Select Harvests Limited (SHV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Select Harvests Limited First Half FY 2020 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Thompson, Managing Director and CEO. Please go ahead.

Thank you. Good morning, and welcome to the Select Harvests 2020 First Half Results. Today, joining me is Brad Crump, our CFO and Company Secretary. Brad and I will focus on the highlights of the presentation and then open up the lines for questioning. No doubt, many of you had time to already digest the result as it was released on Friday afternoon. You will have to control the slides at your end, and I'll just advise you which slide we're up to as we go through the presentation. So Page 2 is our disclaimers, which is the usual disclaimers applied to this presentation. Page 3 I'm on. As you can see from the financial overview, the result has been -- is not as strong as last year. Despite this relatively weak performance, we still see this as a solid result. Much of the shortfall has been caused by factors outside our control. I must stress that this result is based on an estimate of value and the size of our crop as we're required to do this as part of the accounting standards. As many of you remember, we significantly upgraded our result last year as we confirmed the size of our crop and the actual pricing as it flowed through to the marketplace. You can see that we had an NPAT of $17.4 million and an EBITDA of $34.5 million. We also had an operating cash flow of 32.2 -- negative operating cash flow of $32.2 million. As previously advised, cash flows were delayed as a result of COVID-19 and the closing down of markets. You can see that our debt -- our balance sheet remains strong. We've had net debt to equity at 17.6%, our ROCE at 4.8%, and the -- and we -- our earnings per share was $0.181 per share. We did declare an interim -- the Board did declare an interim dividend of $0.09 per share, and we are offering a DRP of 3%. Now moving to Slide 4. The -- you can see that the estimated crop is 22,600, which is flat -- metric tons, which is flat versus last year. The theoretical crop would have been 21,800 metric tons. This crop is an average yield per acre of between 1.4 to 1.5 metric tons per acre. This is significantly above our forecast volume of 1.35 tonnes per -- metric ton per acre. You can -- this being the second year that we have achieved this, we're now seeing that our horticultural programs are beginning to deliver consistently. The average price is $8.20, which is down $0.40 on last year. This is in part due to the announcement of a larger U.S. crop and more recently lockdowns in key markets such as India and China, which I'll talk about in more detail. Our EBIT is down 10.8% to 28.1%. A significant part of this EBIT decline is an increase in our water costs, which I'll talk through in the next slide. Our Food Division EBIT was at $1.7 million. This is continued -- this is a result of continued pressure from the domestic market from house brand businesses -- house brand competition. Also, we had a long shut -- a 3-week shut of the Parboil facility, which meant we couldn't supply as much into the industrial market as we wished. From a people, culture and sustainability perspective, our lost time injuries were down 34%. We've managed the COVID-19 environment across our 16 sites and had no incidents in our facilities. And most of the administrative staff maintained -- are operating off base. We donated over $100,000 to the bushfire appeal. And from a corporate perspective, you can see our results that the AASB16 leasing accounting standard has been implemented. We continue to focus on our cash flows. And now I'd like to go through the EBIT waterfall on Slide 5, which shows you the movement year-on-year. We're going to spend a bit of time on this slide. And what we have done is to try and adjust -- show you the adjustment based on the actual first half, not the results first half. So the $9.4 million is the adjustment that we've made in the second half of the year for a higher crop and improvement in the price. So you can see that last year, we reported $31 million. In actual fact, if you looked at the half as a result of the adjustments in the second half, it would have been $40.4 million. Since that first little box of negative $400,000, that is related to the increase in yield because last year, we had an extra 80 tonnes in the -- which we delivered in the crop. We've lost $4.5 million in the half relating to price. 70% of our crop is committed, and 30% of the crop is uncommitted. This is an estimate of what we think we will deliver by selling the remaining 30% of the crop recognizing the 70% of the crop that we've already sold. Our operating horticultural and orchard expenses are up $1.3 million. Part of this is general OpEx inflation. There is also the age profile of our orchards. As they get older, they require -- immature orchards require more irrigation and water. And then we had a marketing adjustment to our leases with RFM, which flowed through in this period. The next area is our water costs. You can see there that our water costs increased by $9.6 million. Most of this was associated with the increase in temporary water prices, which got close to $1,000 per megaliter. Also, we had to negotiate some of our longer-term leases at higher prices during that year. We're anticipating seeing much of this coming back to -- in the 2021 year, which I'll talk about later on in the presentation. There's $1 million associated with processing costs. We believe we'll recoup these in the second half. Part of this has been really the start-up of the plant and the introduction of new technology. Plus, the latter part of the crop is a little bit wetter, so we're having to do additional drying. It is not atypical to see our hull sales down year-on-year. At this time of year, we have slower hull sales in the first half partly because we actually don't have the hull available to sell. So our hull sales are strongly skewed to the second half. And then we had a 3-week maintenance shutdown in our Parboil facility upgrading an oven, which meant that we had no sales relating to that for a significant period of that part of the month -- part of the period. We had lower margins across the consumer business and in the industrial business. Most of this is associated with the weakening of the Australian dollar. Many of the commodities we buy, such as walnuts, pistachios, peanuts are sold in U.S. dollars, and we're unable to pass those on to our trading partners. We had an increase in our corporate costs. Part of this was investment in our sustainability reporting, increased insurance, JDE, and we have had some corporate activity looking at potential acquisitions. We are anticipating the second half will be much stronger than the first half, which is not atypical in our business. I'd now like to hand over to Brad.

Thanks, Paul. I'm on Slide 6 now. This shows -- this is Select's first reporting period that incorporates the AASB16 leasing standard. As shown on the slide, the major impact is on the company's balance sheet. The quantum of the adjustment is due predominantly to the long-term leases that are applicable to 50% of our orchards. The impact for the first 6 months; on the income statement is quite minor due to the fact that the majority of costs sit within the 2020 crop growing costs and will not flow through the income statement proper until the crop is sold. Note that at the end of March, only a small portion of the crop was actually sold, so some of that AASB will flow through the income statement later, and it currently sits in the fair value adjustment. Moving on to Slide 7, which is Select's income statement. The first thing to point out is the amount of revenue recognized is down 6.5%. And as Paul mentioned earlier, this is due to delayed shipments as a result of COVID-19. EBITDA has reduced by 10.4% compared to 2019 first half due to a reduction in the forecast of 2020 price of the crop to $8.20; an increase in water costs of over 70% due to water prices; an increase in other growing costs of 5.2%, reflecting -- mainly reflecting the age profile of the trees. We had slower hull sales as a result of improved livestock conditions, a 3-week shutdown of Parboil, lower margins impacting both consumer and industrial foods, an increased corporate cost as a result of increased corporate activity, some process improvement activity, timing on incentive accruals. And this will balance out in the second half of the year. These impacts are reflected in each of the division's EBITs. Net financing cost reductions reflect the lower debt position on average through the year, and interest rates being down for the first half of the year as well. Moving on to Slide 8, which is our balance sheet. The balance sheet remains in solid shape. At 31 March, it's -- this is close to our peak debt period due to the investment in the crop yet to be sold. Our bank debt position at the half is $70.4 million. This is higher than last year due to the higher growing cost for the 2020 crop, and this will reduce in the second half. The higher growing costs are also reflected in the company's higher working capital. Again, this will unwind as the crop is sold in the second half. Our gearing ratios remain well within our covenants and will remain so for the remainder of the year. With current delays in shipments being experienced, debt levels will reduce at a slower rate than they did in FY '19. Slide 9, which is our cash flow. A number of components impacted the cash flow in 2020, in the first half of 2020. We had a significant tax bill that related to 2019 earnings. In 2019, we had the benefit of the financial year transition period that led to a reduced tax payable position in that -- at that point. We paid out a significant dividend payment relating to the final year-end 2019 earnings. And we had higher CapEx spend relating to $3 million in additional horticultural equipment, which is predominantly due to a increase in our orchard matrix that occurs each year. We've had $5.7 million in CapEx and upgrades to our Carina West processing facility. And this was in particular in upgrading our inshell sorters, and these have led to an increase in inshell production in the first half of 2020. We also had increase in capitalized rent relating to our development orchards and an increase of $1.5 million in food-related CapEx to improve efficiencies to flow through in the second half of the year. I'll hand back to Paul.

All right. We're now on Slide 10 -- 11. We're going to talk about the Almond Division. I'm not going to talk about every box there. I'm going to focus on 2 of those: cost of production and water. The 6 -- 7.3% in the cost of production, this is a combination of the age profile, biennial bearing of the trees, general OpEx in place, the to-market adjustment of the RFM leases, inflation and adjustment on the other leases. And we -- as we said earlier, the processing part of this can be recouped in the second half. It's also our investment in the expansion of Phytec to all of our farms, our important water management systems. As you would be aware, we've had good autumn rains, above-average -- and above-average winter rains are forecast. This is a positive for the 2021 crop. We will not recoup all of the -- all of this because of resigning of leases. It's difficult to estimate what we will recoup in cost in 2021, but we know it's likely to be significant. If I look at -- now we look to Slide 12. As I said earlier, our current estimate is based on us achieving a crop of 1.4 to 1.5 megaliters per tonne, and this is an off year. We're confident that changes to our horticultural practices, the investment in frost fans and the investment in CapEx will mean that we can deliver similar results into the future. This chart is representative of 1.35 tonnes per acre. If I look to the outlook, look at sales. As we've previously announced, we have been experiencing some delays. Our estimate is that China is not fully back but is improving every day. Clearly, the political situation is a distraction. We can only focus on getting our customers their product to them on time, on spec with the correct packaging and paperwork. The main market we're concerned about is the Indian market, which I'll talk about as we talk about Slide 14. As you can see, the current market conditions, if you look at them, generally look extremely positive. With the crop -- despite a large crop increase in the U.S. of 11.9%, a forecast gross increase is nearly 17%. Shipments are up in nearly every metric. And one concerning thing is the Indian market. The uncommitted inventory is at 15.7%. Last month, it was 7%. This is a direct result of the lockdown in the Indian marketplace. The Indian market represents 12% of all exports -- 12% of the U.S. exports. We really need these markets to come out of lockdown. And we also need to generally -- in general, for the foodservice marketplace to free up to clear this stock before the big crop from new -- enters the market next month -- enters the market next year from August, sorry, in the U.S. market. If you look on Slide 29, you'll see there's been a dramatic drop in the almond price since this -- since the COVID-19 started. And this is purely related to market lockdowns as people are unable to get access to markets and ship market and consume product. If we turn to the food business, this is -- it's been disappointing. The Lucky Brand is still struggling to gain traction against the other retailers -- I'm on Slide 15, against retailer brands. Sunsol has continued to grow and recently picked up additional ranging in both Coles and Woolworths last time for the first time we supported the brand with billboards during The Voice television show. The industrial market still remained strong, but sales were constrained due to the shutdown of the Parboil facility and the slowdown in the foodservice industry. Now on Slide 17. We see industrial sales strengthening in the second half as the foodservice markets open up in Europe and locally. Lucky, we're going to be focusing on gaining additional ranging in the cooking category and entering into new categories. We see the Sunsol additional ranging generate an uplift in revenue. Project Shaker is starting to deliver efficiencies with some lines lifting output by over 10%. And 0 harm, of course, remains our main focus. And we've done significant work in the area of managing COVID-19 at our 16 sites to ensure that we continue to deliver good results in this area. This is an example of -- Slide 17 is the media campaign for the Sunsol brand -- sorry, Slide 18. Our strategic priorities and strategy remains unchanged. We want to be a leader in the better-for-you plant-based products, optimizing our almond base, growing our brands and expanding strategically. We are a vertically integrated paddock-to-plate organization. I'm on Slide 21 -- 22. Our priorities are clearly to complete the sales program in a volatile market, process and pack and ship the current crop, manage our cash position, get our horticultural programs in place for 2021, so we can deliver deals that were delivered similar to this year, concentrate on reducing our costs, mitigate our water costs. It's going to be an interesting market as more water flows -- more water is available for allocation. Waterfind, one of the largest marketers in the industry, so they're expecting triple the value amount of allocations available to the market next year, which must influence price. We're going to continue to look at growing our business, use our strong balance sheet where appropriate, focus on building our consumer -- and foods and industrial businesses and prioritize capital investment to give us the quality and best outcomes. If we look at the outlook for 2020 -- the rest of 2020, almond pricing should stabilize once we really know what this U.S. crop is, both size, quality. And that will be -- start to be harvested in late July, early August. So we'll get a good-view lens on that at that point. We see that our hull sales will increase as inventory becomes available. External processing contracts are also skewed to the second half. We'll be completing those and gaining the revenue from them. Yes, the cash flows, as already said, have been delayed. But we've -- as Brad said, we forecast those will come in more strongly in the second half than the first half. The Parboil plant is fully operational, so we see no disruption in that plant. We see the return to the foodservice industry contributing to stronger sales. And we're expecting consumer sales to be stronger as responding to our marketing programs and our increased ranging in our domestic retailers. So at this point, I would like to thank you all and throw the floor open for questions.

[Operator Instructions] Your first question today comes from Josh Kannourakis with UBS.

Just first thing, obviously, a few things in the first half and that you noted sort of one-off in nature. If we put them all together, can you give us a little bit of a context of just the sort of total magnitude, like if you can up a couple of those things, that -- the $4 million, $5 million EBIT, just trying to understand the magnitude of some of those issues that will be -- some of them reversing into the second half.

Yes. Look, Josh, I mean you can see from the waterfall, there's probably $3 million to $5 million, the one-offs in there, the processing, the hull sales, the closure of Parboil.

Yes, yes, got it. Understand. And then just second one just around water. I know we love talking about that a lot. But just in terms of as that unwinds, can we just talk a little bit about, into next year and the following years, just how you see that cost unwinding, the impact, obviously about $9 million or $10 million in this year just to give us some context around that?

Look, I mean well, the only thing we really know is that we've had to increase some of our longer-term leases. So what we don't know is the allocations. And the main driver of the price of water is going to be the general security allocations in New South Wales. If they're strong, the water price would react quite dramatically. I mean if we sit here today, the water price is closer to $250 than $1,000 that was during the mid-season. And it's really difficult to make a call on the water price. I would -- when I say significant, we're definitely not going to recoup the $10 million out of that. We may recoup around the $5 million would be a rough guess. But if you get 100% allocation of general security, in my time at Select, the water price has been as low as $20. I don't think it's ever going to go down to that, but it's a very volatile market. You've also got the ACCC findings coming out on the 31st or the interim report, which will mainly be around trading but also -- which will be about trading behavior. It's not actually the water market per se. And then you've got a lot of activity from some of the state governments around changing regulations around access to water, which also -- really, government behavior has the biggest influence on water price. If you look in the last 12 months, the change to the intervalley trading rules by the Victorian government prompted the 2 largest movements in the water price. And the other movement was the government buyback programs. And both of them had a -- from a grower's perspective, a negative impact on the water market.

Got it. Understand. And just final one, just around, I guess, the balance sheet. Obviously, by the end of this year, you'll be in a good position and noted some corporate activity. Can we talk a little bit about just, I guess, progress in that sphere and some of the opportunities you're seeing? Obviously, there's some publicly announced ones out there as well from RFF and others. But just in terms of domestically and also some of the stress in California, do you see any potential over there as well?

Look, I think California, they're certainly -- while we come out of drought, they generally go into drought, which causes stress, and we're seeing that with water allocations being lower than they were last year. They've also got issues around the SGMA legislation. People are getting -- as it moves closer, which I think is about 3 to 4 years off, it's starting -- we're starting to see the drop in prices of Californian farms. I think at the moment, the focus is more on the domestic opportunities, which you've talked about. And look, generally, if there's a public -- there's generally as many opportunities that are in the public domain as there are in the public domain. So it's -- the market is certainly more active than it was 12 months ago.

Your next question comes from James Ferrier with Wilsons Advisory.

The -- I think it was 359 acres that you ripped out and replanted this year. What are your plans on that front over the next couple of years? Do you want to sort of take advantage of where prices are now and try and sort of get a bit of a replant program underway in the next couple of years? Or is it really what you did this year that's a bit of a one-off?

No, that was a one-off. That was the completion of the Kyndalyn Park property. We've really only got one other property, which is the Wemen farm, which is around 400 acres to the 150-odd hectares that's available that's appropriate to replant. Everything else is in its younger age profile. And the Wemen farm, we've already seen the results of that crop. In the last 2 years, it makes no sense to pull that farm out at this point in time. But it's close to 33 years old, but it's still performing well.

Yes. And what's -- I guess, if the replant activities other than Wemen, as you say, unlikely to be consistent in the future, can you give us a bit of a feel for what you're expecting on full year CapEx and D&A?

The full year CapEx?

Yes.

Well, I think if you look at our cash flow, so for the half, we've got orchard and tree development at $18.3 million. Now mind you, that includes some horticultural equipment as well. So the second half CapEx profile will be a lot lower than the first half. So our property, plant and equipment, that's already basically sunk for the year, so that won't occur in the second half. And around $7 million or $8 million of that tree and orchard development won't occur in the second half either. So the second half CapEx profile is a lot lighter than the first half.

Okay. That's helpful. And then just given you've got the movement in D&A around AASB16, et cetera, what's your expectations for the full year? Do you know?

Well, it will be -- obviously, it will be a lot higher than the second year. So I'm just flipping through to the income statement. So yes, you've seen -- so in there, our D&A is sitting at 9.1%. So that's expected. I mean it won't move materially in the second half.

Yes. And last question for me. Paul, in your remarks in relation to the almond price, you used the word, you expect it to stabilize. Obviously, the spot price is quite a bit below where your existing forward sales are committed. I'm just interested in your usage of the word stabilize. I thought you might have been a bit more optimistic about prices moving back up towards maybe an 8 handle.

Yes. Look, I mean the issue is really with the Indian market representing such a big part of the U.S. crop. And it was supposed to come out of lockdown last Thursday, and it hasn't come out. It's just causing a lack of confidence in the market at the moment. Until we get the -- a major market -- like that's the third largest market. There's the domestic market, the European market and the Indian market for the U.S. crop. Until that is sort of like back on, there's a view that it's going to come back into play, people are nervous.

The next question comes from Paul Jensz with PAC Partners.

Quick question just on the U.S., Paul. Just with the cost base going up, can you make some comment about the relative cost basis, U.S., California versus America or versus Australia and Spain?

Yes. Look, I mean the U.S. market is a difficult market. It's a bit like here depending on how much water you buy. At the moment, the per acre foot price of water is close to their equivalent per -- their equivalent megaliter price per acre foot of water is somewhere between $500 to $900 on the west side, and they use a similar amount of water to us. Those guys would have a cost that's somewhere -- the U.S. cost varies somewhere between their cash cost of somewhere between $1.50 to $2 a pound, so it's difficult to say what's exactly there, the actual price in the whole market. We know that we are more than price competitive, and that's driven by higher yields. They're not yielding as much. And in their forecast, that 3 billion pound crop, they're talking about a 10% increase per acre in their crop on an on-year. So they would do extremely well to hit the 3 billion pounds.

Yes. And in that cost base, you don't have much in there for depreciation. That's essentially a cash cost. So if they go and they'll be replanting, it's quite a bit higher than that, correct?

Yes, yes. And where they're replanting the land is going to be more expensive than, say, historically because of the SGMA legislation because you've got to guarantee yourself a water source. I think this -- if pricing continues this way, there will be a removal of orchards in the U.S.

Well, I mean just a follow-up to that is we thought that was going to happen a few years ago, and they've sort of peaked along. So when the -- is this, do you think, the final sort of death now for the, I suppose, the 15% of very old orchards over there?

Look, I mean if pricing stays where it is, yes. I mean what saved people from making that decision previously has been the strong almond price, which we've been a beneficiary of.

[Operator Instructions] Your next question comes from Jason Palmer with Taylor Collision (sic) [ Taylor Collison ].

Just one question from me if I could. In respect of the almond price that's currently in the market and the contracts you've got in play, is there any risk of counterparty renegotiation now or potentially deferral -- further deferral of contracts?

Look, it's not without risk, but our current position is that a contract's a contract. Ironically, nobody looks to renegotiate a contract when the price goes up. And we're taking that stance at the moment in the market.

There are no further questions at this time. I'll now hand back to Mr. Thompson for closing remarks.

All right. We're going to be talking to many of you in the next couple of days. So thank you very much for dialing in on a Monday morning. Have a good week. Thank you.