Scales Corporation Limited (SCL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Scales Corporation Interim Results conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Andy Borland, Managing Director. Please go ahead.

Good morning. I'd like to welcome you all to the Scales' half year results announcement for the 6 months ended 30 June 2020. With me today is Steve Kennelly, our CFO. Earlier this morning, we lodged our results with NZX, which included a presentation pack that we'll base our comments on during this call. Steve and I will run through the presentation slides, and we'll then take questions. An agenda is provided on Slide 2. We'd like to cover our response to an effects of the COVID-19 pandemic as this has obviously had consequences for each of our businesses. On Slide 4, we've summarized some of the key strengths that we believe represents Scales and which have been core to ensuring that the group has operated successfully throughout the recent COVID-19 pandemic. These are uncertain and unusual times, but we're proud of the way that our team has united and how our diversification strategies and vertically integrated operations have served us well. We've benefited from having a strong financial position and of course, our hard working and courageous team. We look forward to building on these strengths, whatever the future holds. Our ability to operate during the lockdown alert levels wouldn't have been possible without our people, so their health and safety was our foremost priority. Some of the practice put in place are noted on Slide 5. We're pleased to say that all staff were retained on full salaries and wages without making use of the government subsidy schemes. However, this did impact us financially from a cost and productivity viewpoint. Our RSE and other workers were supported until they could be repatriated, and we continue to take part in discussions with government around the future of this vital scheme, a scheme without which, the Horticulture industry would face considerable labor shortages. Moving on to Slide 6. Each of Scales' businesses were and still are in the privileged position of being deemed essential. As I've already mentioned, we're grateful for the efforts made by each and every staff member prior to, during and after the initial lockdown period. We wouldn't have been able to continue trading, had it not been for the overall team effort, particularly in Mr Apple, when lockdown occurred during our busiest period of the year; advice and direction we received from the Ministry of Primary Industries at the start of the level 4 lockdown period around safe practices in the workplace and transporting goods, and these were implemented swiftly in accordance with best practice. However, as recent resurgence of COVID-19 has shown the ongoing effects of the virus will continue for some time. We believe that the diversified nature of Scales and the resources available to us will allow us to operate successfully over the short to medium term as the pandemic evolves. Whilst the pandemic has created some uncertainty for our operation and in global markets overall, we believe that we can operate successfully in a new normal, as noted on Slide 7. We continue to maintain elevated hygiene practices and policies that are in place that will allow us to transition back into lockdown, if required, and the current lockdown in Auckland serves as an example of this. We're also looking forward cautiously, but proactively to the future, working closely with New Zealand government agencies on the RSE scheme as well as continuing to investigate potential investment opportunities. We have confidence that we'll continue to operate successfully in the new COVID-19 world. Turning to Slide 9 and some first half financial and operational highlights for the group. Given the current pandemic conditions, we're happy to report a half year underlying NPAT of $29.2 million and an underlying EBITDA of $44.4 million. These are only 3% and 6% down on prior year, respectively, although the earnings mix by division does differ from prior years. Mr Apple benefited from having sufficient resource during its peak period to harvest record export volumes of 3.9 million TCEs. However, COVID-19 did disrupt supply and demand, particularly in Asia and the Americas. I'll touch on that more later. Food ingredients benefit from increased demand for Petfood as customers sought to shore up supply, providing us with an outstanding result for the period. Moving on to an update on sustainability on Slide 11. Once again, Karen Morrish and her team had a busy 6 months with the additional impact of COVID-19 to deal with. By ensuring rigorous health and safety processes in a safe working environment, all our businesses were able to run effectively in lockdown throughout their peak periods. We're also proud to support a number of community initiatives both here and in China, and we're continuing to supply apples into national food bank networks. Some environmental highlights from the last 6 months include a reduction of level of waste that goes to landfill, commencement of our climate change adaptation project and continuation of the management, monitoring and protection of our water right resources. Turning to Slide 12, and the subheading there says it all: more than ever, it's all about our people. Without their dedication, care and attention, the business could have experienced quite a different result. Some of our people-focused initiatives include concentrating on health and safety critical risks and related training schemes, development of 3-year health and safety strategies for Mr Apple and Logistics, initiation of pay equality review throughout the group and the launch of an intranet for the Board and senior management so they can more easily access their policies and procedures. I'll now pass over to Steve to discuss the financial results for the first half of the year. Steve?

Thanks, Andy. Turning to Slide 14 and our group financial performance. As Andy has noted, group underlying NPAT for the 6 months to 30 June 2020 was $29.2 million with underlying EBITDA of $44.4 million. The table on this slide shows a reconciliation of our underlying results to our NZ IFRS reported results. And as you see, as there has been less M&A activity in the first half of this year compared to the first half of 2019, our underlying reported numbers are more comparable this year. If we move on to Slide 15, you'll see a summary of our divisional performance comparing the first half of 2020 to the comparable period last year. In addition, we've summarized the results from the second half of last year, which highlights the seasonality experienced by Horticulture and Logistics, in particular. It's important to note, as Andy commented earlier, the Horticulture division was affected by COVID-19 lockdowns. Whilst the division experienced strong sales into Europe, it was adversely affected by unusual sales patterns into Asia and near markets. As a result, the division's results are behind the same period last year. It's also worth noting that NZ IAS statements require us to measure unsold agricultural produce at fair value less cost to sell. This means the expected profit on our unsold fruit is effectively recognized in our interim result, and this results in additional seasonality and profitability. Food ingredients benefited from strong first half demand as customers prepurchased Petfood ingredients. Logistics continue to trade in line with last year. Again, you'll note that Logistics' profitability is seasonal due to its exposure to the agribusiness sector. Turning to our balance sheet on Slide 16. We continue to be in a strong financial position with net cash of $54.8 million as at 30 June 2020, providing us with leverage for future investments. And as noted on the slide, there was an increase in agricultural produce inventory at 30 June 2020, compared to 30 June 2019. This was due to a higher percentage of unsold fruit at the end of the period. As previously mentioned, this was due to supply and demand in the Asia region being affected by COVID-19. However, as at today's date, only around 20% of fruit remains to be sold. I'll now hand you back to Andy, who will give you a further update on each division.

Thanks, Steve. Slide 18 provides a summary of Mr Apple's volumes this season. Pleasingly, the final export crop is 3.9 million TCEs, ahead of previous guidance and also representing a new record for Mr Apple. Our export packout is approximately 76%, slightly lower than last year's rate of 79% due to a lower packout on the final packed volumes. Premium variety volumes continued to increase, up 6% compared to last year, and we're delighted to see significant increases in the sales of our newest brands, Posy and Dazzle. Turning to Slide 19 and a summary of horticulture markets. Our overall strategy of diversification in both geographical and channel markets proved more than ever to be a benefit this year. Whilst we remain committed to the Asia and Middle East markets, we continue to -- our continued participation in Europe and U.K. markets provides us with an ability to withstand the effects of COVID-19 around the world this year. Our investment in Fern Ridge Fresh also provides us with an alternate export channel for Horticulture produce, and that continues to perform well. I'd now like to talk about Horticulture's margins starting on Slide 20. We recently undertook a comprehensive review of profit margins within the Horticulture division. This review identified that Mr Apple has experienced a 4% decrease in EBIT margins over the 5-year period from 2015 to 2019. The principal reasons for the decrease were identified as increases in labor and compliance costs, which have only partially been offset by increased orchard gate returns. We're aware that the vision -- that the division continues to face headwinds in respect of margins. And accordingly, Andrew had been working -- and his team, together with direction from the Board, are focused on initiatives that will maintain the existing margin rates. These initiatives include continuing maturity of recent redeveloped orchards with premium varieties, particularly Dazzle and Posy; adoption of innovative new 2D planting techniques, which will allow trees to be pruned, thinned and picked more efficiently; development of the division's new efficient cool store at Whakatu and a comprehensive review of orchards and varieties in order to achieve higher values and yields. Slide 21 shows the trajectory of EBIT margins in recent years, as outlined by our margin review work. Whilst 2020's margins are still to be determined, we believe that these are likely to be below recent years, primarily due to pricing pressures in the Asian markets due to COVID-19. However, we also believe that these pressures will be temporary and that margins will return to more normal 2019 levels from 2021 onwards. Moving on to the Food Ingredients division on Slide 22. Food Ingredients experienced an outstanding first half of the year with 116% increase in profitability, mainly as a result of customers' preordering inventory due to COVID-19. Shelby, in particular, was able to capitalize on these opportunities, resulting in a 14% increase in the division's volumes compared to the same period last year. The effect of COVID-19 on the division and on the industry in general remains uncertain. However, we are seeing numerous reports of global increases in pet adoption rates, which we consider to be positive for the industry in the medium term. John Sainsbury, Brett Frankel and their respective teams are focused on how the pandemic is affecting the Petfood industry, and where possible, will take steps to benefit from those changes. Profruit also performed well, benefiting from high fruit brix and exceptional yields. Accordingly, its sales are ahead of the same period last year. Turning to logistics on Slide 23. Logistics continued its gradual upward trend, generating a profit slightly ahead of the first half of 2019, thanks to the hard work and initiatives of Kent Ritchie and his team. Whilst the airfreight services experienced some disruption due to COVID-19, the division benefited from exposure to the essential agribusiness sector. We have confidence that the industry and the government support will ensure there is sufficient airfreight capacity in future periods. We've also decided to combine our sea and airfreight businesses under one Scales Logistics brand. This will be rolled out over the forthcoming period. Lastly, on the full year outlook in Slide 25. As noted in our recent business update, we anticipate that our full year underlying net profit will be at the bottom end of our previously advised guidance range of between $30 million and $36 million. This takes into account the impact that COVID-19 has had and continues to have on our -- on each of our businesses. Horticulture is expected to experience ongoing disruption in global markets, but we believe Food Ingredients will continue its strong performance and Logistics is expected to be in line with the expectations due to agribusiness customers' volumes. We're continuing -- we're currently reviewing a number of possible investment opportunities, and we continue to proactively seek out further investment opportunities. However, ability to review, meet with management teams and conduct diligence has been hampered by the inability to travel. Furthermore, whilst offering up opportunities, we naturally wish to proceed cautiously in the current uncertain climate. That concludes today's formal presentation, although we point you towards Appendix 1 of the presentation pack, which provides additional financial information that reconciles underlying earnings to reported earnings for each of our divisions as well as the group. We're now happy to take questions.

[Operator Instructions] Your first question comes from Guy Hooper from Forsyth Barr.

First question for me, just I guess on the Horticulture business. What does the result imply for second half apple prices? Are we assuming prices remain soft? We can further strengthen? What's being assumed in that?

So we've valued our unsold 30 June stock at what we believe the prices will be at, and that's really I think a continuation of where they were at 30 June. So we're not anticipating any further weakening.

Yes. Is there -- I guess any -- what are stocks in China like at the moment in terms of apples? Is there any risk that they could weaken? Or how long is that I guess the bigger domestic crop likely to be an overhang on prices?

No. Guy, it's all gone now. The harvest was started. But the real issue there is that we'll -- the latest season that we're selling are under programs, retail programs, we've got up there. So we're relatively -- we're aware of the market conditions and understand them. So our programs where our late Queens are settled, if you like, but just have to continue through. We're continuing with likes of Europe market right through till October, November.

Okay. And then just I guess on the Food Ingredients business and the growth. Can you give us a bit of color as to what exactly the drivers were? I mean you've called out both pull forward of demand which -- does that mean you think that there's a possibility the growth softens in the second half? And then there's also reference to like new volumes or new business in the U.S. Is that new customers? How recurring is their growth?

Yes. Look, Guy, I think -- yes. We are expecting the sort of overperformance to even out. I mean but in terms of -- people did stockpile a little bit, I think. But I think the general trend around the increased pet adoption rates has also driven an increase in -- an overall increase in demand. So I think if things do stabilize -- we're happy, though, that we've got new products, and hoping to start up operating out of a new facility in Dodge City in the U.S. for Shelby in the later -- last quarter of this year which will contribute, if you like, new volumes for 2021 anyway.

What does the new facility do for capacity? How material is that?

Well, it's just -- it's right beside a big beef plant. Yes. And so it does provide additional volumes of like frozen -- plate frozen material. And so we've sort of linked it right beside a meat -- a large beef plant. And then it will go, if you like, across the road into a plant that we've -- going to start operating. And that will just add net volume to our Shelby business in America.

So have you bought that plant? Or you're leasing it? Or...

We're just operating it under sort of a -- like a supply contract.

Your next question comes from Mei Zi Ho from Nikko Asset Management.

Just got a question on the Horticulture side. I think Guy had already touched a little bit on that. I just want to dig deeper. You said this year, you had price pressures on apple sales and particularly in Asia. How confident are you that given COVID may still be around that, that's -- what are you thinking of mitigating that same result again next year, if you like? And how you see it playing out next year? Just trying to see if there's like a structural kind of change in terms of maybe the change is like it was at coldstoring the apples more and it'll affect price? What are your thoughts around that?

Yes. Look, we are calling sort of this impact, particularly in China, as a COVID-related event. If you see, their lockdown started on the 25th of January and went to the 25th of March. So they're exactly 2 months ahead of us. And during their lockdown, their large crop that they had last year didn't move much and then started moving when our window sort of opened. So it clashed. So that's -- really is a one-off. We don't expect that to be happening next year. And so the -- what we're seeing in the market, what we're hearing in the market is very much the COVID-19 impact in Asia did slow that market, and it should revert to normal next year, or whatever it looks like. But we don't expect to see that price pressure and that volume pressure to be repeated.

Okay. And just one more question for me. With regards to your RSE season, you said you were working closely with the government. Do you have anything more to expand on that? Like what kind of -- are you seeing problems in getting workers to New Zealand? Or what are your traction on that government so far?

Well, we've been a very -- the industry body, New Zealand Apples & Pears, all horticultural -- and Horticulture New Zealand, they've all, if you like -- working with the various government agencies to discuss and establish ways of bringing the RSE workers back in. Clearly, that's had a little bit of a hiccup, if you like, with this Auckland outbreak. But we feel like -- well we're expecting that most of them are coming from countries that don't have COVID. And so there should be some sort of system to being able to have them come from their non-COVID country to our under control COVID country and working safely and effectively. So that's what we are hoping for and anticipating to be agreed with the government. But reality is, that's -- those -- the workers need to be back in the country in the November, December period and moving then on into the critical harvest period for us, which is March, April.

Right. So would you say that you are confident or positive in that kind of time line to bring them back?

Yes, yes. Why not? I mean we -- it's an essential scheme. It's a very win-win scheme. So the Pacific Island countries, Samoa, Tonga, it's very much -- just those examples, Vanuatu, very much rely on it for export earnings, if you like. They're exporting labor. So it's a win-win, and we would expect some sort of common sense to prevail. But -- and also that the underlying thinking is that the workers and the communities they work in will be able to remain safe. That's the MPI setup, if you like, from the -- that helped us to stay working, and lockdown 4 was very much predicated on -- you're able to work if you can keep your workers and the community safe. And I think we proved that very effectively. And by the way, of the processes that we put in place to our change of our operations, and we would expect that to continue for the 2021 summer harvest.

[Operator Instructions] Your next question comes from Chris Byrne from Craigs IP.

Just can you give us a bit of an indication of what trends have been like, let's say, over the last 6 weeks for like -- for Food Ingredients, which has had a ripper of the first half. Have things sort of tapered off? Or are you sort of seeing other businesses where demand is holding up quite strongly, and it's quite difficult to determine what's going to be ongoing and sustainable versus what was sort of I guess stocking up?

Yes. Well, look, we are expecting the second 6 months to be, if you like, solid again, if you like. So it's -- we're not seeing demand coming off. If anything, because of the problems in the U.S. market in terms of the ongoing COVID and like the large meat packers, we are very, very short of stock. So we -- so if we had more stock, we would have more trade, but we've got enough to keep trading at pretty good volumes. So no, I think feeling like the demand is holding at this stage anyway, Chris.

Okay. And in terms of -- into the Horticulture business, the actions you're taking to sort of drive margins back up or certainly hold them in FY '19 levels, do you see some upside in margins in that regard? I mean if you expect pricing to revert to more normalized levels in Asia and you are taking these actions to sort of take that cost out, get efficiencies, more higher value varieties being planted, do you see some upside to those sort of numbers?

I think we see pretty good, solid performance '21 on. If things revert to that 2019 level in terms of margin, but also then, these initiatives start kicking in. So very much expecting -- I've got high hopes for the values of sales for Dazzle and Posy. Very much pivoting quickly towards having an online portal up in China because we -- that's obviously been a big shift, if you like, or they've just shifted further into e-commerce sales. So all of those things are really expecting to see -- normalize those Mr Apple earnings or back to a more normal situation. And these initiatives will contribute to ongoing good performance. That's our thinking.

Okay. And in terms of just your experience over the last several years in apples. In terms of -- you see some new price points being hurt in Asia because of their existing apples has been competing with yours. Have you seen in the past where that sort of anchored prices into the next year? And it can take a year or so or 2 seasons before we get back to more normalized pricing? Because they sort of say "Look, well, these are the prices we got the apples for last year." And that just gives you more confidence to negotiate more? Have you sort of seen that in the past? You said it takes a couple of years to sort of clear that towards normal previous pricing levels?

No, that isn't -- we I don't think I've ever seen that, Chris. I mean I think it's -- it does seem that has had a one-off effect by that, their very large crop being held up and that having an impact. And that did have a -- COVID had an impact around all of Asia. I mean Thailand is normally a very strong market for us. It was harder this year. The best market in Asia this year was Vietnam and later in Taiwan. And I think it was because both those countries really handled COVID well. And so -- no, look, we would expect next year China and Asia to be what we would call more normal and not have that impact of their crop being late in our season.

Okay. And just finally one from me on the Food Ingredients side of the business. You obviously got a fair amount of cash for investment as well not just acquisitions. I mean with that business going very well, I mean I know you're looking at opening another on a supply contract basis in the new facility you've talked about. But are there opportunities to accelerate investment into the Food Ingredients business that you're sort of looking at, given what's happened over the first half?

Yes, there are. And to be fair, they're mainly in the U.S., so not being able to get up there is a little bit of a -- holding us back a bit. But we've picked up great people in the Shelby business. And yes, we're sort of now telling them, "Well, we don't know how long it is before we can get up there." So we're getting them to get on with proactively looking at some of these new opportunities. So we've -- there is -- it's a huge industry in the U.S. and Shelby is very well placed and highly regarded as a team. And we are -- got some good opportunities to look at up there for both I would call it, organic growth, but also by potential, if you like, bolt-on acquisitions.

Our next question comes from Christian Bell from Jarden.

I just wanting to build on a previous question asked around Slide 21. You've got the EBIT margin drag through time. Just what -- even though you just addressed that, just what exactly are the assumptions going into that? Like I mean because you've got a combination of the premium varieties coming in, cost-out initiatives, sort of like are you kind of -- and also a shift from Asia to Europe this year. Assuming that you're going to shift back to a more Asia-focused volumes next year on top of the premium price uplifts and the cost-out, just wanting to understand exactly what is going into those EBIT margins.

Yes. Well, I think the -- as the yield improves on these new plantings of 140 hectares, that's a contributor for a start, and they are higher value than even our current premium prices for the ones we're expecting, the Dazzle and Posy. So that's -- it's a big driver. Because those -- each year, those plantings are yielding more per hectare, it takes 5 years to get to full maturity. So that's a definite contributor. As the new planting technique, as more of those hectares come on, the cost of harvesting them, the cost of spraying them, et cetera, is lowered. So that's that 2D planning structure is -- and we actually believe that structure will deliver more yield per hectare. So the sort of a comp -- that second point is really a production and cost -- production increase and cost decrease. The new coolstore, it's being built right beside our biggest packhouse at Whakatu at the Mr Apple head office there. We've got the land there that we're building at the moment, and that's just going -- we've been trucking huge volumes of apples into that complex for packing and having it just a forklift away, if you like, is going to create a lot of efficiency. It's a big store, and it will give us a lot of efficiency. And then just, yes, the continual work of the guides, looking at their -- at the forest varieties, the Pacific Rose is a variety that we've -- it's a harder apple to grow at good yield and it's had -- it hasn't packed out as well as we'd have liked to. We've sort of, if you like, not -- we're pulling out our hectares of that down from -- significantly. And ultimately, we'll exit that variety, for example, and just replacing it with these higher-yielding and higher-pricing apples. So I think it's a -- and the area that we don't mention there that we've had significant costs out of in the recent years as our packhouses, and there's still more automation we can put into those packhouses to lower the cost of -- per TCE.

So just on that -- so I mean taking into consideration that you expect a normalization in prices and a lot of cost-out initiatives. Just why haven't you -- why isn't that growth expecting quite significant uplift in EBIT margins going forward?

Well, I guess it's a point we raised at the start. We have had the, if you like, the wage cost lift from $17 to $21 an hour. So that's a huge part of our costs. Compliance is an area where costs are rising. We deal with the FX and the shipping costs yearly, but we've got to manage that as well. So it's a -- the cost pressures are real. And these initiatives we're doing, and if you like, the thinking is to hold that margin at that forecast level. Because -- I mean labor is significant and government-legislated increase in cost.

So can we assume that you are -- so built into it, built into their gross, we can assume that pricing does experience an uplift from the premium varieties in a normalization and then also cost-out, but then that's essentially offset by the fact that we've got rising labor costs?

Well, I think with that we would -- the -- yes, I guess that is the fact. I mean the rising labor cost has been factored in. We've -- we're paying it this year, we've paid it last year and we'll pay again next year. But it's going to -- I think under this labor government, it was held at $21. Is that right?

I think there's really one more.

Yes. So we've factored that in. The cost of doing business in New Zealand has not gone down, and we have to just do better to keep going ahead, and we've got plans to do that.

Great. And so just -- I mean you sort of -- I think it was in the full year report for '19 sort of indicated that you expected a price based on 2019 prices, a weighted average price of about $37 by 2023. Are you still expecting to get to that point?

Yes, we haven't changed our assumptions around pricing.

Okay. Cool. Great. And so just moving -- or if I may, I don't want to take up too much time, but are you sort of -- as part of that, we are assuming that volumes back to like -- the geographic mix goes back to normal as well. So obviously, European volume is way up this year. We can see that reverting back to -- going back to Asia in the years going forward?

Yes. I think that would be fair, yes.

And also a softer European crop forecasted for 2020. So do you expect maybe some -- a little bit of, I don't know, support in the European, U.K. markets for next year?

Yes. Absolutely. And I mean there's definitely a softer China crop as well.

All right that's -- all right. Cool. It's good to know. And sorry, just lastly for me. The construction for the coolstore near the Whakatu packhouse, is that still -- is that kind of going according to plan?

Yes, yes. We'd be finished by Christmas.

[Operator Instructions] Your next question comes from Adrian Allbon from Jarden.

Can I ask 2 questions? Just on the Petfood part of the business. Now that you've had more time to integrate it and get use to Shelby. Originally with that part of the business, I think you were hoping to lift the EBITDA by $10 million, and there was an additional sort of $50 million of investment required to support that. But I think where that investment amongst that whole sort of group of businesses was to be placed was still to be determined. Can you give us an update on whether you've determined that yet? And if so, where that sort of money would be likely to be spent?

So at the time that we're enjoying the happy place of getting -- without any more capital. So that's -- the business is performing really strongly as group business is going well initially. But they -- I think the question is that the allocation of more capital to it will be, I think, bolt-on businesses, Adrian, for potentially bringing in new products, e.g., fish or other proteins. So I think the new initiatives have been more adding to Shelby organic, as I mentioned, quite capital-light what we've done in Dodge City. It's just a new processing plant that we've got supply agreements into to -- that actually ends up making our product on contract and then we trade it. So it's very capital-light, but it's going to contribute good margin.

All right. Okay. And then just a second question. Just with like the way that risk-free rates have been dropping like a stone and at very low levels, can you give us sort of an update on how the sort of you and the Board are thinking about that in terms of I guess price you pay -- or price you potentially pay for assets? And what sort of -- whether that sort of permeated into some of the vendors' expectations that you sort of button to?

Yes, that's a very, very good question, Adrian. That's a challenge because we're still looking at 15% Rockies. But clearly, the weighted cash going into, if you like, assets at the moment, is causing a very high valuation. So we've got a battle there, if you like, but we continue to look across a wide sphere of businesses and industries within the agribusiness set. And we feel there's opportunities there, and it's just the ability to get reasonable due diligence done on them, given this inability to get around has probably been our biggest handicap at the moment. But yes, going to still try and beat -- maintain those good, rocky performances is what our investment thesis remains.

Right. So take it from that, like, you've got a sort of a reverting sort of expectation into the future given you've got to own [indiscernible] systems of the future when you're making your ultimate decisions?

Yes.

So you haven't softened on that effectively, I suppose?

No. We probably sort of see the current -- there's just this huge stimulus going in from the government, hasn't it? And at some point, that's got to slow down and either spend -- hopefully stop before we're bankrupted, and then things will revert to normal, yes.

And then just in terms of -- just following on from that, like, I guess the previous sort of when you put your criteria out, which I know is going back probably 12 months now was more sort of facing like vertical kind of opportunities into China. Is now what you're signaling with your experience of Shelby that it could be either that or as strong as the opportunities in the U.S.?

Yes, well I think the U.S. opportunities are very much orientated around Petfood ingredients because of -- we just went there and got started. I guess we've traded there for a long time, did the investment into Shelby. It's fantastic, we're very pleased with that investment. The people are of incredibly good caliber and great to work with, and they were very -- be very pleased to give them more capital as the opportunity presents itself. And our partner there, Brett, has just been really solid and supportive of our plans.

Our next question comes from Hugh Stringleman from NZ Farmers Weekly.

Yes. Andy, can I ask a question about the Hawke's Bay drought and whether that impacted your water supplies in any way? And perhaps there's an ongoing effect there too as well?

Yes. Hugh, look, no, it didn't affect us. So you see there we got a record crop in that drought because we have very, very good resource that is -- and the water -- irrigation water is applied very strategically. So it's sort of put on and drip form. So we -- we're supplying the water as the tree needed it. I think we might have got one small orchard impacted by a water restriction, but overall, getting a record crop in what was an incredibly difficult drought, yes, I agree. But I think our water resource is one of our critical success factors in Hawke's Bay, and we can -- we'll -- we're working hard to do everything in a very sustainable way and retain the right -- the water rights we've got.

Good. And a question about the 2D planting. How would you assess your speed of that? I know you -- are you an industry innovator in that? Or is it a well-proven technique around the industry?

Yes. Well, look, it's -- those 140 hectares we talk about being redeveloped to -- from '18 to '20, have all been done in that. So that's -- it's a very good start. I would say we're definitely an innovator on that one because we haven't followed the, if you like, the traditional plant and food recommendations there because they're ones were nearly twice the cost to establish, which -- that was one of the reasons we put it off. But our guys are very orientated around what's best for the tree to produce the best yield. And whereas talking to Andrew van Workum and Richard Hill recently, I feel that the more expensive models are sort of are, if you like, trying to dictate to the tree, whereas our one is more the tree will grow naturally on that 2-dimensional structure we've put in place. So we are a bit of a -- I'm relying on our 30-plus year of experience and a fantastic team that know what they're doing in apples on that one, Hugh.

Sure. And would you anticipate sort of sitting still for the next couple of years to see if it actually does work before you go further in the conversion?

There's an element of that -- the discussion happening at the Board table. Yes.

There are no further questions at this time. I will now hand back to Mr. Borland for closing remarks.

Yes. Well, thanks, all, for participating in today's call. Yes, that's been anything but a normal 6-month period, but we're pleased with the manner in which we dealt with the challenges the team has faced with the COVID pandemic. We are actually happy with the overall results, and we look forward to updating you further later in the year. And thank you very much for your support and interest. Good night -- well, good afternoon.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.