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

Okay. Let's get started. Good morning to everyone, and welcome to the results for the 6 months to 31 December 2023 for Cobram Estate Olives Limited. My name is Sam Beaton. I'll be -- I'm a Joint CEO of Cobram Estate Olives Limited. I'll be joined today by Leandro Ravetti, who is the other Joint CEO and also Russell Dmytrenko, who is the CFO and Company Secretary. In terms of the agenda for today, I'll take you through the financial results. I'll also give you a commercial update. I'll then hand to Leandro. Leandro will take you through the business operational highlights and also an update on our growth pillars. At the end of the session, we'll have plenty of time for questions. Now if you do wish to ask a question, there's a raise hand symbol at the bottom of your screen. Please press that. When it gets to time for questions, Russell will call your name when it's your turn and unmute you and then you can verbally ask your questions. Again, we'll have plenty of time for questions. In terms of the 6 months, it's been a very pleasing one for the business. We've seen strong sales growth over the 6 months in both Australia and our U.S. markets. We continue to report strong operating cash flows. We reported an increase in profitability, which was driven by the increase in sales and an improved product mix. We continue to invest in capital projects, the majority of that being growth capital projects in both Australia and the U.S.A. As we announced prior to Christmas, we completed a harvest in the U.S.A. in November, yielding a record harvest, and our Australian harvest is due to commence in April this year. Of course, all of these items we'll cover off in detail during the presentation. Before we get to the numbers, I just wanted to reemphasize a really important point, and that's how we account for the crop hanging on our tree. Under accounting standards, we record the fair value or the expected net selling price of our olive oil we harvest. We then deduct the actual costs of selling it, and then that profit increment is taken into account. Now at 31, December, even though there are olives on the tree, we don't take any of that profit to account. It's all taken into account in the second half. So our expected fair value gain for the Australian crop will all be in the second half of the financial year or the full year results. Getting to the highlights of the numbers. Our group sales revenue was up to AUD 113 million, which was up 59% compared to the prior period. Pleasingly, a lot of this growth came from packaged goods sales. Our global packaged goods sales, AUD 91.7 million, up 50% compared to the prior period. We saw growth in both Australia and the U.S.A., with packaged goods sales up 41% in Australia to AUD 71 million and 100% or doubled in the USA to AUD 20.2 million. Our EBITDA, we reported an improvement compared to the prior year, up to AUD 8.2 million, which was an increase of AUD 7.5 million. We did still report a loss at the half year of AUD 7.2 million and -- but it was better than last year. And it's important to take into account the accounting for agricultural crop. And as a reminder, we don't take any profiting from it relating to the 2024 Australian crop at half year. Cash flow from operations continued on a strong trend. We reported cash flow from operations before, which is cash flow before interest and tax of AUD 32.1 million, which almost doubled the prior period. And the net debt increased up to AUD 201. This was expected and planned as we drew down existing facilities to fund future CapEx. If we move to our detailed profit and loss. We look at our business in 3 business segments, the innovation and value-add or wellness division, U.S.A. olive oil and the Australian olive oil business. The innovation and value-add, we reported a small profit up from a loss of AUD 1.4 million in the prior period. We continue to focus that business on value adding our waste and mainly in B2B transactions around selling our waste as biomass -- as a biomass energy source, sorry. The U.S.A. olive oil business, a small loss of AUD 400,000 last year. For this 6-month period, we reported a profit and EBITDA profit of AUD 1.4 million. This was driven by the increase in sales and also an increase in margin. The Australian olive oil business EBITDA grew from -- to AUD 6.1 million from AUD 2.5 million in the prior corresponding period. Again, this was driven by an increase in sales and also a more profitable product mix. From a cash flow perspective, we continue to report strong operating cash flows. This 6 months reported cash flow from operations of AUD 32.1 million was up AUD 21.3 million compared to the prior corresponding period. This increase was driven by increased sales and increased profitability. After tax and interest, our cash from operations were AUD 22.7 million. As you can see from this table, we continued to invest in capital projects. We invested AUD 32 million for the half. The majority of that capital was spent on growth CapEx projects. Leandro will talk through those projects in his part, but investment in both Australia and in the U.S.A. During the 6 months, we paid our full year dividend. So AUD 11.5 million is our dividend, net of our dividend reinvestment plan. The chart on the right or the graph on the right shows the trend in operating cash flow over the last 4 half years. And also important to note that at 31 December, we had AUD 32.7 million in available debt and cash. From a balance sheet perspective, our balance sheet remains strong at gross assets of AUD 616 million at 31, December. It's important to note that our trees and irrigation structure carried a written-down cost under our accounting policies. If they were carried at fair value, then that value would be AUD 121 million higher than what's in our books. It's also important to note that our brands at Cobram Estate and Red Island are carried at cost. So what we spent to purchase the brand is not at fair value. So they are carried at just under -- just around AUD 6.5 million between the 2. The other point on this page, there's a non-current tax liability of AUD 75 million. The majority of that relates to the write-up of -- historical write-up under the accounting standards of our olive groves and the tax liability would only be payable if we sold the assets outside of the group. Net debt ratio did increase. As explained, we drew down on our debt facilities as expected to partially fund some of the growth -- sorry, the CapEx. And also importantly, just to note that that same debt ratio was 37% back in June '21. Group olive oil sales -- our packaged good sales, which is our main focus, grew by 50% over the 6-month period. The chart on the right shows the split between packaged goods in Australia, the big part of the pie chart and then U.S. packaged goods sales, 18%. Then the other 2 smaller parts are U.S. and Australian bulk oil. The bulk all that we sell is predominantly low-value bulk oil, and we also do have a small amount of long-term customers that we sell some of our higher-grade olive oil. Moving on to just Australia. So this chart is just packaged goods sales in Australia. The bar chart shows the growth in sales over the last 4 half-year periods split into branded sales, which is the bigger part of the bar charts and private label sales. We reported a 41% in packaged goods sales compared to the first half FY '23. This was pleasingly driven by growth in all categories, both Cobram Estate, Red Island and private label. Our total olive oil sales in Australia, so including bulk, grew by 41%. Moving on to the U.S.A., again, showing the last 4 half-year periods. We had a very pleasing result in the U.S.A. We continued to see growth in packaged goods sales, which more than -- which doubled the last period. You'll see that the growth in private label. This is more around the availability of oil with a bigger harvest we were allowed to start when we started our private label program earlier in the year, whereas last year, a lot of our private label sales were in the second half. Moving on to the -- so this chart shows the supermarket scan sales for the 6 months, so what customers in the U.S.A. pay at supermarket checkout. It's external data. It does exclude a couple of the retailers but includes most of the market. Our growth reported at 27.4% in the U.S.A. So this is just Cobram Estate U.S.A., and our store count grew by 12.3%. For the 52-week period, we're the #9 brand in the U.S.A., #9 olive oil brand and closing in on #8. We're currently ranged in just over 17,300 retail stores. From a cost perspective, pleasingly costs have stabilized, particularly our key input costs around fertilizer energy and diesel. We did see during the half an increase in water price in dollars per megaliter. It's still well below long-term average, and we paid AUD 135 for our water in the first half. And we're seeing the storages at 88%, which is historically at a high level for this time of the year. So certainly the short-term outlook looks positive. We did have wetter weather period than expected around Christmas time, which has led to we will use less water for the full year than what you normally would or what we have over the long-term average. This also has an impact on the associated costs around pumping. In terms of business update, so just a few things that we wanted to highlight. In January '24, so post the balance date, we entered into a loan agreement with PGIM for a AUD 15 million long-term loan. It's a 15-year loan. And we're using that money to purchase our California land to continue our grove expansion. We've already utilized [ $7.3 million ] in U.S. dollar terms to purchase 2 properties, which Leandro will talk more about. It's around 156 plantable hectares that will be planted this year. We're also working with a third party on 2 large-scale renewable energy projects in Australia. These -- I will point out both these projects are very early stage and highly uncertain. We're not funding these projects. So these projects be funded, operated developed by third parties and on vacant land that we own. They -- both the sites are very strategically good locations. They're close to transmission lines, electricity substations and away from high density living. In terms of if these projects are successful, then we'll generate income through long-term leases and, of course, we'll keep shareholders updated as they progress. Director's loans, going back to March, April 2021, the company lent Leandro and I money to exercise options in the company at the time was AUD 10.4 million. We still have loans of AUD 7.6 million owing to the company. These loans -- the interest rate on those loans is based on the ATO benchmark interest rate, which is currently 8.27%. And as a result of this high interest rate, both Leandro and I have decided to sell some shares to reduce these loan balances. We are looking to sell approximately 2 million shares each. And after this share sale, we'll still have approximately 10 million shares between the two of us and we certainly don't intend to sell any more shares in the foreseeable future. Independent of this, the Director -- the Non-Exec directors resolved to under the loan agreement to extend these loans for any balance that's still owning through to the 1st of April 2026. In terms of financial outlook, it is very positive for the business. We're expecting sales profitability and operating cash flow to remain very strong into the second half. We're seeing very strong consumer demand and certainly seeing that in the first 2 months of this second half. There is no doubt that there's favorable trading conditions. We're seeing a shortage of global olive oil and historically high global prices. In Australia, we last harvested in June 2023. So we only have a certain amount of oil to sell. So our second half growth will be constrained, but we'll have new oil available to sell in late May 2024. Leandro will be touching our crop, but certainly, Australian crop is within expectations. From a pricing perspective, at the moment, we're reviewing our pricing across all our packaged goods range in Australia, and we do expect pricing to increase in the coming months. I'm now going to hand over to Leandro and of course, we'll have time for questions at the end. Thank you.

Thank you, Sam, and thank you very much to all of you joining us live today. Over the next [Audio Gap] I'll try to provide a summary of the key updates from our operations and a brief overview of the important actions linked to the ongoing implementation of our growth pillars. Move to the next slide. As we have previously announced, our 2023 California harvest was completed on time between October and the end of November, early December last year. We achieved a record high production of 3.2 million liters of olive oil and this is a production level 89% higher than what we achieved in 2022 and still 48% higher than in our previous year in 2021. This growth in production was fundamentally driven by increased food supply from the larger area of third-party growth and the contract together with the maturing profile of our own growth and very good levels of extraction efficiencies in our new mill. No doubt, as Sam pointed out, we welcome this increased oil availability to enable us to continue growing domestic sales in the U.S.A. You can move to the next slide. And in this slide, we just see some photos of the first harvest of our 116-hectare Esparto South Ranch, which was planted in 2021. And it's a beautiful property, foothills of the [ sound ] Sacramento Valley with a great initial crop showing the productive potential of the area. Move to the next slide, so staying still in the U.S. We have experienced excellent weather conditions since the end of harvest with over 400 millimeters of accumulated rain and no damaging frost events recorded to date. All the reservoirs delivering water to our groves have above average levels for this time of the year and this led to full district water allocation already announced for the upcoming 2024 growing season. If we move to Australia, we have also -- sorry, we say on the previous slide. If we move to Australia, we have also experienced positive normal weather conditions during winter and spring, significantly above average rainfall during the 3 weeks between the end of December and early January, had limited negative impact on the groves as this time of a year is not a critical period for olive, we've been lucky with that. But having said that, the extra rainfall did have a clear positive impact on reducing our water requirements as Sam pointed out. All arrangements are on track for harvest to begin by mid- to late April in Australia. And precisely linked to the start of harvest, we are excited to invite you all to the official opening of our new mill at Boort on Sunday, the 28th of April. For more details, please check the invitation that we will be sending you soon via e-mail and posted mail and reach out to our staff to confirm your presence, helping us with the organization of the event. We sincerely look forward to seeing you all at Boort because it has been a great project and we're very proud to show it. We'll move to the next slide. In terms of these upcoming harvest expectations, the season is shaping up well with no damaging events to date that could impact the 2024 crop. And unlike last year, this seasonal flowering took place between late October and early November, just a few days earlier than long-term average, which is always a pleasing thing to see. Flowering levels and distribution were largely in line with the company's expectations. Slightly lower than expected flowering levels on limited areas of the Boort grove linked to the wetter than average conditions during the 2022, '23 season have been offset by above-average fruit set levels across all groves and good fruit development to date, which has been confirmed with the latest direct measurements performed just weeks ago. It's obviously subject to normal risks associated with farming and the natural variability. Crop projections for the 2024 Australian olive harvest are within the range of our original expectations. And while the crop yield is projected to decrease in the financial year '24 compared with financial year '23 in most areas of our groves, the current market conditions, as Sam pointed out, suggests that the value per liter is expected to be materially higher than in the previous financial year. We move to the next slide and to finalize our presentation, I'll touch on the key developments related to our growth pillars. These pillars are quite simple and focus on producing more oil from our Australian olive groves through maturing trees and efficiency gains, growing our fully vertically integrated business in the United States, growing branded product sales with a focus on improving the net return per liter and capitalizing on our sustainable position and upcycling of our olive oil byproducts. In terms of Australia and more oil production, the company is in the final stages of completing the replant of 271 hectares at its Wemen grove, just a few kilometers to the northwest of our Boundary Bend grove. This is the last of the replants related to the replacement of the underperforming Barnea variety with that program commencing all the way back to 2010. So we are very pleased that we got to this final stage here. We move to the next slide. This planting that I have just described, and that is indicated in the graph to the right of your screen as 0 years old, you have the full age profile of our trees in Australia, represented by each of those bars while the dark green line describes the oil production levels per year of age of the tree. As you can see, some 10% of our growth here in Australia have not reached productive age yet being less than 3 years old, 25% are still immature being between 3 and 8 years old and 65% of the fully productive trees are still quite young in the expected life cycle of olives with most being 20 years old or younger, having at least another estimated 20 productive years in front of them. Without any new further plantings and associated CapEx in Australia, we will see the mature area grow by 53% over the next 8 years. Now we move to this slide in the U.S.A., in California. And as part of our second growth pillar, this past 6 months have seen the completion of 2 significant growth capital projects and also some additional important acquisitions for further development. The first project was the planning of our 354-hectare Dunnigan Hills range grove. This first-class development was completed in 2 phases between November -- between May and November 2023. And in this slide, you can see some of the photos of this beautiful site that has access both to underground water and surface district water. [ Move to ] the next slide. In this slide, we have a visual in shaded blue of the new farms purchased over the past 4 months and we are intending to develop this calendar year. The first one, right at the left of your screen to the northwest of our recently developed Dunnigan Hills range and the third one to the right of your screen to the southeast of our Esparto South Ranch have been purchased only last month as described by Sam before. I actually wanted to show them together with our existing farms, which are obviously shaded in green because one of the most important aspects of these 221 hectares is the fact that all blocks of land are in prime locations and right next to our existing groves. These obvious reasons allowed us for a larger scale and more efficient verticals for our practices across all those sites as well as more cost-effective overhead management. And another Red Island feature that I don't want to forget is that all new blocks have additional wells, access to district water, housing and all workshops that add to the value and functionality of the overall development. Move to the next slide. Here I'm utilizing a very similar graph for our groves in California than what we showed in Australia and including the plantings that are going to take place over the coming 12 months of age 0. We can clearly see a significantly younger profile of our [indiscernible] in America with only 11% of our trades being over a young mature age, 29% are still immature, so between 3 and 8 years old and a staggering 60% of our farms are yet to come into production with plenty of organic growth to come. Move to the next slide. The second important growth capital project in California has been the first phase of the Woodland site expansion, which was successfully completed in time for the 2023 California harvest. This investment doubled our milling capacity from 32 to 64 tonnes an hour and you can see sort of all the lines there in the photo to the left and increased our olive oil storage from 2.9 million to 4.5 million liters. The expansion of the finished goods warehouse and the installation of a new bottling line to handle the current and forecasted growth in production and sales is being implemented right now. We move to the final of my slides on the sustainability, innovation and value-add pillar. We are pleased to see that since these half-year results, as Sam have shown, this pillar has become a profit center for the company. As part of the zero waste strategy, we continue to add value to the byproducts of our operations, keeping our focus on the internal use and business-to-business sale of olive biomass and ingredients to food manufacturers, nutraceutical companies, agricultural operations, hospitals, nurses and so on, mainly as a renewable energy source for heat and electricity, but also as organic soil amendment amongst the other uses. It is also pleasing to see that those efforts continue to be externally recognized through a number of awards and also the accreditation of our California operations under the Leading Harvest Farmland Management Standard for sustainability. And this brings me to the end of our half-year results presentation, but we will be happy to take any questions that you may have. So Russell may join us and help us to coordinate your questions and the answers.

Thanks, Leandro. The first question we have from [ Taylor ] from Barrenjoey. [indiscernible]

Are you able to hear me okay?

Yes.

Perfect. Just in terms of the current growing conditions and weather in Australia, that's been a key to date, but could you talk through what we should be looking out for over the next couple of months that could positively or negatively impact yields between now and harvest?

Sure. The main process that is taking place at the moment is what we describe as oil accumulation. So essentially, the fruit is growing and building up the amount of oil in the fruit. So what we are seeing over the next 2 to 3 months is the final definition of how much oil will be in the first, which obviously can have an impact on the final yields. What we're looking at the average weather conditions, the closer to the average weather conditions, the better will be for the trees. We are hoping to avoid extreme heat temperatures for prolonged periods of time or seeing a very early onset of cold temperatures in autumn. Provided that conditions stay average, that's what we normally look for, especially because this year things have started a little bit earlier. So we're getting timely bit of head start. We just hope that to continue throughout this period.

Okay. Great. And then just, Sam, also on Australia. So sales growth was pretty strong in the half. Can you just comment on what you're seeing in terms of the consumer backdrop at the moment in purchasing habits and if you're seeing any signs of customers trading down?

No. Look, we are -- and I think the backdrop to this is the well shortage of olive oil has really led to a significant increase in pricing, particularly for imported products. We've certainly been a beneficiary of that. We've seen consumers switch to our product. We have taken market share. And what we typically find in the past is that when consumers try high-quality extra virgin olive oil like ours, they'll typically stick. But certainly, the volumes and the sales rates remain strong.

Okay. Perfect. And then just last one for me. On the U.S. and now that we have that 3.2 million liters of olive oil, how should we think about the strategy there in terms of sales and profitability growth? And will you be reinvesting any of the U.S. profits back into the brand profile there?

Yes, absolutely. I think the first point is that as a business, both in Australia and the U.S.A., we only put around the best half of our oil into Cobram Estate. So private label in the U.S.A. and Red Island in the Australia play an important role in that. We continue to and will continue to educate consumers around the amazing quality of both California and Australian olive oil, the freshness of it and the taste. So that's really part of our ongoing marketing strategy, absolutely.

Next, we have Jonathan Snape. Go ahead Jonathan.

Can't hear you, Jonathan.

No.

Why don't we go to the next, Russell and then we can come back maybe to [ Jon ].

Next, we have Ian Munro.

Just 1, just on the production profile. If we look at Boort, obviously got quite an immature grove profile relative to Boundary Bend. Are we still sort of 70-30, 65-35 in terms of the split between the 2 sites on sort of high-level assumptions?

It depends on the year. Obviously, I agree with you. I mean in terms of overall area, both sides have very similar area with both being [ Matianga ], but Boundary Bend, remember had [indiscernible]. And so in off years, particularly this coming off year the proportion will be much closer between the 2 groves. And we expect that, obviously, over the years to get and consolidate around that 50-50 split. But in on years, particularly in the past on years, the distribution was around the percentage that you gave.

Yes. So what we're saying is, even with the rainfall in Boort, essentially, it has come at a time when it hasn't disrupted oil accumulation in your field, so with -- a dry water will probably make up for some of that excess rainfall because I note that the actual millimeters fallen at Boort is comparable to the prior year. So just trying to get my head around any kind of risks to volume into the second half.

The significant difference that happened between this year and the past was that last year, a lot of the excess rainfall occurred during springtime linked to pretty cold temperature conditions that affected flowering and fruit set. This year, the, let's say, excess rain happened over a shorter period of time and after flowering and fruit set, which is a period for the trees where the trees are a lot less susceptible to exposure to this condition and with temperatures have remained relatively normal. So they didn't drop below long-term averages worth potential.

Excellent. Just looking at the commentary around some constraints to olive oil availability into the second half, just in Australia, sort of just trying to get a sense of whether there's any skew to volume in the first half. Obviously, you got sort of the seasonal strength around Christmas time, et cetera. But is there any sort of unusual skew to the first half that we should be thinking about?

A little bit, like Christmas is always a little bit bigger. I think last year, we had a skew towards the second half for a number of reasons, availability of Californian oil and we sold a lot of our low-value bulk in the second half. This year will be more consistent, half 1 compared to half 2. The comment around constrained is that we've got so much demand at the moment for our olive oil that unfortunately we can't supply that demand. So we're carefully managing it. We've got enough oil in our tanks, obviously, for all our customers. But yes, we wish we had another couple of million liters.

Yes, exactly. Very valuable at this point in time. Just a follow-up on the CapEx, perhaps just into the second half. So we've got replacement at Wemen, the new groves or land acquisition in California plus BAU CapEx plus upgrade of the bottling facility at Woodland. So are we thinking sort of CapEx in the second half similar to the first half? Or is there any other adjustments to be thinking about?

Yes, I think that's a fair comment. And obviously, depending on land acquisition in the U.S.A., we secured that funding, which we've used around half of it. But, yes, most of the CapEx going forward outside of what we call maintenance CapEx will be channeled to the U.S. and around increasing supply of Californian olive oil.

And so just, I guess, taking into consideration Leandro's comments, this is kind of -- are we thinking FY '24 as, I guess, a peak CapEx year for Australia once this replacement work is done at Wemen that then really the incremental CapEx is more skewed to the U.S.?

Yes, that's right. I think FY '23 in terms of the split between Australia and the U.S. was probably the peak for Australia. And this is the last of our redevelopment projects, and we've developed a mill to -- the mill and capacity for full maturity. So yes, that's a fair comment.

Congrats on the results.

Thanks, Ian.

All right. We'll try Jonathan again.

Have you got me this time?

Yes.

All right. Can I just ask you a quick one, sorry if this was asked, I jumped off and jump back in again. Around the pricing comments, particularly around the crop valuation because, obviously, that's one of the biggest drivers for the second half and how you're going to bring this stuff into account. But you pushed up pricing in Red Island in February last year, you pushed up the Cobram packaged formats earlier, I remember, it was early 2024. So are you talking about another round of shelf price increases in excess of what you've already done over the last 12 months? And then should we expect to see the benefit of that brought to account at farm gate kind of when you're doing the crop this year, if that's the case?

Yes. So the second question is probably easier. But yes, you would see the benefit of any price increase. The valuation of the crop is based on what price we expect to sell that all for over the next circa 12 months, obviously, less selling costs. In terms of pricing at the moment, it wouldn't be appropriate to comment on it, but it is under review. And yes, it is in addition to what we did last calendar year.

Okay. Because you've used the word the materially higher crop valuation, which implies that you must really have, I guess, a clue in terms of what the uplift would be? Is it -- when you're looking at -- I know you don't disclose the crop valuation, which you kind of calculate it, would it be a similar kind of step change to what we saw last year? Or would it be bigger?

Look, I think...

It's not -- it's -- we don't make forecasts on crop size and crop valuation. But as you pointed out, we did increase our pricing in Cobram in October and then the impact of what we're doing now will be inflected in the crop.

Combined with a higher proportion of high-value products that have been selling so that is a combination of previous price increases and the combination of the type of product that we're selling now that certainly is an improved position in comparison with the previous year.

Okay. Okay. And look, on the intercompany sales, it's been quite large last 2 halves, it looks like [indiscernible] of product over the last 12 months from, I guess, in Australia over to the U.S. business, and then that's probably going out in a branded format. How should we be thinking about that going forward? I mean, historically, it seems like it's been a bit of a tool for clearing positions, particularly there's low-value stuff. But how should I be thinking about it in those outward years and particularly into the second half? Is it something that's going to be ongoing? Or is it part of just that clearing of last year's lower quality stuff?

Yes. Look, we have a -- we certainly -- we have a big customer base in the U.S. and particularly in relation to our low-value oil, which we -- is always around at least 5% of our oil that we don't put in bottles. It's really about the highest price we can achieve. And as I said, we've got a strong customer base. It's all B2B transactions. So we would expect an ongoing program of selling bulk oil in U.S. We did do a small trial of Australian oil and we have some smaller private label contracts in the U.S. It's not a material part of the sales in the U.S., but we continue to work on strategies to move some of our oil in the U.S.

Next we have Larry Gandler.

We are not hearing you, Larry. Don't seem to be unmuted. Not he is mute. [indiscernible]

Yes, let's move to the next. We'll come back to you, Larry. We've got [ Peter Parker ].

Sorry, we are not hearing you either. Let's move to the next one then.

I will try Larry again.

Can you hear me now?

Yes.

Yes.

Great. Okay. Well done on the result. I guess a few questions for me, obviously. So with regards to this constraint around the second half, I'd like to explore that a bit further. Looking at the balance sheet, oil inventories were down about 25% year-over-year, not versus the end of the financial year. So looking year-over-year, down 25%. I guess with California being a good harvest, values up, I would have to think that leaders are down more than 25% for Australia. So when I'm looking at your packaged sales last year in the second half, the June half, it was something like, I don't know, AUD 65 million. I know you don't want to give a forecast, but you guys may not be able to surpass that given your inventory constraints. Is that how constrained things are? I don't know whether you can maybe put some more color on how things -- how constrained things are maybe creeping.

Yes. We're seeing really strong demand. We did -- going back to this time last year, we did sell a lot of our lower value oil in the second half of the financial year. So that would explain some of the difference. We have -- in terms of inventory in our tanks, we've got enough inventory for all of our customers. Like we said, we wish we had more because we've got unprecedented demand. And we have a lot of tools to be able to manage that supply in terms of depth and frequency of promotions. But I think, as I said earlier, the comment is more around that we're not -- we won't see the skew in sales towards the second half like we did last financial year that half 1 and half 2 across the group will be more consistent.

Okay. That's actually good, I guess, that's helpful there in terms of working how to predict that. I guess, Andrew, one question I've got for you, I'm sure you watch what's going on in Europe very closely and how that's going to drive tactics and strategy for you guys. Looking at Spain, the weather in January has been very warm. And from what my -- I'm very much in newbie here, my understanding is that the olive trees need to hibernate, they need cold weather in the Northern Hemisphere winter. I'm just wondering what your observations are as we come out of the Spanish harvest for their next on year. What are you thinking there?

I've learned one thing over the past 25 years that [indiscernible] difficult to predict. But certainly the whether -- the temperature can play a role, as you pointed. Rainfall is another thing that normally is very closely looked at. In Spain, so far, they had below average rainfall for the winter period. February picked up a bit with about 50 [ mills ] in the main area. But so far, they got only 100 mills accumulated since November, which is not great news, but they're coming from an off year. So the expectations are that trees should have good potential for the following year. It's all come down to see how much the temperature or the low rainfall can potentially shave off from that potential on our on year. [indiscernible] still a long way to go for them. Flowering is in May. Temperatures can impact. We hope -- almost hope that conditions improve a bit in Europe just to normalize the market a bit. We still don't worry too much about that. Obviously, with our strategy, we just always try to focus on growing our branded sales and remove ourselves from that sort of commodity and currency risk that usually agriculture has, and obviously, we are not directly benefiting from the high prices in Europe or what may happen if there's a bad crop. We're just trying to really strategically capitalize on the positive environment that Sam mentioned, just to improve the penetration side of our brands and really looking after medium and long-term contracts with those partners that really value quality and security of support. If anything, the [indiscernible] have to realize that it's not that secure the supply of olive oil from the major rain.

Okay. Great. I get that. And one last financial question for me, Sam. Just in terms of payables, they're up about AUD 15 million in the period. Just wondering if that's anything anomalous and whether it's going to reverse in the next half?

Yes, good question. The majority of that -- so our trade payables, if you like, there's been no material change. The majority of that relates to the U.S. expansion where basically big milestone payments were due in January. So not -- it won't reverse through operating cash flow, but it will be recognized, obviously, in CapEx, cash flow.

Next, we have [ Michael Johnstone ]. Go ahead, Michael when you are ready.

Looks like it's still muted, Russell.

Still muted.

Yes. Michael, we will jump to -- we'll move to [ Mark Topy ].

We'll come back to you, Michael.

Go ahead, Mark.

You hear me all right?

Yes.

Yes, Mark.

Terrific. Just first question, I suppose with the pressure on supply. Sam, I'm just wondering about product mix and you've got a picture in front of us there of higher-value products. I'm just wondering how you're thinking about allocating the oil to higher-value products versus perhaps Red Island? Is there a bit of thinking around moving the oil into and getting a better margin on those higher value product as you go forward?

We've certainly never and we will never compromise on quality. So obviously, the Cobram Estate range has our highest quality oil then Red Island and then private label. So certainly nothing. It's something that we wouldn't do. Of course, it's more around frequency in debt for promotions, which you can somewhat control demand.

Right. And just on the bulk side, what's happening in terms of third-party contracts? What's the sort of level of production is your planning going on? Can you see more ability to trade in some of that third-party production?

In Australia or the U.S.A.?

In Australia primarily, yes.

There's not that we're seeing not significant amounts, but I'm sure in this environment may stimulate plantings. And we always work with parties in terms of cooperation around processing and marketing partnerships like we have in the past. But no, we're not seeing any material plantings go in the ground.

And Mark I mean, we obviously -- as we communicated before, we have some long-term ever-growing agreements with important growing partners in Australia. Most of the trees are sort of immature, but obviously, the production is going to be growing over the next few years, roughly in line with our own production as well. And certainly, that will contribute in '24 to increase the amount of oil available for us for Australia.

Okay. Great. And just then on the cost side, can you comment like, a lot of food companies you're seeing a lot of cost pressures. You've obviously got benefit on the water side. But can you maybe touch on the pressure on the cost side and then how you're managing that?

I think like any business, there's cost pressures with items such as wages and some of the admin type costs, service costs. But our major input costs such as energy and particular engine and fertilizer have stabilized, if not at lower levels. And yes, so we're pretty comfortable with where that's sitting across the group. Like we said, water has increased, but it's still well below long-term average and our water costs for the full year will be roughly in line with what we expected.

Great. And then just lastly, in terms of the U.S. market and maybe shortages or rather Europe, can you give us a bit more insight as to what's happening in the U.S. market? And I think in Australia, over time, we saw the 30s and the market embrace the Cobram brand. How do you see that progression in the U.S. of, if you like, the consumers embracing the local brands and making a shift to higher-quality product?

Yes. I think as most of us know that in the U.S., the shelf is dominated by lower-quality imported oil. And certainly, over the last 5 to 10 years has been a trend towards higher quality, locally produced olive oil. We're obviously a beneficiary of that. I think in terms of what's happening on shelf similar to Australia, the imported brands are having to increase their prices multiple times. And so we're, again, in a favorable trading environment in the U.S.A.

I think just to add to that question, Mark, if we analyze probably the global trend to what happened over the past 24 months, and we've checked on the price elasticity, the world has seen a very different behavior in Mediterranean countries like in Spain, where the consumption obviously fell more sharply over 25% as opposed to countries like Australia, Canada, Japan or the U.S.A., where consumption particularly at retail level did not really change much. So it surprised many about the relative inelasticity of the olive oil in those countries outside Europe. So it changed really a bit. And to put it in perspective, if we looked at 25 years ago, 3/4 of the olive oil in the world was consumed around the Mediterranean and now 2/3 of olive oil is consumed outside the Mediterranean. And that obviously created a big shipment change in terms of how the industry reacts and that was being one of the reasons driving the higher prices.

Great. And just so -- just to close off on that then, what do you feel you need to spend in terms of brand promotion in the U.S. going forward? Or how do you see that in terms of building the brand?

Well, we've been building it for a number of years now. And obviously, marketing in the U.S.A. is quite different because of the scale. So it's cost prohibitive to do a national campaign. We're focused more around public relations. We do a lot of work in digital, but we also spend a high proportion of our marketing spend in store, so trade marketing, so whether we're promoting the product through promotions or discarding in-store and that. So there's a slight difference in our marketing approach. But we're marketing some messaging around high-quality, locally produced, fresh great-tasting extra virgin olive oil.

We will try Michael again. Michael, if you could just unmute.

Can you hear me?

Yes.

Yes, Mike.

Okay. I've been busily pressing unmute consistently for a while, so I'm glad it's got through. Anyway, Sam, Leandro and Russell, thank you very much for the continued performance and presentation. Just very quickly on the AUD 15 million land loan. Is there anything significantly different in the conditions of that loan, apart from the length of it? And obviously, that's included within the roughly 30% gearing level. And allied to that on a go-forward basis and as much as fundings required in excess of that, that comes from operations, are you seeing sort of bank debt as being the normal source of that funding?

Well, I think we are, as a Board, comfortable with the debt levels, and we obviously assess that based on the increasing asset base, increased profitability and cash flow. In terms of your question around the new loan, yes, as you said, it's a 15-year loan fixed interest rate, it amortizes over that period. There's -- the main difference is there's no link back to the Australian assets. So it's purely secured against the land in the U.S.A. and the operations in the U.S.A. So very much a stand-alone funding that we'll use to purchase land.

And then we have in [ Lindsay Stubs ] who is our last question. Just unmute please, Lindsay.

I had 2 questions. You referred to Wemen grove and I think you said you were replacing trees. Is that because of their age or because of their variety? My second question was, I seem to remember from the annual report you had land in Argentina. Do you still have that and what were your plans? And my third question, I think that you've just answered. So just the 2 questions.

I'll let you talk, Leandro.

Thank you. Yes. I'll cover them. The replacement of the trees in Australia is mainly driven by a varietal issue. So very early on, 20-odd years ago, when the company started, and there was not a lot of data in Australia, a number of different varieties were planted. Between those varieties was one variety called [indiscernible] that then over the years of provincial be underperforming other varieties that were sort of next to it for a number of reasons, particularly higher susceptibility to fearsome diseases. And it became a logical financial decision to gradually replace those underperforming trees. And that was the main driver for that, not the age, but the performance of the variety versus other varieties doing much better. In terms of the land in Argentina, we haven't done anything with that land yet. Although we continue to be of the view that finding large-scale land to develop projects, similar to what we have in Australia or around the world, is very difficult with the right climate and the right water. And we hope that at some point, we are able to capitalize on that in some shape or form.

Just going back to your first answer. I see you're planning varieties, Picual, Coratina and Hojiblanca. How long before they will be sort of producing? Is it 5 years or 7 years or...

In the system that we use, the first harvest happens at year 3. It's a limited harvest, barely covers the harvesting cost and that increases over time until the tree reaches -- matures at about year 8. It's a fairly linear growth in production between year 3 and year 8 that we have tree reach its maturity.

And we have Peter Parker back. Hopefully this works this time. Just unmute please, Peter.

Sorry, we cannot hear you. Still not able to hear you. You seem to be muted now. But we still cannot hear you, Peter. Sorry.

I think what we might do is we'll try and -- we'll contact Peter directly and answer his question. I think -- or Peter, if you could e-mail the investor e-mail with your contact details, and then we can answer you directly because it looks like your line is not working.

And, yes, we just wrap an hour of our presentation.

And that was it for questions, Sam and Leandro.

Fantastic. Thanks, everyone, for joining us, and really appreciate everyone for staying on for the questions. And as always, please reach out directly if there's anything else.

And thank you Russ for the support.