Select Harvests Limited (SHV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Select Harvests webcast. If you have any questions today, please SMS Andrew Angus on 402-823-757, and those questions will be answered after the presentation. I would now like to hand the conference over to Mr. Paul Thompson, Managing Director and CEO. Please go ahead.

Great. Thank you very much, Amanda, and thank you, everybody, for joining us this morning. I'm delighted to talk to you about the acquisition of the Piangil Almond Orchard and the capital raising associated with that orchard. Now one thing from a process perspective, I do not have control of the slides, so those people listening in will have to flip the slides themselves which is quite easy on the right-hand side of the screen. Just from a history perspective, this isn't the first time that we've looked at this asset. We've looked at this asset some 7 years ago, but unfortunately, we weren't able to achieve a transaction at that point in time. It's always been a target asset for us. I can assure you, this is a competitive process we've been through to bid for this property. And as you know, there's many pension funds, both offshore and local pension funds. We've been very active in the almond space in the last [ 18 to -- 8 and 12 ] months in particular. This is a quality asset that we're acquiring. It's in our preferred growing zone of South Australia and Victoria. Our preference in those 2 regions as opposed to, say, New South Wales is that climatic conditions are more favorable for growing and there's less climatic interruptions such as rain during harvest and rain during spray periods, which prevent us from getting onto the orchard. And as a result, generally, our growing costs are slightly higher in New South Wales and their quality's generally a little bit lower as a result of those issues. Firstly, I would like to point out the disclaimers that are in the presentation on pages 2, 3, 4 and 5. I'm now going to talk to you on Slide 6, talking about the content of the presentation. I'm going to talk to you about the almond orchard acquisition. I'll give you a company update. Talk to you about the capital raising, both the use of the capital and the structure of the capital raising. I'm now on Slide 7. This is our strategy slide on a page, you can see that this acquisition delivers to 2 of our strategic priorities. It delivers us to the strategic priority of optimizing our almond base and expanding strategically. It delivers scale to our organization, allowing us to benefit from this scale in our supply chain, plus with our capital base, you will see that we're deploying this where we're going to be EPS accretive from the transaction. And post the equity raising, we're going to be and able to maintain a strong balance sheet and allow us to continue to pursue executing our growth strategy, which is outlined on the slide in front of you. I'll now proceed to Slide 7, which talks about an overview of the acquisition. This acquisition has a nice blend of mature and immature orchards. It has 1,566 hectares of orchards under trees. There's -- 1,177 of those are mature; 389 of those are immature orchards. There's 1,877 metric liters -- megaliters, sorry, of high reliability water and there's also 622 of low reliability water. To just touch on that, we have a strategy in our business of holding 30% of our water in owned entitlements or leases, which expire with the term of the leased orchard or -- and 30% of our water is held in leases which are between 3 to 5 years, and then 30% are bought on the spot market. Recognizing that we're going to acquire this asset, we have actually already acquired enough water in the midterm leases and held enough water prior to this in the long-term part of our 30% that we don't seek to acquire any more water to still live within our policy. We are acquiring 641 hectares of unplanted land. That land we currently deem as not being suitable to plant almonds. And also the current main lines are unable to support that -- support planting out that area. We do have to invest furthermore in the irrigation infrastructure, which I'll talk to you about later. The -- there were also associated with this acquisition, there is some plant and equipment and housing which is part of the acquisition. We entered into the deed and sale agreements with United Almonds Limited, and United Almonds Limited is an MIS business, which is sort of around the 14 years of age. We also have Bright Light Agribusiness, which is a private individual, has significant almond assets in Victoria who is consolidating back to its base. And then we have the operators in the orchard have a shareholding in the orchard as well, where consideration is $129 million for the purchase of the asset. We will also be acquiring the -- we'll be acquiring a 2021 crop, so the 2021 crop is sitting on the trees today. So we will be buying those -- the investment into those trees at costs so that we get the revenues from the 2021 crop next year. We do have -- we're not operating the orchard at the moment, but we do have oversight on how the orchard is being operated and where money is being spent. And we're very happy with that -- the way the operating -- the orchard's being operated. As I said, it's a high-quality asset. The acquisition is going to be funded with both debt and equity. We've entered into new facilities for debt. And we're going to do a placement of -- we're going to do a capital raising composing of an entitlements offer of $80 million and a placement of $40 million. The acquisition is midrange -- EPS accretive from 2022, but in -- it actually uses 2021 as well, which will be the full -- first full year of our operation, if you take into account we're where purchasing the crop. The acquisition is subject to conditions, including ACCC approval, which we have, but they always have the right to withdraw. I can't see any circumstance in which they would be doing that. We have to get the approval of the MIS unitholders. And at the moment, the directors are going to recommend that the unitholders accept our offer. We're confident that they will accept our offer. We do have break fees and no-show fees, no-show -- no-show conditions on that so that it's highly conditional so that nobody can -- it'd be difficult for people to bid over the top of us. We also will be seeking with the directors judicial approval from the court to the way in which the assets are divided between the unitholders. This is an asset sale, but we don't want any recall from any of the unit members that they've been unfairly treated. We estimate that post the unitholder vote, plus the judicial approval, that the acquisition will be completed in December 2020. I'm now going to move to Slide 9 and talk about the actual asset. As I said, this is a high-quality asset. It would yield in the top quartile within our current portfolio. We have a farm that is very similar to this farm, which is only 80 kilometers away. Very similar -- well, almost exactly at the same climatic conditions, very similar soils, very similar in [ zones ]. We've done extensive work, probably -- we've been doing due diligence on this farm for over 9 months, which includes a very detailed due diligence around the legal so that we're not -- have any issues separating the asset from the units, from the MIS and the previous owners. And we've also done extensive horticultural due diligence and financial due diligence. This farm has been well operated at a cost base, which is similar to ours. We do believe that there is opportunity, in particular, to improve the quality of the almonds coming off that orchard, and that relates to their ability to harvest and to do that, we would be investing more in harvest equipment, which we can talk to later on in the presentation. The quicker we can harvest, the quicker we get it off the farm and the better condition we get it off the farm, the higher price we'll get from that almond -- from those almonds when we sell them. And the higher revenue will drop straight through to the EBIT line. This plant is extremely attractive. You look at the mix, we've got a nice big lump of mature cash-generative assets in there, and we also have some future growth in there involved in immature orchards. This is a 20% increase in our area, and if you take our volume as it stands today for the 2020 crop of 23,000 metric tons, this is a 20% lift next year based on 4,600 metric tons, or 25% in the year 2026. So this is by no means an insignificant increase in our almond portfolio. We also have additional production, which will go through our Carina West Processing Facility. Most of it will displace existing contracts but it means we get the full margin, the growing margin, the processing margin and the marketing margin. And importantly, it gives us more flexibility in the way in which we run that facility. So -- and we will see drop-through in fixed costs in such areas as corporate and our horticultural team. If you now move on to Slide 10, this farm is located 40 kilometers away from Swan Hill on the border of Victoria and New South Wales. Swan Hill has a population of 11,000 people. It has a good labor force and lots of services -- and great services available to us. Put this in comparison to our other operation -- major operation at Robinvale, we're operating with a population of 3,000 people in the base. So this -- certainly, we have no concerns about the serviceability of this property. I'm now going to talk to you about Slide 11, which talks about what the volume impact of this has on us. And it's important you understand the assumptions here. The long-term average yields for this farm, we've assumed, is 1.4 tonnes, which is in the red number at the top of the graph. We've taken -- the pink represents all of our immature orchards coming into maturity. And that assumption is based on what they have performed over the last 2 years, where they've performed well above industry average, so that is baked in there. And then the bottom light blue area is at 1.35 tonnes to the acre, which is the industry average. We've done -- and you might say, why are you estimating that your farms are going to yield less than the Piangil farms -- the Piangil farm you're acquiring? Part of it is the age demographic of our farms is much older than the farm that we're acquiring. So some of them are beyond the sweet spot and are sort of in the tailing out period of our orchards. You can see there that, that number is probably as conservative or definitely realistic when you compare our theoretical volume in 2020 versus the crop that we've actually announced in a separate presentation last night, where our theoretical volume was 21,828 metric tons, and we delivered a crop of 23,250 metric tons. So look, I think it would be fair to assume that these are extremely realistic assumptions that we've put into our modeling. Just -- and the other part of that is, I'm now on Slide 12, just sharing with you in both hectares and acres, the increase in volume that is associated with this investment. As I now go to Slide 13, you'll see what this acquisition does to our profile. With the -- pre the acquisition of Piangil in the yellow and the -- post the acquisition of Piangil in black, you can see there that the volumes have -- the age profile has young-ed up, particularly with the new 1-year-old plantings that are in there as well. The example of our older farm matrix, you can see there, we have a farm that's 36 years old. You can see that it's 36 years old, and it's -- that farm, for instance, is yielding 1.3 tonnes, which has an impact on our average. I will just go through the crop processing. At the moment, we've processed 90% of the crop, as you can see there. We anticipate finishing at the end of October -- or the middle of October. We processed very little of the Piangil orchard offtake at the moment. It's an insignificant part of that volume. We also are estimating our crop will be 23,250 metric tons. That's up 250 metric tons from our previous updates. We've maintained our pricing range between $7.25 and $7.75. As in our last update, we talked about difficulties with market access around the COVID-19 and the renegotiation of pricing with customers in some of the export markets. We're now confident in that price estimate that we're giving you. The markets have opened up post COVID, which I'll talk about in a minute. From a COVID perspective, it did curves differently market access, which meant demand was softer. In fact, some demand certainly disappeared from this year's volumes as people were unable to purchase or consume the product. We're deemed an essential product -- essential business by the state government. So we are allowed -- we've been able to operate pretty well unaffected with, of course, additional hygiene practices put into place. The biggest impact is that most of our executives have been operating from home since March and have performed exceptionally well under pretty difficult circumstances. We have not been a recipient of JobKeeper, we're ineligible. So the result we're talking about is clear -- that has no impact or benefit from the JobKeeper subsidy. Our year ended on the 30th, which is obviously 2 days ago, so we haven't done our results yet, but we are in line with the consensus that's out there, which has an EBIT of around $35 million and NPAT at around $25 million. Some people would anticipate that it should be slightly stronger because of the increase in our crop. But we have, as previously indicated, had a weakening in the sale of our Almondco waste, hull and shell into the stock food market as the drought has broken, and we have been -- the pricing and demand for that is decreased. As you look out -- look forward, this sort of shortfall will be more than compensated by the drop in the water price that's associated with the drought breaking. The almond conditions last year, the U.S. announced a -- or forecast -- the U.S. Department of Agriculture forecasted 3 billion pound crop, which is an increase of about 12% on the previous year. And the previous year was an increase, which was right around 8%. So the U.S. crop has grown quite rapidly in the last couple of years. Due to weather conditions, just as -- pure horticulture, the crop has been harvested earlier. So 36% of the crop is in compared to the same time last year. Sizing is smaller, which is not uncommon in larger crop, that the actual size of the nuts are smaller. Currently, industry forecast, nobody's talking above 3,000 tonnes, and maybe it's going to come in a little lower. Look, I think it's really a bit -- it's too early to look at that. December is sort of when we'll get a better vision on where the U.S. crop's going to finish. They're sort of halfway through their harvest at the moment. The August California Almond Board Position Report shows really strong demand rebound in the marketplace. Shipments were up 31% versus last year. They sold 193 million pounds. To put that in perspective, aren't in the 1 month -- the Australian crop was 234 billion pounds. Pleasingly see markets such as the Middle East, India and China rebounding strongly. The interesting thing in India was probably the market. The China and Indian markets were the most -- which were affected most, particularly as they had their workforces returning to regional areas and markets and gatherings closing, which is a big part of the way in which the product is sold in those markets. The particularly pleasing market is India, which I think all bodes well for future demand, is we're seeing demand -- strong demand out of that marketplace. That demand is generally driven by festivals, weddings and gift giving, none of those functions are allowed to occur at the moment under the COVID rules in India. And people have turned to this product as a healthy option to make sure that they maintain good health to combat the pandemic. If some of this change to healthy eating is baked into future behaviors of Indian consumers, we can see strong, strong demand out of India moving forward. Californian crop is 37% sold versus last year, it was 29% sold. So that is very positive, now the very positive sign for the market, recognizing that 80% of the global almond production is in India -- is in, sorry, in the U.S. The Australian Almond Board results came out in July where the crop was down 37%. This should not be a surprise to everybody. Our sales are down about 20%. This is just the delay of sales. It's not sales are missing. We've had approaches and agreed with our customers that there's no point shipping them stock if they can't sell it. We don't have a credit risk with this because -- or our export customers. We have cash with documents and we have no product stranded in ports. So things are looking good. And what we've seen as again communicated to the market is a delay in cash flows. If I look at the crop -- look forward to 2021. And these comments around the crop goal for both the Piangil orchard and our own orchards. We're at the fruit sizing stage. So we've got through the challenging pollination stage of the horticultural cycle, and we're now starting to get vision on the crop. Our tree health looks good and our outlook for the crop remains positive. It's too early to make a call on the volume. But last year, we had multiple frost events. This year we've only had one. And we're nearly out of the frost season. That's generally [ nonmilling, tough ] time. I won't comment again on the water area. In our food business, we continue to have challenging in the Australian marketplace, particularly with disruption to certain parts of the supply chain. I think we're all aware of what's happened to foodservice-orientated businesses. We had some good news in the -- it's good success in our consumer business with 6 additional Lucky range products going into Woolworths. They should start showing up on shelf in the next couple of weeks. Our Thomastown production facility, we have a lease expiring, where we've been there for well over 10 years -- over 15 years, actually. Expires on the year 2022. So we're having a look at both our supply chain and strategic options to how we grow that business. I'll then draw your attention to Slide 17. On Slide 17, it shows you the long-term demand for Australian and the U.S. almonds. I don't think anybody could be too upset with the direction in which that is going. The thing I would point out is in the period around '13 and '14, which was the California drought, production was significantly hampered. And this is a very typical commodity market, supply and demand influence price. So I would now like to turn to Slide 18. The first thing you can see there is that mountain, which relates to that '13, '14, '15 period of where the value of supply came from. And the other thing that I'd like to draw your attention is that historically, almond prices have overcorrected in both of the upward direction and downward direction. And historically, in both the times the almond prices had a positive run, generally the low is followed by -- the following low is higher than the previous low. So the general trend price movement in prices have been moving up. The other thing you'll see is the collapsing of pricing between the blue line, which is the nonpareil, which is a snacking nut, and the green line, which is the product that's used in things like almond milk and yogurts and things like that. We are seeing a movement in the marketplace to the consumption of the product being more ingredient-based than whole snacking nut-based. So that means, basically, another way of saying the demand for the products across the board are increasing because there are so many different alternative ways of using that. I'd like to address now why is pricing where it is at. Why has it sort of ticked up? And what do we see -- what sort of price signals should we see for the future? So pricing where it's at, at the moment, if you look around sort of March -- September -- between September and March last year, you can see the pricing was pretty reasonable, pretty steady, drifted down a bit. That was really a response to the announcement of the 3 billion pound crop. People were sitting there saying, look, this is a big increase. We're going to have to find new markets. Certainly, moving prices upwards ain't going to do that. And perhaps if we move prices down a little bit, demand will -- that will stimulate the additional demand. Then you can see this -- and look, most people, and including ourselves, have sold a lot of our crop at those, what I'd call, normalized pricing. Then you can see the sharp drop in pricing after that. And that is really the announcement, the impact of COVID-19 and the large crop together. People are trying to sell the tail end of their crop. They're also seeing COVID -- they're also seeing markets such as China and India being disrupted because of the COVID where in those -- both those economies, ports were blocked. And also the work -- the community, the workforce and the population was going back into the regions earning no income. So expenditure dropped significantly. So you saw -- and then you saw farmers trying to clear the tail end of this crop saying, well, we've made our money on that crowd of the crop. Let's just get the cash for the rest of it, and let's move on with next year. So pricing went down. It's gone down pretty close to growing costs for many growers, particularly in the west side of the Californian part of the industry. The slight tick-up there is that's the commencement of selling the new crop. Of course, there's a very big reluctance to sell your entire crop at a loss or at breakeven point. So we're seeing grower pressure to move prices up. We've also seen, as I spoke about earlier, demand increasing in markets like India and China and Europe. And we've also -- people have a vision on the crop and have a -- particularly the Americans have an impression of where it's going to be. So typically at this time of year, pricing is generally fairly stable. We -- sorry, probably the biggest driver of moving pricing up in the future is always demand. We have a couple of periods of times in the year where pricing is more -- pricing is more around, sort of more sensitivity. December is a period where the U.S. know exactly how big their crop is. The U.S. growers do -- they have a vision of how much carryover stock there is into next year. They have a vision of what their tree health is like. Generally, the U.S. tree health is more biennial than ours. They have an -- sorry, and they know pretty well what the carryover stock is to next year as they said. So if there's any negativity -- and the last point is they also have a vision of where -- what's going on with their water market. If there's any negativity in those -- in any of those areas, generally, you'll see some pressure to move prices up. If there's any positivity in those areas, you'll see prices generally move down. The other point of inflection is when they have their bloom in February, where price -- people start reviewing pricing again. I think the thing I'd like to reiterate is pricing is at a 10-year low. A hell a lot of almonds have been sold quite successfully and consumed by consumers at prices far higher than the prices you'd see today. So my impression is the pricing -- and the pricing -- it's unsustainable for pricing to stay where it is. So I can't guarantee pricing will go up in the next 1 month, 2 months, 3 months. But certainly over the next few -- next -- the horizon -- a year plus, this pressure on pricing to move up is going to be there. But now move on to the capital raising and the source of the capital. Firstly, we've renegotiated our debt funding with Rabo and NAB banks. They've given us a waiver of covenant on the 31st of March on the leverage -- the debt leverage ratio. That's just reflecting the fact that we've got to invest $25 million in working capital to acquire the current crop on the trees. And we haven't got the income from the previous crop coming in from the Piangil asset. The other part about it is the source of where the funds will go. You can see there, it's broken up. The CapEx of $17 million, probably about $10 million of that relates to investment in harvest equipment. The rest of it relates to investment in irrigation infrastructure to ensure that the farm irrigation structure has the capacity to distribute the water throughout the farm, particularly to the immature orchards. If you look at that, we have sufficient water -- capability to bring water to the farm. It's more about distribution of water and fertilizer within the farm. The other thing I'd draw your attention to is that post the equity raising, we have headroom in our debt to enable us to continue to pursue our growth strategy, and it also recognizes the inherent volatility of our business. And I was -- that was Slide 20, apologies. Slide 21 gives you a pro forma balance sheet. And look, it's pretty straightforward. I won't go into too much of the detail of that. If you have any questions, please come through to us. As I said, look, we're very conscious. The Board's extremely conscious of making sure that this equity raising is equitable to existing shareholders. So they have a priority with the pro rata accelerated non-renounceable entitlement offer. Institutionals have opportunities to put bids in from a placement perspective. And they say that we've been -- had extremely positive response from our institutional investors. And the other thing that is worth pointing out in the retail entitlement on Page 23 is that we'll be looking to see whether we can give retail investors an opportunity to take up 50% of their entitlements. So that is a top-up facility, recognizing that we don't want people to be diluted significantly or diluted at all. New shares will rank equally, and the dividend will be payable on that. The capital raising timing is on Page 24. If I go through them from a summary, this asset -- this almond asset delivers strongly towards our strategy about optimizing our almond base and growing strategically. And it gives us scale to our operations. Post -- and we've managed this within our water -- existing water strategy. The capital raising is to maintain our balance strength -- balance sheet strength and give us a sufficient headroom to recognize the volatility of the industry and support our future growth. And in summary, this farm helps us to continue to be one of the largest almond growing processors globally. And we think it's a fantastic opportunity for the business to continue on its growth path. And we maintain high confidence in the underlying fundamentals of the industry.

I've got a few questions. How does the Piangil orchard compare to the other orchards that we've looked at? This is at the top of the tree. It's in the top quartile. I don't think there's many better assets out there that have come or will come on to the marketplace. The other one is, how are the current fires and drought conditions in California impacting the almond industry? Look, there's no direct impact on the trees themselves. There's been no trees burnt or anything like that. Look, the weather conditions have made it a little bit more challenging for them to dry their crop. It'd be fair to say they're probably going to have increased moisture in there, which will -- maybe the grading of the crop will be slightly down, and it probably will create a better environment for insects to live there, to breed in. So I'll just wait a couple of seconds to see if there's any more questions. Hopefully, I've covered everything. And there's -- and you people are as excited -- you, shareholders, are as excited about this as I am. Brad, have I missed anything?

There's one other question there, Paul, I'm happy to answer, around processing.

Yes, yes.

The Piangil orchard, their crop currently gets processed at the Almondco processing center in just out of Renmark. The question is, does Carina West have the capacity to process the Piangil crop? Yes, it does. So all the crop from next year onwards will go to our Carina processing facility, which is just over 80 Ks away, so it's close. And what capacity is left at Carina after allowing for the Piangil crop? So once we have this crop going into Carina, we'll be up close to 30,000 tonnes, which is sort of getting close to our capacity. With a little bit more investment, we can bring that capacity up to 35,000 tonnes. So we do, do some external processing at the moment. Some of those contracts will drop off this year. So we do have capacity at our current facility to handle that.

Okay. Thanks, Brad. I think we'll leave it at that. So if any people have any more questions, please feel free, at the back of our presentations, we have our contact addresses. If you can't contact us by phone, please e-mail me and we'll respond as quickly as we can. Thank you for your time. Goodbye.