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Edited Transcript of SHV.AX earnings conference call or presentation 29-Nov-20 10:00pm GMT

·33 min read

Full Year 2020 Select Harvests Ltd Earnings Call THOMASTOWN , VIC Nov 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Select Harvests Ltd earnings conference call or presentation Sunday, November 29, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bradley Crump Select Harvests Limited - CFO & Company Secretary * Paul Thompson Select Harvests Limited - MD, CEO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * James Ferrier Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst * Josh Charles Kannourakis UBS Investment Bank, Research Division - Research Analyst * Mark Topy Select Equities Pty Ltd., Research Division - Institutional Research Adviser * Piers Flanagan CLSA Limited, Research Division - Research Analyst * Andrew Angus ================================================================================ Presentation -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [1] -------------------------------------------------------------------------------- Okay. Good morning, and welcome to the Select Harvests 2020 -- sorry, I'm getting some feedback here -- 2020 full year annual results. I'm Paul Thompson, Managing Director of Select Harvests. I'm joined today by Brad Crump, the CFO and Company Secretary of Select Harvests. Coordinating today's presentation is Andrew Angus, from Overland Advisory (sic) [Overland Advisers]. Andrew will facilitate a short Q&A at the end of the presentation. This presentation is being recorded and will be loaded on our website. Please note the disclaimer and the basis of the preparation of this presentation. 2020 has been both a challenging and volatile year. In summary, the things that are within our control have been delivered, many of the items outside our control have been unfavorable. The Almond Division delivered another solid result in a challenging environment. The Food Division is still struggling to gain traction in an equally challenging market. Some of the challenges we faced were a record crop ex California, 18% larger than 2019, COVID-19 demand destruction with economies going into lockdown, operational constraints throughout our business, market access issues of COVID-19, operational and the weakening Australian dollar, and finally, near record water prices putting significant pressure on our growing costs. On a positive note, we have recorded a record crop. Costs have maintained -- have remained flat, increased ranging for Lucky. We've grown the Sunsol brand, reduced LTIs and acquired a significant orchard in Piangil. I would -- as I said, I would describe the result as a solid result. NPAT, EBITDA and EPS were all down versus last year, largely driven by a lower almond price. Importantly, we've maintained a strong balance sheet and a low level of debt, giving us the confidence and firepower to acquire the Piangil Orchard. The low ROCE is again impacted by the almond price and the maturity profile of our orchards. As previously advised, cash flows have been delayed as our export program was disrupted by the COVID-19. The Board has maintained the customer practice of a 50% dividend, the final dividend will be fully franked and $0.04. There is a 2.5% EPS on offer -- DPR on offer. I'll spend more time on the divisional results later in the presentation. As you know, our result is largely dependent upon the performance of the Almond Division. The size of the almond crop was -- the size of the almond crop, which was a record of 23,250 metric tons. The almond price was $7.50, which is down 12.8% from last year. Despite a 40% increase in the absolute cost of water, we've been able to maintain our position as one of the lowest cost almond producers with a cost per kilo of $5.36. The Food Division was able to continue to grow the value-adding environments, but struggled to pass on cost increases related to other commodities and increasing strength of private label had an adverse impact on our mix. As I said earlier in the presentation, there is -- there can be a lot of volatility in our market. This volatility can be both positive and negative. This chart highlights 2 things: that having a low-cost is critical, having a growing almond base is a positive for bull and a bear market. Our strategy to expose ourselves to the favorable macro of almonds is a winner. This is highlighted by comparing 2020 with 2017 where the almond price is similar. In 2020, we generated an additional $15.8 million in NPAT despite significantly higher water costs. Our strategy to grow our base, focus on cost, in an effort to leverage our fixed cost base has paid off despite the adverse impact of commodity pricing. COVID-19 has impacted all businesses. We were relatively lucky as we've been able to continue to operate. The main financial impact has been the shipment delays, a lower almond price and the renegotiation of contracts which have all been previously communicated. Our #1 priority has been the well-being of our staff and visitors to our facility. COVID plans have been developed and implemented at all facilities. Operationally, we've had some challenges such as sourcing base across borders and social distancing in working -- and work environments. We did experience market access issues and channel shifts as governments implemented lockdown policies. Despite this, the demand for almonds and healthy plant-based foods has remained strong. We're ineligible for JobKeeper. As we look ahead, we see some of the challenges will continue and far fewer than the last 12 months. We've been able to secure our harvest labor for the -- which will commence in February and March. One positive note of COVID-19, we have seen an uplift in demand for healthy based plant-based foods globally. I'll now hand over to Brad for the group financial results. -------------------------------------------------------------------------------- Bradley Crump, Select Harvests Limited - CFO & Company Secretary [2] -------------------------------------------------------------------------------- Thanks, Paul, and good morning, everyone, and thanks for joining the call this morning. As Paul has already touched on, Select Harvests delivered an EBITDA result for the year of $57.8 million, an EBITDA of $38.7 million and an NPAT of $25 million. While EBITDA and EBIT margins were solid, they were below 2019 due to 2 major factors. Firstly, global almond prices decreased from $8.60 per kilo last year to $7.50 per kilo in FY '20. This had a $25 million adverse impact on the company's EBIT result. Secondly, water costs for the 2020 crop increased by 63.4% on a per kilo basis. This added an additional $8.7 million in growing costs. A lower whole market, increased growing costs, processing costs and a lower Food Division result also impacted the FY 2020 results. From a materiality viewpoint, the major reduction in earnings was in the Almond Division as a result of the decreased almond price and the higher water costs. The lower Food Division result was due to ongoing private label competition from domestic retailers, and this impacted our consumer-branded product margins. This was partially offset by higher industrial food-related sales, particularly in almond [price]. As you can see from the graph on Page 10, external market factors being the almond price, water cost increases and the subdued hull market attributed to a $36.7 million reduction in EBIT from FY '19. The company's improved FY '20 yield added a $4.8 million in earnings and this was offset by a 6.5% increase in production costs, excluding water, which was mainly increases in lease costs, including changes to AASB 16. Also, we had higher processing costs and the lower Food Division result, which brought our results from $80 million down to $38.7 million in EBIT. Moving to the balance sheet on Page 11. The balance sheet remains in a solid -- in a very solid position. There are a few areas to point out. Firstly, net working capital has increased by $40 million from the same time last year. This is due to 2 reasons: as a result of COVID-19, the 2020 crop shipping schedule has been delayed, leading to higher levels of inventory and debtors. This is expected to unwind through quarters 1 and 2 of FY 2021. Secondly, the 2021 crop growing costs are higher with -- than 2020 due to the maturity profile of our trees continuing. The second point on our balance sheet to point out is that net debt as of 30 September 2020 is $57.5 million. This compares to having $7.9 million of cash in the bank and no debt at the same corresponding period last year. This, again, is due to the delayed shipping schedule impacting cash inflows and obviously also the lower operating results. Net bank debt gearing ratio sits at 14.2%, and there's considerable headroom in both our covenants and banking facilities at the end of the year. Thirdly, as a result of AASB 16 leases, we are now recognizing $236.4 million in right-of-use assets and corresponding lease liabilities. The vast majority of these relate to our long-term orchard leases. It's worth noting that our own orchards and processing assets are recorded on the books at cost at $169.8 million. The detailed valuation that was completed last year valued these assets at $249.7 million. Similarly, the company's water assets are recorded at cost at $37.9 million. The current market value of those assets is $97.7 million. In total, the current value of these assets is $139.7 million higher than that recognized on the balance sheet. In summary, gearing remains low, working capital will reduce and there is additional value on our -- of our recorded assets. Moving on to the cash flow. The cash flow for FY 2020 has seen the company's operating cash decrease -- cash flow decreased by $67 million for the year. This is compared to FY '19, and this is due to 3 factors. First, obviously, the lower operating performance; secondly, the delayed 2020 crop shipping schedule; and then thirdly, the return of the company to a tax payable position following the refund received last year due to the timing differences when we changed our financial year. Investing cash flows remained steady at $35.3 million, and this is made up of horticultural assets being harvest equipment, tractors, et cetera, for our farms of $12.5 million; some infrastructure costs of $2.1 million; our processing assets, for example, new sorters of $9.6 million. We spent $1.5 million on new food assets to improve efficiency, and we had corporate assets of $400,000. In addition to this, we had our usual expenditure of around $10.2 million on tree development costs. I'll now hand back to Paul to go through the rest of the presentation. -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [3] -------------------------------------------------------------------------------- Thank you, Brad. We'll now talk through briefly the divisional results. The Almond Division result, Brad and I have discussed most of the items on this page. What this -- what the numbers don't reveal here is the wisdom of our almond marketing -- almond crop marketing strategy last year where we decided to sell as much of the crop as early as we could in the sales cycle so that we could benefit from the flow-on from higher prices last year. This strategy has proved successful, but it has caused price renegotiations we've talked about previously. But I can assure you, net-net versus our market intelligence, our pool price is higher than our competitors in the local marketplace. From an on-farm performance, you can see here that a combination of our risk mitigation strategy and our customized horticultural programs have gone through. From a risk mitigation perspective, our installation of frost fans and our higher harvest matrix means that we've protected the crop and also we've been able to get the crop-up earlier as we did have late season range again this year. Our customized horticultural programs and on-farm fertigation, irrigation strategies have paid dividends with all age cohorts and geographic regions yielding well above the industry average. We can see no reason why these sorts of improvements are not sustainable in our agricultural portfolio. Now I'd like to walk you through our costs of growing almonds. The orchard cost increase was largely driven by more hygiene activities, which we strive to improve the quality of our crop profile as the economic benefit of that is significant. You can see there was a large increase in water in the cost per kilo. Our water policy means that we were not fully exposed to the high prices or the lower prices, reminding you that our water policy is that we have -- 1/3 of our water is owned in permanent entitlements, 1/3 of them are along our midterm leases, 3 to 5 years and 1/3 of them -- what we buy in the spot marketplace. Pleasingly, the harvesting and processing costs have remained the same. The rental cost increase is the market review increases associated with our leases from RFM. Again, you can see that our cost is competitive from a global perspective. During the equity raising, I spent a significant amount of time talking about the current and future of market pricing. I'd like to point out that chart beneath is the price in U.S. dollars and shows the pricing of 3 main varietals of almonds, that being nonpareil, pollinators and standards. You can see that pricing has remained close to the 10-year lower average. The Californian industry dropped in the prices to move volume, and it's certainly working. To date, their shipments are up 25% with 53% of their crops sold and I expect November will be -- again be a very strong number. We need as much as possible of this crop to be cleared before we start selling our crop. We do not anticipate seeing a dramatic move in pricing until March -- till December, March period. At this time, the U.S. will have a view of the tree health, the crop potential, they'll also have an idea of what's happening in their water market, which today appears to be challenging. It appears that the water markets between Australia and America are acting in an inverse way with La Niño -- or La Niña. Just to remind you on the water market outlook, again, as I said, our strategy is 1/3 of 1/3, 1/3, 1/3. In 1 single year, we'll never get the full impact of water price decreases. The water market has improved dramatically, as you can see, with allocations well up, and you can see how prices responded. If you look historically, when similar allocations products had responded more dramatically than they have here. But this can partly attributed to the fact that there is more permanent crops in the Murray-Darling Basin there has been previously. And also at the moment, the ACCC is investigating to see whether or not the market is operating in a rational way. And in the appendix, you can see the summary of our submission to the ACCC calling for brokers to be licensed, calling for a regulated market similar to the ASX. If we look out from the future of the almond -- for the Almond Division, it looks positive. It's too early to forecast our crop, but our tree health is good, and we're very confident we have a good crop. We see markets returning to normal and prices recovering, remain focused on our cost and our cost per kilo. We see further opportunities to reduce costs and improve productivity, quality and deliver innovation in our processing facilities. As I just said, the water outlook remains positive from both in supply and a cost perspective and add into Piangil to this, which is a significant stepping stone in our growth out into the future. We have no planned new developments at the moment. The Food Division. Demand for plant-based products are going to continue, and we need to participate throughout the value chain. You can see here, this is the almond -- the almond product growth continues. It's important that we participate in this, as I said, throughout the value chain from raw almonds right through to paste and powders. This result was below our expectations. We've continued to grow our almond-based products in both the consumer and the industrial space. Mix has not been of our favor with continued growth of private label. Our processing costs have improved as Project Shaker, which has been focused on our conversion costs and our logistic cost has taken effect in the Thomastown facility. Our corporate costs were lower, some of our activities were curtailed due to COVID-19. If I look to the future, we anticipate a stronger finish in the 2020 calendar year. And with the impact of our additional Lucky ranging in Woolworths and our larger Sunsol base, this brand has continued to grow. Our lease at Thomastown expires in 2020. We're taking the opportunity to review our value-added strategy, in particular, the supply chain. Corporate activity will return to normal post-COVID-19. If you look at our strategy and our priorities, we recognize the importance of our triple bottom line. We cannot create a sustainable business if we do not deliver in all 3 areas, that being people, planet and profit. You can see some of our activities related to all of these. We'll be releasing a full sustainability report at our Annual General Meeting in February. Our strategy delivering these 3 areas remains unchanged. It's about being a leader in the better-for-you plant-based environment as having the values of trust and respect, integrity, diversity, sustainability, performance and innovation. It's about our strategic priorities remain optimizing our almond base, growing our brands and expanding strategically. Our operational focus is including customer supply chain people and capital, and it's all about growing shareholder value and sustainable shareholder value. Piangil. Piangil Almond Orchard, I won't go into the detail of this slide. We currently have oversight of the operations of the orchard. We've commenced the capital investment -- we have the capital investment programs in place. We're engaging with the employees on the facility on a weekly basis. We have the unitholder votes occurring in the first week of December, the judicial approval in the second week of December, and we envisioned settlement prior to Christmas, and we're extremely excited about this opportunity. You can see the significant amount of growth that this acquisition is going to give us. And you saw earlier the importance of growth and the impact it has on our business. Our priorities remain the safety and well-being of our employees, executing our horticultural programs, focusing on cost reductions across all areas of our business, integrating the Piangil Orchard, reviewing and improving the food business, the marketing program to maximize the value of the 2021 crop, manage our cash position post-COVID-19, strategic growth, assessing organic and inorganic options, growing the demand for value-added -- meeting the demand for value-added almonds and prioritizing our capital investments. I'd like to thank you for listening in today. Brad and I will now take questions. In the appendix, you will find a 12-year financial history, a map of our orchard portfolio, a table of our orchard profile, our yield targets by aging cohort, the Australian and U.S. element demand shipments update, a global tree nut pricing in Australian dollars, the key points of our ACCC submission and finally, a list of websites you may find of interest when investigating the almond market. So now I'm going to throw the floor open to questions. Andrew? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Andrew Angus, [1] -------------------------------------------------------------------------------- Paul, it's Andrew here. I've got a couple of questions coming through. So if you just bear with me, and we'll have James Ferrier from Wilsons coming through to speak to you now. -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [2] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Andrew Angus, [3] -------------------------------------------------------------------------------- I think we'll have Mark Topy from Select Equities after that. James? -------------------------------------------------------------------------------- James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [4] -------------------------------------------------------------------------------- James here. First one is just on corporate costs. It moved around a bit in the FY '20 year looking half to half. What's your expectation for that line in FY '21? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [5] -------------------------------------------------------------------------------- Look, it's -- there's no big changes at all there, James. Some of the areas where costs were down were obviously, as I said, related to COVID-19. Things like travel and accommodation were well down. Virtually, being a Melbourne-based company, a lot of us were trapped in our homes. There wasn't a great deal of investment in training and things like that as, again, it was not possible in the environment. And we need to reinvest in our people and those sorts of things will come back. So I haven't got a number in mind, but it's not a significant increase, James. Brad, do you agree? -------------------------------------------------------------------------------- Bradley Crump, Select Harvests Limited - CFO & Company Secretary [6] -------------------------------------------------------------------------------- Yes, Mike, slightly. James, the other thing, obviously, with the lower result, there are a number of things that come down a bit, for example, accrual and STIs and so forth. So I would expect going to next year, it won't be dramatically different to what it's been in prior years. -------------------------------------------------------------------------------- James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [7] -------------------------------------------------------------------------------- Okay. That's helpful. Second question and maybe, Brad, while you do have the floor. Can I just clarify some of your itemized commentary on the CapEx? And in particular, just looking back at the first half result presentation, there was $18 million for tree and orchard development CapEx and then the full year number was $10 million. Can you just reconcile that? -------------------------------------------------------------------------------- Bradley Crump, Select Harvests Limited - CFO & Company Secretary [8] -------------------------------------------------------------------------------- Yes. I think when we spoke at the half year, I mentioned that some of the -- some of those orchard costs that we had -- that we had spent was included in tree development costs. So I split them out now so that they are sitting in the horticultural expenses. -------------------------------------------------------------------------------- James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [9] -------------------------------------------------------------------------------- Okay. Okay. That's helpful. Yes. So that... -------------------------------------------------------------------------------- Bradley Crump, Select Harvests Limited - CFO & Company Secretary [10] -------------------------------------------------------------------------------- Our tree development costs sit around that $10 million credit per annum. -------------------------------------------------------------------------------- James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [11] -------------------------------------------------------------------------------- Yes. Terrific. And then within the $26 million, I think I got it right, it was about $12 million of farm equipment, under $10 million relating to Carina West. What was the remainder? -------------------------------------------------------------------------------- Bradley Crump, Select Harvests Limited - CFO & Company Secretary [12] -------------------------------------------------------------------------------- There's $2.1 million of sort of infrastructure costs, some new irrigation equipment and so forth we put in place. There's $1.5 million that we spend in the Food Division on Project Shaker, so we put some new equipment in place. And then there's $400,000 in corporate, which is related mainly to IT. -------------------------------------------------------------------------------- James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [13] -------------------------------------------------------------------------------- Yes. Okay. Great. And last question, Paul, your comments there on the almond market and the likely timing of a reaction in the almond price makes sense. What sort of almond price in A dollars are you getting offered at the moment, not that you're necessarily forward committing at this stage of the crop, but what sort of price are you seeing now? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [14] -------------------------------------------------------------------------------- It's still around $6, $6.50, depending on which markets you go into, James. There's a graph on the back of it, which shows the pricing round just below $6. But generally, the market is still getting a slight -- the Australian markets is still getting a slight premium. -------------------------------------------------------------------------------- Andrew Angus, [15] -------------------------------------------------------------------------------- So Paul, we have a question from Mark Topy from Select Equities. Mark? -------------------------------------------------------------------------------- Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [16] -------------------------------------------------------------------------------- Just on the FX side, the Aussie dollar sort of forward cover from here, what are your thoughts and how you're seeing things in terms of that Aussie dollar impact from here into '21? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [17] -------------------------------------------------------------------------------- Last year, the average currency was about $0.68, Mark. We take cover -- we have a policy to where we can sort of take forward cover but not dramatic amount of forward cover. I think we're still around the $0.70 to $0.71 at the moment on this year's crop. Would that be right, Brad? -------------------------------------------------------------------------------- Bradley Crump, Select Harvests Limited - CFO & Company Secretary [18] -------------------------------------------------------------------------------- Yes. It was currently sitting -- we're not fully hedged for the 2021 crop yet, but we're currently sitting at an average of pretty much [smack] $0.70 at the moment. -------------------------------------------------------------------------------- Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [19] -------------------------------------------------------------------------------- Okay. That's good. And just on the country markets, can you give us a little bit more insight into perhaps how India is going and China is going? And where are you seeing the sort of stronger demand? Or is there any sort of bottleneck -- bottlenecks associated with COVID, perhaps in India or elsewhere? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [20] -------------------------------------------------------------------------------- Look, I mean, the bottlenecks, there's a general bottleneck. I think you'll find all country -- companies exporting with containers and shipments and that. So it is challenging getting product to the export markets and actually receiving product from the export markets as well. So it's more logistical. It's not ports closed or anything like that sort of thing. The India market is extremely strong, and it's moving significant volume. And you can see that one of the reasons the U.S. guys have dropped the price as significantly as they have is to gain access to the China market including the tariffs that are going to inevitably put on the product, and you've seen an uplift in the China market as well. So I think the China market -- one, U.S. is up 12% or something like that, and India is well above that number. Europe, throughout the whole process has been extremely solid. Even with all of their lockdowns, it's had a 6% to 8% growth year-on-year throughout COVID-19. The U.S. market, again, is also very strong, particularly in the manufactured products, so paste and products like that. So certainly, these low prices is stimulating demand. And it's a good thing for the future. The more almonds we get in, particularly as an ingredient into a product, the larger the market will be moving forward. -------------------------------------------------------------------------------- Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [21] -------------------------------------------------------------------------------- And perhaps historically, there's been a little bit of substitutional or change between cashew. And is that almond demand sort of coming a little bit at the share of other sort of nuts? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [22] -------------------------------------------------------------------------------- Look, look, Mark, I mean the -- in the snacking markets, you're right, there is a bit of change, but not many people change as an ingredient. And if you have a look at the -- I might just go back a slide here. If you have a look here, you can see that the blue and the -- the blue which is really the major snacking and the other nuts have really started to draw closer. So as the product is used an ingredient, there seems to be less substitution going on. If you look at most -- if you walk through a supermarket, and you're looking for a tree nut to be used as part of the promotion of a product, very rarely, do you say, it includes cashews, it includes almonds. Cashews are much more ball of nuts type product where almonds is becoming more and more an ingredient. -------------------------------------------------------------------------------- Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [23] -------------------------------------------------------------------------------- Okay. That's good. And lastly, just on the water prior acquisition sort of strategy from here. Can you see water prices may be dropping a little bit more, if we get more rain? Or I don't know if you've got, I think, some forward contracts on your water, but just in terms of the strategy there and being able to take advantage of the lower water cost. -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [24] -------------------------------------------------------------------------------- Look, definitely, I think there's the permanent entitlement market. This entitled market and the -- I'll go on [forward,] sorry. -------------------------------------------------------------------------------- Mark Topy, Select Equities Pty Ltd., Research Division - Institutional Research Adviser [25] -------------------------------------------------------------------------------- Yes. I'm still thinking of the spot market. -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [26] -------------------------------------------------------------------------------- The spot market. Look, the spot market is definitely more responsive to supply, as you can see here. There's some crops were clearly, the economics of it are pretty difficult at the moment with some of the trade issues going on. So maybe more water will flow into the marketplace, which will clearly take advantage of when we get the opportunity. -------------------------------------------------------------------------------- Andrew Angus, [27] -------------------------------------------------------------------------------- Paul, we've got another question from Piers Flanagan of CLSA. I'll put him through. -------------------------------------------------------------------------------- Piers Flanagan, CLSA Limited, Research Division - Research Analyst [28] -------------------------------------------------------------------------------- Just a couple for me, if I can. Just firstly, on demand being strong. I mean there's still sort of a 1.6 billion pounds that are unsold. I mean do you think sort of demand can be sustained at these prices? Or is there a concern, I guess, in what the carryover could look like into next year? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [29] -------------------------------------------------------------------------------- Look, I think next month's a critical month. The November number is a really critical one. If you have a look at the moment, I think the crop is 53% sold versus 46% sold. And even last year, remember, the market increased by 12%. The supply out of California increased by 12%. So certainly doing a good job. The other thing is the markets which are really strong, particularly the India and China market and the Middle Eastern market which have come back, almost immediate consumption markets. So people are buying in literally markets and then consuming, whereas Europe, and the U.S. and Australia, there are potentially people buying and stockpiling products. So yes, reasonably confident that this is flowing through. We're not hearing -- the market is reasonably transparent. We're not hearing with people having enormous inventories out there, Piers. -------------------------------------------------------------------------------- Piers Flanagan, CLSA Limited, Research Division - Research Analyst [30] -------------------------------------------------------------------------------- Sure. And then I guess just on geopolitical risk with China. Is there anything that you're seeing there at the moment? Or how are you thinking about that over the next sort of 6 months? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [31] -------------------------------------------------------------------------------- Look, I might, obviously, the China things are concern to us. We're probably a little bit more fortunate than many other companies that we're selling a commodity and the China market is really be new to us. If you went back 4 years ago, China represented less than 2% of our sales. We've maintained strong relationships in our global network. China's consumption is equivalent to the Australian -- total Australian crop. So they're hardly -- they're not reliant on us. So look, we can just play it as we see it. We have very little product from the 2020 crops still to deliver into the China market. So we'll see what happens. -------------------------------------------------------------------------------- Piers Flanagan, CLSA Limited, Research Division - Research Analyst [32] -------------------------------------------------------------------------------- Sure. And then just finally, on the Food Division review. Obviously, the division has been impacted by private label for a few years now. Are you able to just sort of talk through exactly what that review is targeting? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [33] -------------------------------------------------------------------------------- Look, I mean it's targeting. It's -- the main part is the supply chain. So this lease is coming up. So what -- and what products we're in and out. So it's a pretty broad basing review, but a significant proportion it is looking at, can we get a lower cost base to remain competitive. -------------------------------------------------------------------------------- Andrew Angus, [34] -------------------------------------------------------------------------------- Paul, we've got a question from Josh Kannourakis at UBS. I'll just put him through. -------------------------------------------------------------------------------- Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [35] -------------------------------------------------------------------------------- First question, just around the cost of production within the U.S. specifically. I'm keen to just talk through what you guys are seeing over there. You obviously have water legislation impacting some parts of California more than other labor costs. Just interested in your view, with prices now trading below cost of production and the outlook for cost production is increasing. Interesting -- interested to understand your view on just what you're seeing on the ground in terms of activity over there? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [36] -------------------------------------------------------------------------------- Yes. Josh, there's probably 2 areas in the U.S. and what -- from a -- with 3 areas from a cost perspective. If you go into the south of the valley, so I'm talking anywhere from Modesto South, they're high-yielding type operations similar to ours and anywhere above that is probably less high-yielding environments. So that has a big influence on cost. The other is the west side of the valley. So people who are on the west side of the valley, probably have USD 0.50 a pound, up to USD 0.50 a pound additional cost in U.S. dollars from a water perspective. And we are hearing in those areas that some people are starting to remove orchards that are in the older age cohort there. One of the larger growers was telling me his growing costs in the west side are about $2 a pound, his growing costs on the other -- east side of the valley are closer to sort of $1.40, $1.50. So there's a significant variable there. I suppose the only warning here is that there's cash costs and actual total cost. And the industry is starting in the U.S. to look more and more at total cost as more and more corporates get involved in growing over there. So we can only see that as a positive for responsible pricing moving into the future. -------------------------------------------------------------------------------- Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [37] -------------------------------------------------------------------------------- Great. And then just with reference to your cost of production. You did mention on the water side. And obviously, you've got some contracts locked in. Is the best way to look at this, if we look at what we think the normalized sort of water prices in a couple of years' time, how long do we need to give those contracts to roll off? Like do we spread that benefit over sort of 2 years? Or how should we be sort of looking at the roll-off of some of the existing contracts you've got from a water perspective? -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [38] -------------------------------------------------------------------------------- Look, I'll get Brad to also call on this, but I think it's really hard for you guys to look at it because you don't know the weight of some of the contracts we have and when they're being -- we're up for renegotiation. We had a significantly large water contract that unfortunately fell due last year. And at the time, the water price was significant -- was at its peak. So our ability to negotiate wasn't that strong at that point in time. And that will flow through for about 3 years. So it's going to take a couple of years for that to sort of wash out moving forward. Brad, would you have any further comments on that? -------------------------------------------------------------------------------- Bradley Crump, Select Harvests Limited - CFO & Company Secretary [39] -------------------------------------------------------------------------------- Yes. So in 2021, Josh, whilst you'll see some favorable movement downwards with the temporary water market coming down. It won't be like a third -- the full 1/3 of that benefit coming through because we do have quite a bit of carryover water from last season that's come that we'll be using this year, which was at the higher cost. So we'll see some benefit into 2021. That benefit will -- assuming water prices remain where they are now, that benefit will more flow through in FY 2022. And then over that -- over this period, we do have some leases rolling off. As Paul mentioned, we had a large one we negotiated last year, which is for 3 years. So benefits will -- assuming water prices stay sort of around where they are. A bit will come through in '21, a bigger chunk will come in '22 and then the full impact will be sort of flow in 2023. With Piangil coming on board, the majority of that obviously adds a bigger chunk of exposure to the temporary market as well. So with prices and allocations where they are now, we'll see some more, I suppose, some increased benefit from a total water point of view in 2021 if you take Piangil into account. -------------------------------------------------------------------------------- Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [40] -------------------------------------------------------------------------------- Okay. Got it. And then just in terms of the rest of the cost production, obviously, a few productivity initiatives in place there as well, can you just talk to more broadly, just any other sort of cost production benefits or sort of inflation expected over the -- into '21. -------------------------------------------------------------------------------- Bradley Crump, Select Harvests Limited - CFO & Company Secretary [41] -------------------------------------------------------------------------------- I think the main benefit will be on our processing side of things, now that we've invested some capital in Carina West, we've obviously got increased tonnage coming through in the next few years, which will bring our cost per kilo down on the processing side. Similarly, from our value-adding investments in Parboil, that's performing well now as well. So we're expecting that cost per kilo to come down as well. From an orchard point of view, our actual growing cost, they should remain pretty much -- it actually remains steady year-on-year. As Paul mentioned, we had a bit of a little uptick this year because we've put an extra hygiene run into our orchards to focus on quality. So I suppose, where we see some real benefit coming through in the next year or 2 is if we can get that quality side improved and have less manufacturing grade as a percentage of our total crop, we can realize that on the price front, and therefore, the EBIT per kilo will go up. So we're working hard to maintain a consistent cost base. On the rental side of things, I mean, we just got a -- we've got an annual uptick every year from an inflationary or set increase each year on that. So that's one that obviously will continue to rise. -------------------------------------------------------------------------------- Andrew Angus, [42] -------------------------------------------------------------------------------- Paul, we got no more questions at this stage. -------------------------------------------------------------------------------- Paul Thompson, Select Harvests Limited - MD, CEO & Executive Director [43] -------------------------------------------------------------------------------- All right. Well, I'll wrap it up there. I'd like to thank everybody for listening in. If you have any further questions at the back of the presentation, there's mine, Brad and Andrew's contact details, and we're only too happy to answer those queries. For those of you who are going to meet in the next few days, looking forward to it. For everybody else, [I'm going to] see you. Have a Happy New Year, Merry Christmas. Thank you.