it's on our property. And the seed is provided by a local seed supplier.

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Unidentified Analyst, [23]

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Local, okay. All right. And sorry, just what -- is that canola? Or is that by gum? Do you know what specific kind of hemp that (inaudible)?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [24]

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Yes, it's probably not -- it's not information that we're releasing publicly. So it's work that we're doing with our seed provider and our strategic partners there on the ground. And certainly, we'll update everyone once we have our first pilot and the outcomes of that pilot.

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Unidentified Analyst, [25]

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Okay. And when -- what's the time frame do you think on that one? Sorry to hog the time slot.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [26]

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No, that's fine. This is an exciting project. So I'm glad that people are asking questions about it. Look, the time frame for us is to have something available early next year, so February, March, in terms of finished or outcome product.

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Unidentified Analyst, [27]

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And you're not planning on updating the market regarding the pilot plan until Feb, March next year? Is that accurate information?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [28]

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No. We will update in between then when there's relevant information. The only thing we can say at the moment is we're preparing the land. And as soon as we get a crop and what that crop looks like, we'll provide some updates. But that will be between now and February. But exactly when we'll get the crop, we'll provide some updates once we get the seed in the ground.

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Unidentified Analyst, [29]

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One last question, I promise.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [30]

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No, go for it. Please.

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Unidentified Analyst, [31]

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Regarding the kind of volumes of organic hemp, I would -- you would struggle, sorry -- sorry, and educate me if I'm wrong, you would struggle to find someone that could process that much organic hemp seed in Australia at this particular moment in time.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [32]

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Well, it depends on how you're processing, what products you're making and how much of it you haul and how much of it you don't haul. So there's a whole raft of things that the team is considering with processing partners as well. And therefore, what different variants of products and how we can then create value-add products out of that. So they are considering all that in terms of capability and capacity as well.

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Operator [33]

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And your next question today comes from the line of [Steve Miller] from [Helmsec].

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Unidentified Analyst, [34]

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Looks like the turnaround is on track, which is good. Just a bit concerned about water prices. We've seen the last couple of weeks, particularly water in (inaudible) water's moved from $650 to $800 a megaliter. Just wondering what percentage of your allocation is leased? And what can -- what part of it are you buying in sport markets?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [35]

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Yes. No, good question, [Steve]. And obviously, we are very keen observers of what's happening in water, about pricing, but then also long-term regulation and government policy around that, too. But in terms of specifically answering your question, about 70% of the water that we need is part of the leases that we have in place. And then about 30% of that is purchased on spot, typically later on in the season. So we'll be watching keenly in terms of what happens to the spot price and water prices. But of course, it's very difficult to know, given that we don't know what the rainfalls will look like over the coming months.

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Unidentified Analyst, [36]

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Just one more question. Do you know if you've leased (inaudible) water or New South Wales own Zone 11?

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [37]

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I don't think we've got (inaudible) but I can come back to you. Let me take it offline and let you know specifically.

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Operator [38]

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(Operator Instructions) We have no further questions on the line today. I would now like to hand the conference back to Valentina for closing remarks.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [39]

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Thank you. Thank you, everyone, for joining us today and hearing our update. Again, we're really pleased to be able to say we've had a very strong (inaudible) year of our 3-year plan. And we look forward to having the investors and broader community continue to support us. So thank you all for your support and look forward to further updates in the coming months.

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Albert Zago, Murray River Organics Group Limited - CFO [40]

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Thank you.

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Valentina Tripp, Murray River Organics Group Limited - MD, CEO & Executive Director [41]

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Thanks all.

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Albert Zago, Murray River Organics Group Limited - CFO [42]

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Thank you.

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Operator [43]

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Ladies and gentlemen, that does conclude our call for today. We thank you all for your participation. You may now disconnect.