Cobram Estate Olives Limited (CBO) Earnings Call Transcript & Summary

All right. Well, we might get underway. Thank you very much to everyone for attending, and welcome to our second presentation as an ASX-listed company and our first as during the first half. So I'm Rob McGavin, the Chair of Cobram Estate, and I'll give a quick summary and hit some of the high points that I think you'd be thinking about and then hand over to our Co-CEOs, Leandro Ravetti and Sam Beaton, who will spend about 15 minutes each taking you through the detail. And then we'll have plenty of time for questions. When we get to -- we might ask you to keep your questions to the end. [Operator Instructions] In summary, it's been a pretty positive first half, as you can see by the highlights in the presentation. And the majority of our business is performing as well or better than expected. Sam, if you can just move the presentation to the key highlights. It must be noted that the reported profit for the half is always really hard to understand in our business and a lot of other agricultural businesses, which have to rely on the accounting standard and treatment of biological assets. But the reason why our half is normally a loss or is a bit of a nothing, if you want to put it that way, is because the accounting standards dictate that the biological crop, which is we call it oil in tank at 30th of June has to be valued at year-end on its expected net sales value and taken to revenue. At the half year, even though accounting standards would allow us to value the crop, we take a conservative approach and we don't value the crop hanging on the tree because it's not -- one, it's pretty hard to know exactly what's there; and two, it's not fully secure until it's in the tank. So our profit will come from this year driven by the oil in tank at 30th of June. So I'm sure Sam will cover this a bit more and you may have questions, but it's not that easy to understand when you're first looking at our business, particularly that we're growing most of the olive oil we produce ourselves. Although we've had many, many positives and they're reasonably obvious by the key messages there, the negative is really the USA sales being down. And as previously communicated, it's important to note that due to constrained supply, they're down, not lack of demand. And it probably reinforces our decision to raise $50 million of equity during the period to accelerate supply from our company-owned groves in California, company owned and controlled groves. The company -- just to give you a little bit of background on this, the company has sort of 3 main sources of supply. One is fruit-sourced from third-party growers who sign a contract with us, send us their fruit. We mill it. It's usually a long-term range between 3 and 5 years. And we get -- the majority of our oil is produced that way from supply with third-party growers. We also have fruit that comes from our own groves that we mill in our own plant, and that's a small but growing materially supply area. And we also go into the spot market -- spot bulk market with, effectively I'll call them, competitors [ in a word commerce ] and buy bulk oil from other California millers and when it's available. And whilst the company's supply of oil from third-party growers and our own growers were in line with forecast and we have the oil that we thought we'd have, to date, we haven't been able to secure oil, although we're in discussions from bulk, I suppose, third-party millers who once we look at the quality, see it's okay, buy the oil. And it always happens after harvest, which only finished in November. And part of the reason for this is that the USA market is very strong for Californian oil, and some of the millers there have pretty deep supply relationships into food service. And the food service industry was reasonably disrupted the last couple of years due to COVID and probably did allow us to buy more oil. And now that's opening up this stronger demand. So whilst the emphasis has been given to maintaining our branded sales during the period, wherever possible, private label remains a really major component of our USA category management and relationship. And I suppose, full year, we won't match last year's volume. I just don't think that we're going to be able to source that supply. We've got good discussions happening. But last year, I think it represented something like 29% of our supply coming from third-party bulk processes. And this year, it will be less. We still expect in the USA to move from #3 miller by volume, which we currently are, to #1 by 2023 or 2024. And that's because of the contracts we've already got signed and the groves are in the ground. So you can't produce oil from groves that aren't in the ground. And that's what makes this business quite protected, but it also means that when sales are strong, it's not like just buying widgets or something else that you can just replace it and keep your sales growing if you don't have the supply. So there's positives and negatives in that. There's no doubt that sales in the USA will be stronger in the second half of the financial year. And we've sold something like $5 million already this year, as in the second half -- early in the second half. And the constraints experienced in California with availability are likely to continue, at least for another harvest until our own groves and third-party contracted oil comes on, which we know it's going to come, but it's just a time thing. And it's important to note that this certainly doesn't make us nervous about the medium term in the USA. In fact, it gives us more confidence, just particularly how strong the demand is for Californian oil and how much supply we've got coming on as a business that's contracted or planted. And regardless, the USA supply situation is not going to materially impact our profitability for the full year or our operating cash flow from the group. It's still a reasonably small part of our business. I'll hand over to Sam and Leandro, who will spend about 15 minutes each taking you through some detail. But I'd just like to remind shareholders how lucky we are to have these 2 young men as leaders of the company, 2 more committed, smart, honest and humble people will be hard to find. And more importantly, they're worked together for 12 years, and are a true team. And I can't underestimate the importance of these attributes and their relationships, ultimate success to our business. So it's with a great pleasure that I'll hand over to Sam to take us through the financials, and then he'll hand over to Leandro.

Thank you, Rob, and thanks to those of you joining us on the call. I'm really pleased to represent the results for the 6 months through 31 December 2021. And then I'll hand over to Leandro, who will give an operational update. I think Rob certainly touched on this. But before I take you through the detail of the results, I'd like to touch on the accounting for our olive crop. And just as a reminder to investors, at 30 June each year, we take the value of the oil at the estimated fair value. We then deduct the actual cost of producing that oil. And then we take that increment to our profit and loss. Now at 31 December, we don't take any of that fair value change to account. So in other words, the profit relating to the 2022 crop, none of that is recognized at our half year despite the fact we have our corporate costs that run through our P&L throughout the year. From an EBITDA perspective, we're pleased to report an increase in EBITDA from $2.3 million to $4.8 million. Our net profit after tax -- or sorry, our net loss after tax decreased from $6.6 million down to $5.2 million. I think pleasingly, for the group, we reported a very strong operating cash flow before interest and tax of $18.2 million, and this was an improvement, up from $11.6 million. From a group sales perspective, we're down just over $2 million across the group, which is really made up in 2 areas. Our Australian Olive Oil sales were actually up around $3 million. And we saw growth in branded private label and bulk sales. The USA, which Rob touched on, certainly been constrained by supply and we saw a drop in sales of just under $5 million. In terms of net debt, we -- following the capital raise in December of $50 million, we have reduced our debt levels. There are redrawable debt facilities that we'll draw on as we invest in capital projects. But our net debt decreased from $164 million down to $128 million. And as a result of that and our asset base growing, our gearing has dropped from 37% at 30 June '21 down to 28%. In terms of our detailed P&L and just a reminder to shareholders, we think about our business in 3 divisions. The main divisions are the Australian Olive Oil division and the USA Olive Oil division. And we also have the Innovation & Wellness division. In terms of the Australian Olive Oil division, we saw an increase in EBITDA of $4.7 million, up to $5.8 million EBITDA. Profit, again, driven by a strong sales. And we also saw, really importantly to us, an increase in net value for every liter that we sold during the half compared to the comparative period. And we're also seeing costs across the group remaining below our budget expectations, which is certainly pleasing. The USA Olive Oil division reported a $200,000 EBITDA loss compared to $800,000 profit in the prior year. Again, this was driven by the decrease in sales, which we touched on in the previous slides. In terms of the second half, as Rob touched on, we've seen a really strong start to the calendar year. And in the first 6 weeks, we've seen net sales of $5 million, and we're expecting a much stronger second half in the USA, although the full year result will be down on the comparative period due to the first half sales result. Depreciation and interest, roughly the same. We will see a slight decrease in pro rata interest in the second half due to the lower debt levels. Our Innovation & Value-Add, an improvement from an EBITDA loss of $3.2 million down to $800,000 EBITDA loss. This division continues to focus on ingredient and commercial products. And we are still selling our Wellgrove products and mainly through online channels, both in the USA and Australia. And we further rationalized our sales and marketing team and using existing resources from our olive oil divisions to assist in that process. We continue to invest in a number of R&D projects, and I'm sure Leandro will touch on some of those. In terms of our cash flow, and just a reminder that our cash flow from our business is much more consistent than our reported profit. And the reason for that is because of the way we manage our oil. So a larger crop like we saw in -- at 30 June 2021 will supply our customers for around 16 months, and a smaller expected crop from this year, the 2022 crop, will supply our customers for as little as 8 months. So we will continue to see much more consistent operating cash flow than reported profit. For the 6 months, we're pleased to report an operating cash flow of $18.2 million, which was up from $11.2 million (sic) [ $11.6 million ] in the prior year. That's before interest and tax. And after interest and tax, operating cash flow of $15 million, which is up from $8.8 million. In terms of what we've done during the half in investment projects, we spent $18.5 million on capital projects, which is pretty much all growth CapEx projects, the majority of that in the USA buying land and developing olive growth. So $18.5 million for the half, which is up from $8.8 million in the prior period. Of course, we raised the $50 million for an institutional placement in December. There was a $4.8 million repayment of prior director loans, and we paid out a dividend during the half as well. The net repayment of borrowings, I touched on that before, but that's a temporary reduction in debt facilities. The debt facilities are still available for redraw as and when needed for future capital projects. Just quickly touching on our balance sheet. We're certainly reporting a stronger balance sheet as at 31 December, assets up and gearing levels down, and of course, borrowings. We -- there's a couple of sort of important points here just to reemphasize. The olive trees, both in Australia and the USA, are recorded at cost. So as a reminder, when we develop an olive growth, we capitalize the cost of the first 5 growing years. We then depreciate those trees on a straight-line basis over 20 years. But the olive trees are not carried at fair value or valuation. They're carried at written down value within property, plant, equipment. Our brands, Red Island and Cobram Estate, are carried at what we paid for them when we purchased those brands. So combined, just under $6.7 million. Again, under accounting standards, you can't revalue a brand. On the tax, there's a tax liability of $47.9 million at 31 December. $44.5 million of that relates to a historical asset write-up from -- for accounting purposes, and that tax liability would not be treated unless we sold olive groves outside of the group. I've touched on gearing ratios, again, decreasing from 37% to 28%. In terms of financial outlook, so we're certainly very positive around the sales outlook, and we're seeing really strong consumer demand for our product. Certainly, in Australia, we're expecting the strong sales level to continue. We're launching a major marketing campaign in April around -- and certainly, we'll be very heavy on TV and digital. We're also renewing our partnership with MasterChef that will air around the same time. And that marketing campaign, that will be shared with shareholders as we get closer to the date. That will run for around 6 months. In terms of U.S. sales, again, I touched on that. We've seen a strong start. We're certainly expecting a much stronger second half than the first half. But again, the full year will be down year-on-year. Across the group, so if you combine all our olive oil sales, we are expecting a modest increase in sales year-on-year when we get to June 30, 2022. In terms of profit forecast, we are expecting an increase in 2-year rolling average EBITDA. So taking into account both a high cropping year like last year and the expected lower cropping year like this year and really driven by the maturing profile of our groves that we've invested in very heavily over the last 5 years, but also the increase in that value that we receive from each liter of oil that we sell. Our statutory EBITDA, so 1-year EBITDA this year as previously communicated to shareholders, will drop materially this year. Operating cash flow, we're expecting a strong operating cash flow for the second half as well, and we'll certainly report a very solid operating cash flow for the 12 months to June 30, 2022. In terms of investment, we will continue to invest in the business, which I'll touch on in the next slide. We -- in terms of the capital side of the business, I've spoken about this already, but we, of course, raised the $50 million in December. We also increased our debt facilities or available debt facilities by USD 7 million. We purchased a property in December in the USA in California, which is about 450 plantable hectares for $9.4 million. And following all that, we still had $51.2 million in cash or available debt facilities, which we'll use to fund our growth in the medium term. In terms of pipeline opportunities, there's a number of pipeline opportunities in the -- in California, USA for growth development that are currently under review. And the other main capital or 2 main capital projects, we're well advanced in the expansion of the Boort processing plant. We expect to start that project after the 2022 harvest in readiness for the 2023 harvest and really will support the increased fruit from [indiscernible] trees and also a material amount of fruit that will start to come from a large third-party planting where we've contracted the process and market that fruit on an evergreen basis. We also have 380 hectares that we're developing at Boort, which joins on to our existing grove, and we use some of our existing infrastructure. And of course, we'll process that fruit at the Boort plant, and we're expecting to plant that in 2023 FY. Now before I hand over to Leandro, just one thing. We've set up a shareholder portal to purchase our Cobram Estate range, Stone & Grove and Wellness products. There will be an e-mail sent out to shareholders in the coming days, and there will be discounts available as we've foreshadowed. The -- to receive that e-mail, though, you do need to elect to receive electronic communication and also tick the box to receive marketing material. There is a -- if you haven't done that, there is a form on our website under the Investor Services section. And I'll ask our coordinators to send out another blast in a month or so to capture anyone that signs up after this call. So thank you. And I'll hand over to Leandro. And as Rob said, we'll certainly have time to take questions at the end. Thank you.

Thank you, Sam, and thank you all for -- there's a bit of echo -- for being with us this morning. I'm sure you all have seen or experienced firsthand some of the many disruptions caused by the latest wave of COVID-19 cases since mid-December, [ a thing we can't forget ]. Fortunately, our operations continue to run relatively smoothly despite the many challenges that other businesses have faced over the past 2 months in particular. Now this is a credit to the company's proactive policies, particularly in relationship to staff safety and stock management as well as to our fantastic team, which I want to thank, who have managed the complexities of this environment without fuss and always trying to put our customers first. Certainly, having our main consumer goods locally sourced also contributed to experiencing minimal supply chain disruptions. Although we have seen like many other businesses, some cost pressure with inputs, particularly like fertilizers, diesel and freight, those increases have been more than offset by the short-term low prices of water and electricity, which obviously are some of our larger input costs. All what I have just really said highlights again the strength and the benefits provided by our vertically integrated model, both in Australia and in the USA. In terms of our grove operations in Australia, I'll talk in a bit more detail in the next couple of slides. But overall, we have been experiencing a very favorable growing season so far. That also led to water usage and costs today lower than what we budgeted back in July last year. When it comes down to an important investment part, for the reason that we raised that capital back in December, planning and applications are well underway for the upgrade of the Boort olive milling facility, with the development works commencing as soon as we finish our 2022 harvest this coming June and with the mill to be operational for our 2023 harvest. In the case of the USA operations, also I'll cover the results of our recent harvest later in my presentation. But I just wanted to highlight here again that over the past 6 months, we have signed a significant number of new grower supply contracts, bringing our total acreage under contract to just under 5,200 acres. This is a significant increase versus the 2,800 acres that we had over the past couple of seasons. Additionally, this past December, as Sam said, we settled on 2 new parcels of land that would allow us to grow our own planted area from the 755 acres of olive groves to more than 1,700 acres of our own groves pretty much by this time next year. All this extra supply of our own and third-party oil under our control will certainly be more than welcome to avoid the supply constraint explained by Sam that limit the growth potential of our branded and private label businesses in the U.S. In other words, I think that Rob covered that, we really needed to grow our supply base because despite the strong demand, we can simply not sell the oil that doesn't exist. Then we can flip to the next slide, Sam, and just talking about Australia. As you all know by now, because both Sam and Rob explained this, the outcome of our olive harvest in Australia plays a significant role in our annual financial results as the resulting crop is valued by June 30, given that our harvest that normally start by mid-April is completed just before the end of the financial year. Due to the alternate nature of olive production and as previously communicated, the crop particularly from our mature trees in 2022 will be materially lower when compared with 2021. Having said that, flowering and fruit set conditions and observations have all been as or better than expected. These good results of those observations so far were not surprising as they reflect really the good condition of the trees, the absence of any damaging frost events during winter and early spring and the favorable weather conditions experienced throughout the growing season, but still certainly a fair bit to go until harvest, 2 to 3 months, really before we get into the bulk of it. But all indicators up to now are pointing to a crop slightly above our initial forecast released back in June-July last year. Move to the next slide, Sam. On the water front, we have purchased over 70% of our full year requirements to date and paid an average price of $97 per megaliter, which is 56% lower than the weighted average price paid by Cobram Estate Olives over the past 9 seasons. Now certainly, as you can see from the tables below, the outlook in the short and medium term is quite positive as allocation water is currently trading at even lower prices ranging between $60 and $70 per megaliter. And the relevant water storages for us are at the moment at 91% capacity, which is nearly 60% higher than where they were this time last year. We move now to the U.S. operation slide, but still talking about water. Our harvest in 2021 experienced a very wet start with up to 8 inches of rain happening during the first week. Although rain in California and most olive growing areas is always a welcome event, it certainly created a few challenges that our technical, operations and milling teams managed to overcome, finally wrapping up harvest on time and without really any major disruptions. The overall production of 570,000 gallons or about 2.2 million liters of olive oil was right in line with our projections. I think -- of this process, I think it is worth highlighting the excellent performance of our mill doing that harvest that achieved a processing efficiency of 92.6%. To explain this better, so it makes more sense to all of you, through our exclusive Oliv.iQ systems, we have been able to extract 92.6% of the oil that arrived at the mill inside the olives. And to put this into perspective, the industry in general worldwide considers an extraction efficiency of 85% as a benchmark for good performance. And we went 7.6 points better than that despite quite difficult conditions this year linked mainly to the high moisture levels in the fruit because of the brand that I mentioned before and the naturally lower levels of oil that happens under those conditions. There is no doubt that our ability through the Oliv.iQ system to continue delivering such high levels of extraction efficiency has been instrumental to secure the additional acreage from third-party growers that I explained before and that certainly are going to feed our supply of oil over the coming years. Also to put the season 2021 in perspective, the production of this year doubled the oil crop that we had in the USA in 2020 from our own groves. And from our own groves for the first time, it became a meaningful source of production, accounting for about 7% of the total oil in the tanks by the end of harvest. As Rob mentioned and as we've seen through the area planted, we expect the share of our own production to continue to grow over the coming years as our groves really mature and the additional acreage is planted. We move to the next slide. Environmental sustainability continues to be a strong focus of the business with several initiatives on the go that we wanted to share with you today. The first one, we have recently signed an agreement with the non-for-profit Carbon Farming Foundation. And we are using the very cost-effective do-it-yourself model to implement some 200 hectares of a native reforestation project at our Boundary Bend site on previously clear land, but unsuitable for olives. We expect this to be just the first of several other similar projects across all our properties focusing a fair bit more on that carbon farming aspect. On the value-add growth pillar, Sam talked a little bit about that before, but probably a very relevant update is the fact that the company, supported by a grant from Sustainability Victoria under the Recycling Victoria Business Support Fund, and utilizing the outcome of years of R&D that we conducted before that is currently installing an Australia industry-first facility that will allow us to process about a quarter, so around 25,000 tonnes of olive pomace each year and upcycle of this waste material into several new circular-economy products. This new plant will result in an estimated 65% reduction in the volume of olive pomace material generated through our mills while lowering the greenhouse gas emissions. The processing of the pomace through this facility will allow us to maximize the quality and the quantity of renewable biomass that we can sell both as biofuel and also as animal feed, together with the ongoing extraction of valuable antioxidants and minor components left over after the extraction of the oil. And finally, we're also conducting a very thorough independent evaluation of our baseline carbon position across our entire Australian operations to provide us with a complete understanding of our current carbon credit and offset opportunities at the same time. I think this will enable us to set clear targets, both for the short, medium and long term and also better evaluating the potential impact of a range of different environmental initiatives that we are starting, like the carbon farming presented before that are at the moment being considered by the business. I think if we move to -- at the end -- yes, with that, I just covered my part of the presentation. So happy to hand it back to Rob for some final remarks and open the time for any questions you may have. Thank you very much.

Thanks very much, Leandro and Sam. [Operator Instructions] So are there any questions? Jonathan Snape has a question.

Yes. Look, just a couple. First of all, just on your comments around the yield for this year, I don't recall there being a forecast for 2022 in the prospectus. Can you help me with what the number actually was that you're referencing back in June and July for the 2022 crop?

Sam, maybe you're best to answer that.

No, we certainly didn't put a forecast in the prospectus. We did say that our rolling 2-year average would increase, but we did give yield estimates by -- and by tree age. So that would be referring to the estimates that we've put in the prospectus based on our yield profile and what we expect each year of crop to -- sorry, a year of trade to deliver at the various ages.

Okay. So what you're saying is that the yield outcome you expect this year is above what you would expect based on if you've taken those averages across the tree age profile?

Yes. For an off-year, our yield expectations, and Leandro, you might want to comment further, are slightly ahead what we had expected at -- or what we had forecast at when we were setting our budgets.

When we consider and we -- it was in the prospectus, the average yields per hectare for mature groves are 2,800 liters per hectare. That is a combination of both an on- and off-year as an average. So looking at last year's results, virtually, you have to have a lower yield this year to still sustain that average. And what we are seeing at the moment is that combination is likely to be above or slightly above that average.

Okay. So if I go back and look at the last off-year, it was 2020, I think you did 6.2, but you got hit late in the season because I think your initial forecast was well north of 9 back then. So should I be benchmarking to the original forecast in '20? Or is it -- it sounds like it's going to be well above the final outcome for that year?

I think that it's actually quite difficult to compare with that year because of the continuous changes in the age profile of the trees, with new trees coming into production and also some of the latest older blocks being removed in that process. So it's a bit of a change between the maturing profile. So direct comparison, it's probably not quite easy to do.

Okay. And look, just on the innovation losses, I mean, it came in quite a lot in this result as it did, I think, in the second half last year. And how are you thinking about the full year there, particularly the second half losses? Is this kind of a sustainable kind of step-down in the cost structure that you've got going on there?

Well, certainly compared to the half just gone, I think that's a fair comment that we'd expect similar results. Based on what we've done to reshape that business, we've rationalized a lot of costs and resources and refocused into that ingredients and commercial space. But having said that, we are still selling Wellgrove product through our online channels.

All right. Great. And just one last question. On the Australian sales outcome, I mean the growth is fairly limited. Particularly given there's quite a big price increase that was pushed through last year, it kind of suggests that maybe the volumes weren't up that much year-on-year. It was more driven by price, and you can kind of see that, I guess, in the margin outcome. You've obviously highlighted some fairly big promotional activities in the second half. But do you expect in the second half we should start to see volume growth returning into the Australian business?

Yes. I think we've seen -- certainly since that price rise in February 2021, we have seen volumes rebound at a level that are higher than expectation. I think to answer that question, the comparative period was December 2020 where we saw significant panic buying through the supermarkets. But we are pleased. We're tracking in line with plan and budget. And of course, our promotional programs change every half as well. And as you suggested there, we do expect to see a further uptick when we start or when we launch our major marketing campaign, which will run for around 6 months.

Thanks, Jonathan. Maybe [ Mark Topy ]? [ Mark Topy ], are you -- you have a question? We can't hear [ Mark ].

Can you hear me now?

Yes.

So sorry. Just a follow-up question on the U.S. momentum, can you perhaps expand on what's happening in the retail market there? You mentioned that you want to increase your position to #1. Can you give us a little bit more understanding of what's happening in the retail space and how you plan to build the brand there as that supply comes on?

The #1 comment comes to being #1 miller or producer in the U.S.A. Obviously, you've got to have the oil to sell out, so intimates strong sales of Californian oil. But I'll leave Sam and Leandro to talk through the second part of the question.

Yes. And certainly, I think as we foreshowed, [ Mark ], the growth in sales has been constrained by the oil, we're seeing really strong demand, though, from ultimately customers and, of course, retailers for Californian olive oil. Both through branded and actually private label, we're having some really good wins in terms of additional distribution. And a lot of our marketing, very similar to what we've done previously in Australia, is around educating the buyers around the category and doing a lot of in-store or direct marketing to consumers. But as Rob said, our volume of Californian oil will be -- or Leandro said, flat for this coming harvest as well. And then we'll start to see an increase. And we anticipate that the volume we harvest and grow -- sorry, process and growth at our own groves will roughly double in the next 5 years.

And just to talk about the retail market, can you give us a better understanding of what's happening there in terms of the brands that are there and just where you're sitting at the moment?

It still is a market that -- and it is and will continue to be strongly dominated by imported oil. Now obviously, the production of Californian oil represents a very, very small percentage of the overall consumption. It's always hard to draw comparisons just in the short term year-on-year with the whole pandemic going on. But if we look at a slightly longer term, let's say 5-year plus, the consumption of olive oil in general in the U.S. sustained a trend of growth of about 2% to 3% per year with an increasing higher amount of growth on the extra virgin and more of the higher quality end of it, which are really, really positive trends for us. And certainly, there's a lot of pressure on growing the local supply but, again, constrained by the fact that there's just not enough Californian oil. But I remind you, it represents less than 5% of the total consumption of olive oil in the U.S.A. versus something like in Australia that is about 50% the local produce. So it's a very, very different scenario, a lot more restricted, the supply of local production over there.

Yes, sure. That's what I was trying to get to. So -- and obviously very pleasing in terms of the contracts that you've done now. I'm just wondering, does that suggest perhaps that some of the additional growers might be interested in signing up with you as well going forward? How do you see that potential?

I mean certainly, as I said before, I think that it clearly took us a few years to build the relationship with the growers and to show them what we could achieve in terms of marketing, price but also processing efficiencies and delivering more oil per tonne of fruit. We feel that this additional acreage sign is a clear response to both our ability to sell the oil at good prices but also to extract a good percentage of oil out of the fruit. And to a great benefit for us in this coming year. Remember that this past year in California was an on year. Following year will be an off year, so the industry as a whole will tend to have lower crops. But our increased acreage is going to allow us what Sam say is roughly maintain our level of production of this year despite being an off year, which is a very, very positive one in terms of supporting good brand and good private label businesses facing the further increase of oil supply in 2023 and after that.

Right. And just remind me, is -- could be off track here, but is there any sense or logic to maybe supplementing the U.S. oil with Australian oil, shipping U.S. -- Australian oil into the U.S. particularly if there's current kind of tightness in the market there?

Yes. We certainly -- one of our actual SKUs, [ Mark ], is an Australian olive oil. Albeit it's a very small part of that business, we do sell high-value bulk olive oil through the U.S.A. And there's a number of other private label-type opportunities that we're exploring that will be very profitable for the business.

Great. And just on, I suppose, the gross profit margin o sort of EBITDA rolling basis or however you'd like to think about it and given you haven't valued the forthcoming crop, just can you -- with lower water costs, is it fair to assume your cost of goods is going to come down materially? Can you maybe just expand on that a little bit more?

I think the first point is that the grove costs are relatively fixed irrespective of the volume of oil. So with a lower crop, of course, your cost per liter does actually go up in dollar terms. We've seen costs relatively flat, with the exception of water, there will be certainly a saving there. But really what -- really, the way you need to think about it is across that 2-year average. So it's the production costs across a high cropping year and a low cropping year that's really important. And as our production increases, then our cost per liter over that -- over those 2-year periods we expect to continue to decrease.

Right. And just lastly, just on the pricing, we've seen a lot of food inflation costs come through. Are you sort of happy where the price at the moment is? Or how do you see that going forward now?

Yes. I think it's fair to say. And we put through a substantial price rise in February 2021 of 18% on Cobram and 12% on private label and Red Island. All -- I think all our major competitors now have put through price rises at retail, so it's -- we'll watch this space and monitor it. Of course, our focus is to continue to produce high quality oil with the lowest possible cost. But if there are costs that we -- that are beyond our control, we are able to pass that through our pricing.

[ John Wolf ], do you got a question?

Gentlemen, can you hear me okay?

Yes. Perfect.

Yes, [ John ].

All right. Look, I've just got a couple of questions. Firstly, relating to the Oliv.iQ system, I tried to do some research. And of course, there's not a lot of information available, not a lot of detail available, a lot of general information. But I guess because it's proprietary, it's a bit difficult to find information. Would that be correct?

Yes. I mean this information -- actually, it's called generic information that describes the main areas of interest in our website. But certainly, the specific technical details behind it obviously are not there.

Okay. And using that Oliv.iQ system, I've seen claims that by using that system, you're able to generate yields in the order of 8 to 9x higher than the average sort of yields one would expect from a grove. Has that been reflected in the yields you've currently been getting?

Yes. I mean the average yields in the world industry of olives, it's about just under 300 liters per hectare. And as we presented in the prospectus, our mature trees are yielding an average -- actual average of around 2,800 liters per hectare, which is sort of roughly around 9x the world's average.

Yes. And that 300 liters per hectare is that you're comparing apples with apples, so mature trees with mature trees?

Correct.

Right. Okay. Is there any other trees that are being planted? Are they GMO trees or not?

No, there is no GMO olive varieties at all. Olives in general terms are an extremely stable genetic -- or genetically stable species. There's no even natural mutations. In fact, the varieties that we are growing now are the same varieties that were around 2,000 or 3,000 years ago, same as the Romans and the Greeks had. So there's very, very little change. A bit like with grapes, very little changes in terms of the varieties that are currently planted. So absolutely, just it doesn't exist. There's no GMO olive variety at all in the world.

Okay. That's heartening to hear. One final question. The recent purchase of land in California, I understand it was something like about $9.4 million for about 189 hectares off the top of my head. Those sort of numbers, that sort of comes -- that sort of works out at roughly about $50,000 a hectare. I assume that's fallow land or that doesn't have trees planted in already?

Sam, but that includes the expected cost of developing that land? Sorry, that's a question. Sam?

The land you're talking about was the land we purchased in December which is -- which will be further developed. It did have some irrigation infrastructure and water infrastructure on it, though.

Okay. So you've paid $50,000 a hectare roughly for the land which is yet to be developed largely.

Land and water, yes, and access to water.

Yes. So is that a fair price? I mean it seems like a lot to me.

I think it's -- we obviously benchmark what land has been selling for, and we do our internal return calculations at the time of purchasing and looking at developing any land. And it certainly meets our expectations. And I think it's really important to note that with -- when you buy land, typically, you'll have access to water, so it's very different to in Australia where you've then got to go and buy either the permanent water or temporary water on an ongoing basis.

Yes. So the land -- the water comes with the land effectively in that price. That's the difference when comparing apples with apples to Australia.

Okay. And the amount of water that comes with the land, how does that work in the -- in California? Like here, of course, you would either buy it on the spot or you would have forward contracts buying it from somebody who already has the water rights. And of course, if you've got the water rights here in Australia, then of course, you're up to the water -- it's up to the water authority on what sort of percentage of those water rights that you can take.

Maybe, Leandro, do you want to cover this because there's 2 types of water.

Yes, exactly. In this particular property, and that has to do also with the price and the quality of the property, there's access to a dual source of water. There's a canal or a channel that runs through the property that allows you to have access to district water or surface water, which is actually depending on the location, but it pretty much is almost comes just at a -- with a small admin fee. But at the same time, this property had its own bores with a history and well-known yields of underground water to supplement that, which is also -- you can access the price of the property relates to the amount of water you can access through the channel, but also the yields of underground water you can get from the existing bores. And that's what gives a full combination. In general terms, obviously, whenever we purchase a property, we make sure that it allows us to access enough water to fully irrigate the olives that we're planning to plant into that property. And certainly, that has been the case with this one and any other properties that we purchased in the U.S.

Okay. So the water -- the access to those 2 sources of water, I mean, is that unlimited? Or is there a top-end volume of water that you can draw given the acreage that you have? How is it controlled?

There is some limitations in the allocation, obviously, in the amount of water you can access through the surface water. And at the same time, there's limitations linked to the capacity of the bores that you can drill and that the aquifer can actually supply. But it is not as tightly limited as it is in the systems with Australia.

Olives, so they're basically set up to be able to supply the main crops over there, which are almonds, walnuts, pistachios. And they are a lot bigger water users than olives. Olives are probably half amount per hectare. So in fact, we're seeing existing farmers, even within those limitations, moving to olives so they can effectively get more area planted with less water. So the -- what I'm saying is that when you buy land, olives are a lot less than most of the traditional crops, so there's ample water with those properties, bearing in mind that every single valley and every single region has slightly different rules. And -- but it's not a big concern, and it's part of our due diligence. And over there, when you purchase a property, it's normal that you have around 90 days to complete your due diligence. So it's usually you buy a property, sign that contract, pay the deposit, and then you have 90 days to say whether you want it or not while you do all of that work including usually putting down some bores and seeing what the regulations are and also the surface water availability.

Right. So what I'm hearing is that -- so the infrastructure that's in place which enables you to access the water is such that you have some -- a bit of -- a lot of confidence, I guess, that, that infrastructure will deliver the volumes of water, and the subterranean water will be available and perhaps even when the water may not be available in the canals. But that -- but in addition to that, the regulatory framework that exists over there at this time is such that you're also going to -- that's also going to be favorable in terms of allowing access to the volumes that are required to water the crops which are yet to be planted.

Yes, correct. And there has been a number of really bad droughts that have been well publicized since we've been there. And we've had, I would say, very little to almost no impact on our groves, and it just comes down to the valley issue and the water supply arrangements for that valley and certainly a lot of the press around really low water allocations and the areas that have been most impacted are South of the delta, which is where they relift water out of the delta and down towards Los Angeles. And that area there, particularly in about 3 or 4 years ago, was really severely hit with almost 0% allocations, where the region we're in had quite generous allocations. And it was partly environmental, partly long-term agreements and riparian rights. And it's a very, very complex water market in the U.S.A., even a lot more complex, I think, than Aus. And it hasn't evolved as much. But it is evolving, and it is a very important consideration because without water, you can't really grow anything in those climates. That's -- some are dominant crop.

Right. Yes. Okay. All right. Look, that's excellent to hear that. Just one final question, and it's just, I guess, a global trend, I guess, that we might be seeing the start of, and this might have being exacerbated by COVID-19's impact on supply chains. Given that a lot of the olive oil sold into the U.S. is imported largely from Europe, I guess, do you see that this deglobalization trend that we might be seeing may be beneficial to locally grown olive oil in the United States to those people involved in the industry?

Yes. Look, absolutely, I think you're right. And when we first started here in Australia, nearly all of the oil was imported. And we've since expanded groves, invested, educated the market. There's just such a massive difference in the consumer value between poor quality or average extra virgin olive oil and high quality. The science is very clear that the health benefits come from high-quality extra virgin olive oil. There's a lot more health benefits in there because it's driven mostly by the antioxidants that are in there. And that's why there's sort of 2 or 3 different markets within a market. So there's the really cheap, really poor-quality olive oil that might be refined, that might not even be extra virgin, which is the juice of fresh olives, in any market, including the U.S.A. Then there's generally the average and low-quality extra virgin. Then there's the authentic, really high-quality extra virgin, and it usually sells for 2 or 3x the price. And consumers realize that you can't produce really high-quality extra virgin olive oil for some of the prices you see. So that's why it's one of the most adulterated products in the world. So as consumers have more, I suppose, empathy and more focus on buying local, the importance of that to jobs and the economy and everything else, the quality implications or the quality rigor around local, both in Australia and in California, it's just a lot more stringent rules and quality assurance and social responsibility in many, many products, including extra virgin olive oil. And I don't think there's any reason that olive oil can't become a really major crop in the U.S.A. and be supplying similar levels to Australia in 10, 20 years' time because the climate is really good. There's lots of available land and water. Obviously, you're going to compete with other crops like walnuts and almonds and the like. But I think it's a hugely -- it's a fantastic space to be in because of everything around health provenance and real value to consumers. And every day, there's another article around why extra virgin olive oil is so good for you. And almost every day, there's another article around refined seed oils and the damage that it does to humans in the long term. So the trend is your friend, as they say, but -- and we've been in it a long time. And again, the unique thing about our business is that it's not like selling widgets, and we can't just go, yes, we can sell twice as many tomorrow. Both in Australia and over there, we can only sell what we produce because it's just so focused on quality and provenance.

Yes. Okay. Excellent. And just one other -- sorry, one other question, which was a little bit of an expansion on an earlier question. So given that about $50,000 a hectare has been spent on purchasing the land with the access rights and the infrastructure that's in place, what would be a reasonable figure to place on the development cost of planting it out. Would it be $30,000 a hectare, $20,000 a hectare for the trace?

Yes, historically, well, it's been around $10,000 an acre so, yes, $24,000 a hectare. And of course, it's slightly different depending on each block of land. And this block of land actually joins an existing orchard, so there'll be some shared infrastructure as well, and you'll see some slight savings there. Yes, Rob?

Yes, I'm sorry. It's certainly the cost including the cash losses to get it to a breakeven point, if that makes sense. So the $25,000 a hectare or $24,000 a hectare is not just to plant the trees, it's to put in the irrigations, plant the trees, nurture the trees, prune...

Like the nurturing, 3 years or something?

Yes, take 3 years -- basically 3 years of costs to get it to cash flow positive or where its crop from the year more than covers its operating cost for the year, if that makes sense, which is still $75,000 a hectare for that, if you put the 2 together, is still pretty reasonable if you look at comparable sales of mature groves or other crops even here in Australia. [ Michael Scully ]?

You will have to unmute it, [ Michael ].

Yes. Okay. Yes, I see it now. Two questions. One is a little bit more on the competition in terms of locally produced olive oil in the United States. I have an idea of what's going on in the Australian market. But I'm still not sure exactly how you're handling things there, so if you could talk a little bit more about the competition. I would think that there's a fair bit of competition in terms of the producers. And the second question is if you could just tell me a little bit more about the accounting standard that you're using for development. And that was new to me, and I'm just wondering if that's a very standard thing in not just olives but perhaps in almonds and other tree crops that's new. So those 2.

So [ Michael ], I'll hand over to maybe Leandro on the first question, Sam on the second. But if I can just say that everything we say here is completely public, and it's not good for them to say too much about your competitors, as you would know, because we also work with them every day. So just bear it in mind.

In a generic sense, it's fine.

Yes. Yes. Leandro?

Yes, [ Michael ], I think the situation in the U.S. from the growing side is actually very different from Australia in the sense that the majority of the olive growers don't vertically integrate. The majority of the olive growers are also sometimes almond growers and walnut growers. And what they normally do, they like to contract their crop to a miller, yes, for that miller to convert it into oil and to do the marketing side. That's a common situation in the U.S. A large amount of -- or relatively large amount of, we may say, medium-scale growers, somewhere between 20 to 1,000 acres of olives, and we're talking about 50, 60, 100 growers like that, that is the common description in Australia. In the U.S. with, at the moment, 3 large millers that are actually taking that crop, and certainly, we are 1 of those 3 large millers taking that crop. Between us and another miller, we focus a lot on retail sales, with branded sales. The third miller does a lot more on the foodservice. And certainly, all 3 could be handling and dealing with a lot more fruit and oil that we currently have. So that constraint on supply has been touching a role with some variations, obviously, in the case of foodservice case, as Rob said, during the pandemic was hit quite hard with the shutdown of the hospitality sector. But that is a situation. And obviously, it is a competing market, and those that are of a better price and a better service and better extraction rates end up being more successful capturing the fruit that is available, a bit similar to what may happen with a lot of wineries capturing grapes and so on.

And we started there with obviously nothing. So there's only 2 large processes, and we've sort of fought our way to the #3 position by volume and with signed contracts. And we know how much fruit trees are in the ground. As we said, we should move to #1 by 2023 or 2024 harvest, all things being equal. So it is a competitive environment, but it's one we really know backwards from being growers ourselves and having run processing courses with UC Davis in the U.S.A. for growers for probably 15 years and more recently moving over there 6 years ago to -- or 7 or 8 years ago actually to start our business. So the momentum is coming, and the trust with the growers is certainly coming and something that we feel really strongly about that if we don't have growers and look after them, we won't have a very good business. So that's always been our focus versus short-term wins.

And again, just -- sorry to reinforce it, just again, it's the fact that the production of Californian oil is so small in the context of the entire market, a lot of that competition, let's say, it happens more at the sourcing level than at the site level, where there's plenty of room for the brands and everything else to keep growing from where we are, just again, simply constrained by the supplier.

Yes. And Sam, if you're happy to answer the second part of the question.

Yes, the question there, [ Michael ], you're referring to the development of olive groves, the treatment of that?

Yes.

Yes. So under the accounting standards now, it changed several years ago, but like any construction asset, the development of an olive grove, you capitalize the cost of that development in the pre-productive years. We choose to capitalize costs over the first, effectively, 4.5 years. So the year at planting plus the next 4 years, those costs sit on our balance sheet. And then from year 6 to the next 20 years, we depreciate those trees on a straight-line basis. Under that standard, you do have the ability to fair value it, but we've chosen to capitalize for the first 4.5 years and then depreciate it on a straight-line basis.

And that's common for similar type of producers?

Yes, I believe so. And I think there's some comparables that may capitalize costs for longer periods. We choose to only do it for 4.5 years, which is around when the tree starts to turn a profit and then for that -- from that period through to around year 8 before it hits maturity.

Thanks, [ Michael ]. [ Peter Parker ], if you can unmute and ask your question, please.

You just need to unmute, [ Peter ].

Yes, here we go. I think that's right now?

Go ahead.

Well done. Another good result. I'm just interested with the ASX reporting why it was done after market. Was that an ASX requirement? Or...

Yes, typically, when you release results, either do it before market or after market, which gives all investors a chance to have a look at the material before the market starts trading. And we felt that releasing it last night gave attendees on this call a chance to have a look at it before the presentation.

Yes. Okay. Obviously, you were just saying yesterday the share price is at an all-time low of under $1.70. What's been driving that down, do you think?

It's a great question. I've got absolutely no idea. I mean volume has been reasonably light, but I don't know, to be honest. Obviously, there's -- without stating the obvious, there's a couple of people who want to sell and maybe a lack of information coming out, people holding off until today's update. I'm not really sure, to be honest.

Here's a $64 question. How do you think the market -- they announce?

We'll see.

Hopefully positive.

Yes.

Have you had any feedback to the people that's stumped up at $2 for the share purchase plan and, obviously, the major investor, how it happens? And were they about paying to that tune?

Personally, I think, although everyone would like the share price to be higher and no one more than the 3 of us on this call as major shareholders, but it is what it is. And the market has been pretty weak and frothy and -- but I haven't had a single call of anyone saying anything much. I still think it will be very hard to get set with any volume at where the price is now because there's such small amounts going through. I'm talking about if you're an institution or someone who wants to get a stake, I just don't think it's possible. But again, you don't know. I can't -- I don't know what every other shareholder is thinking, and that's stating the obvious, too.

Have you seen any institutions -- obviously, you can't disclose that, but is -- are you seeing more institutions have a look at the companies?

I mean we get a reasonable amount of calls. January is always a very quiet period to everyone and every business investor-wise. But we're well into February, and yes, I don't really know, to be honest. I mean most of the trading happens with nominee companies. And unless you go and request to report for a see-through, it's very hard to know who's doing what. But again, our shareholders have the right to buy and sell, and anyone else does as well. So it basically is what it is. And hopefully, we've seen the bottom of the price. But again, it's -- I think it's reasonably volume related. So a big seller coming in would move it and a big buyer coming in would move it is my personal thoughts. That's again stating mostly the obvious.

Yes. Do you -- at this point, do you put an estimate of your dividends? Or is that wait until the half -- until June or July when you report?

I think it's no secret we expect to keep paying dividends. And I don't know whether it will be split into 2 or just stay as 1. We haven't really had that discussion. But certainly, the business has got really good operating cash flow and a really strong balance sheet, so we're certainly in a position to pay. I can't see that's stopping anytime soon.

Yes. And you probably don't need to raise any more capital.

No. No, that's not the plan, certainly, certainly not at this price. Thank you very much, Peter. Appreciate your questions. There's no other questions at present, so unless someone puts their hand up soon, we might call it a day. But really do appreciate you taking so much time to come on and the interest that you're showing in the business. And certainly, we're all very optimistic about this business and the opportunity that's in front of it particularly in the medium to long term. So yes, there's no more questions. So with that, we'll close it. And thank you all, and we'll be in touch soon.

Thank you.

Thank you.