Select Harvests Limited (SHV) Earnings Call Transcript & Summary

Okay, you're all right to go, Paul.

Thank you, Andrew. Okay. Welcome to Select Harvests' 2021 Half Year Results Presentation. Joining me today is our CFO, Brad Crump, and Company Secretary; and Andrew Angus from Overland Advisory, who manages our Investor Relations. This presentation is being recorded and will be available on our website. Brad and I will present the results and provide a market update. [Operator Instructions] Please note the disclaimer and the basis of preparation of this presentation. As an introduction to our performance in the first half of 2021, this has been challenging as it was in the second half of 2020. As you have previously been advised, like many businesses, we've had the operational issues of COVID-19. In addition, we've had market access issues in major markets, Europe, India and China. Like all export-orientated businesses, we have seen the dollar appreciate over 10% over the last 12 months. But the biggest single headwind was the U.S. industry's marketing of a record crop 20% larger than last year. The net impact of this is that Select Harvests has had delays in cash flow, depressed pricing and a much more -- a much weaker bottom line. As you can see, the low almond price significantly impacted our results. NPAT for the first half was $1.3 million. EBIT for both divisions was $3.1 million. The EBITDA was $12.8 million. EPS, $0.026 (sic) [ $0.011 ] per share. We maintained a strong balance sheet. Net debt to equity was 21.7% excluding lease liabilities. Operational cash flows was a positive $6.3 million. This cash flow was the result in part to the delayed shipments, all due to market access issues. In a normal year, our shipment profile would have been 75% of shipments were between March to August and 25% for the remainder of the year. In 2020, it was a 50-50 split. As a result of these results, the Board has elected not to pay a dividend. I would like to remind you that this result is prepared on the basis of the assumptions around cost, price and volume. The actual result is not known until the crop has been 100% processed and 100% committed. As we sit today, with 40% of the crop processed, 50% of the crop committed and 80% of the export currency hedged at 73%, we're anticipating a crop of 28,250 metric tons. Around 4,500 of this is from the Piangil acquisition. This is marginally higher than the forecast we announced on the 29th of March. Growing conditions we have seen were good without being spectacular. The harvest in New South Wales was delayed. The general quality is better than last year. And this, plus our investment in new [ shredder ] means that we are getting a higher percentage of inshell from our crop. The price realization is $6 a kilo, which is at the top end of our March 29 announcement. Market prices have remained low as the industry is marketed at the larger U.S. crop. The delay in the Australian shipments has put additional stretch on an already full supply chain. Prices have started to recover, but a lot of this has been evaporated through the appreciation of the currency. We have made a strong focus on our controllables, including the integration of Piangil Orchard, cost in general and staff safety. The acquisition is meeting its business case as we are well in the way -- underway in integrating the orchard into the Select Harvests group. We've kept our costs down through absolute cost control. We have a particular focus on our harvesting costs, Carina West productivity, our water strategy and our general repairs and maintenance expenditure. As always, our people are our first priority. Our team has continued to manage through the challenges of COVID-19 where total recordable frequency rate has reduced by 6%. I'll now turn to our operational performance. At these prices, we are seeing strong demand for all -- from all markets, China, India and Europe. Last year, the domestic market grew by 10% with over 350 new products being introduced into the market with -- containing almonds. Plant-based protein through products like almonds is becoming more and more an everyday staple in our lives. As I said, we have 50% of the crop committed. We're expecting similar pricing -- and we're expecting some further price recovery, but the full benefit will not be felt until the 2022 crop. We have inventory -- we have invested in new sorting capability, which has improved our in-shell yield and throughput. Water prices have fallen, but we have experienced -- we have experienced a small benefit as we were concerned about availability after the end of last season and carried a significant amount of water over at a higher price into this year. The food business transaction is proceeding with companies undertaking detailed due diligence as we speak. We've commenced some of the transfer of our industrial capability to the Carina West facility. We have capital plans to increase the value-added capacity at Carina West as the market demand continues. Recognizing the volatility and inherent risks, we have maintained a strong focus on our costs, cash flows and balance sheet. I thought it important to give you the context of this result. You can see what we can control, we are. If we can mitigate a risk, we are mitigating that risk. Unfortunately, it is virtually impossible to totally compensate for the almond price decline at this magnitude. You can see there that we've managed to maintain our cost, as we said, not far above last year with our orchard investment program that's seen volumes grow. And unfortunately, you can see what a dramatic impact the price decline has been. I'd now like to hand over to Brad.

Thanks, Paul. Good afternoon, everyone. As Paul has touched on, the reduction in the global almond price has had a material impact on the 2021 half year results. On a positive note, revenues for the half were 24.2% higher than the prior corresponding period. And this is due to COVID-19-related delays in sales in the second half of FY 2020. You'll see the impact of this on Select's operating cash flow. Select's EBITDA, EBIT and NPAT are all predominantly impacted by the reduction in the almond price from $7.50 to $6. This is what has been used in the 2021 crop fair value calculation. Partially offsetting this was the additional tonnage produced by the newly acquired Piangil Almond Orchard. Other factors that impacted the Almond Division's results were the ongoing lower value of the hull market as conditions remain positive for traditional livestock feed, and also moderately higher cost per tonne due to increased level of costs recognized as Select's younger trees mature by another year, and additionally, yields are lower than the 2020 [ expected ] results. The Food Division produced an improved result on the back of improved margins on value-added almonds produced into the industrial market. Additionally, there's been new Lucky product range in the major retailers, and continued growth with Sunsol muesli. Lower corporate costs are due to lower employee payments, including short- and long-term incentives and reduced discretionary spend. Moving to the next slide, which is an EBIT waterfall. This clearly shows visually the impact of the lower almond price, reducing year-on-year, the half year result by $25 million. There's a small benefit from water savings in the first half, and this is due to the lower price. The benefit will increase considerably going into FY '22. The half year result benefit is reduced to the large volume of carried-over water from FY '20 that came in at a higher price and the increase in expenditure recognized due to tree maturity profile. So more water has come on to our P&L. The Piangil additional volume has contributed $2.7 million in EBIT. And as mentioned earlier, costs per kilo have increased. Just going on to our sensitivities on the next slide. Whilst 40% of the 2021 crop has been processed, 50% contracted for sale and 80% of the exportable crop hedged against the USD, there is still potential for some movements. As shown on the table, there are 3 areas that are very sensitive to a small movement in their drivers: the crop size, the crop price and the USD per rate -- the U.S.-Aussie dollar rate, FX rate. You can see there that the sensitivities are pretty clearly shown. And this is on -- this is -- the sensitivities are based on the whole crop, the price and the FX, not on the amount that's still unsold. Just going on to our next slide. This slide gives us -- as shown on this slide, Select's cost per kilo for the 2021 crop has increased and this is mainly due to 2021 yields being lower than the 2020 record result and the higher recognition rates for our immature orchards. As the pie chart shows that while a large portion of these costs are considered variable, they are fixed in nature. For example, there's a fertilizer program in place during the growing cycle. This is committed cost based on an assumed tonnage. So we don't change that as the year goes on. Overall, costs only increased by 1.4% -- sorry, cash cost only increased by 1.4%. The higher overall increase was due to additional depreciation from the Piangil Almond Orchard acquisition. The balance sheet remains in a very strong position. Despite the lower earnings result, Select's gearing position remains relatively low at 21.7%, and all bank covenants were met for the half. Current assets are higher due to the inventory in biological assets as a result of additional crop related to Piangil. The increased sales have also led to receivables being higher as at the end of March. Noncurrent assets are higher due to the acquisition of Piangil coming onto the balance sheet. It's worth noting that all owned orchards and water assets that are on the balance sheet are at Select cost, which is materially less than their current market value. Bank debt is higher due to the portion of the Piangil acquisition that was debt funded, and bank debt is forecasted to reduce in the second half as 2021 [ sales increase ]. Finally on to our cash flow. Usually for the first half, Select produces a positive operating -- sorry, unusually for the first half, Select has produced a positive operating cash flow. This would normally be negative in the first half due to the growing and harvest costs offset by the second half when the bulk of the crop is sold. The reason this year produced a first half positive operating cash flow is that a significant portion the 2020 crop sales were delayed due to COVID 19. These sales accelerated in the first half of FY '21. Investing cash flows were dominated by the Piangil acquisition. Other investing cash flows were in line with the prior corresponding period, other than an additional $4.4 million of permanent water that was acquired during the period. Thanks, Paul.

Thank you, Brad. Now I'd like to turn to the market outlook. As many of you'd be aware, 80% of the world's almonds are grown in the Central Valley of California, and as I said earlier, the crop was 20% larger than the previous year. It is no doubt that the size of the U.S. market are the price-setters for the market. The 2021 crop is due for harvest in August. Currently, industry forecasts predict the inventory between seasons will be 8-week stock, which is a very manageable carryover, whereas last year, the carryover was larger. The size of this year's crop is the topic of a great deal of conjecture within the industry, with industry consensus well below the U.S. Department of Agriculture's forecast of 3.2 billion pounds. As you can see from the slide, the marketable crop will be somewhere between 10% smaller or 2.5% larger than last year. This is extremely manageable from an industry perspective. What's going to influence the size of this crop is going to be the impact of the California drought. Ironically, droughts are the best growing conditions for almonds on the basis you have sufficient water. The current allocations being deliberated in America means it's very questionable whether it's going to be sufficient water for them to grow a large crop. The conditions that -- in the market at the moment and from a water base perspective and that being snow pack, aquifer and reservoirs is very similar to the 2014-'15 period where almonds pricing moved up to over AUD 10. There is one big difference between the 2014-'15 drought is there's been an additional 400,000 acres of bearing permanent tree crops put into the Central Valley. To put this in perspective, they planted over 3x the Australian almond industry into the valley. The available water is the same. It'll become clearer if this is being accounted for in the crop estimate on July 12 when the Department of Agriculture -- the U.S. Department of Agriculture releases the objective estimate. At the moment, market pricing has really -- has firmed slightly, but there's a lot of subjective as to whether or not it's been fully built into future pricing. The other -- couple of other things to note in the industry forecast are -- is the slowdown in growth moving forward. As you can see, there's been quite a dramatic growth in the past 5 years. It's certainly slowing down in the next few years in America. And the impact of the water legislation, which is unknown, and probably hasn't been built into these orders. From a macro perspective, the impact of that legislation is that between 25% to 35% of all agriculture in the Central Valley is going to have to lay fallow. Now whether or not that is almonds -- how much of that is almonds has not being determined and really does depend on industry profitability. The index -- the appendix of the presentation contains a lot more detail about both the U.S. and the Australian conditions moving forward. Last night, the California drought monitor was released and 26% of the state is in exceptional -- in its exceptional drought condition, which is the highest drought condition. That is a movement of 11% in just 1 week. As I said, demand has been very strong for plant-based proteins, and they are becoming more of a stable part of our diet, things like almonds. For all the pain of the low prices, it can be said this is about the best marketing tool for driving future demand as almonds become used in more and more snacking, confectionary, bakery and beverage products. As you can see here from this chart, you can see the sort of the momentum that is building with double-digit growth in exports for almonds into mainly the Asian and European marketplaces. The industry through its industry marketing boards are continuing to invest heavily in the Indian and China and the European market. The health benefits of almonds are so well known that in India, they have been described as an immunity booster nut by the government, encouraging consumption during the COVID-19 period. if supply can't meet demand, inevitably price must shift up. Our strategy remains unchanged. It's to become a supplier leader in plant-based foods, namely almonds. It's basically around our strategic priorities to optimize our almond base. That's becoming -- through becoming more productive and potentially acquiring additional almond orchards, growing our brand, and particularly in the B2B environment and obviously, expanding strategically in areas where we think that growing almonds is going to be a long-term viable proposition. You can see here that we have the growth built in, and our volumes are assured moving forward from here through to the year 2028. And this is on the basis of the maturity profile of our orchards coming -- becoming older. Our focus is on the triple diagram of people, planet and profitability. If I look at our 2021 to '22 focuses, we've recognized that -- we're recognizing the need to drought-proof ourselves with ongoing focus on minimizing the usage and the mitigation of the water risk as one of our key activities. Last year, we published our sustainability report. The next step is to set more -- some more stretch goals, particularly in the environmental quadrant there or planet. We have the opportunity to commercialize our excess co-waste at our Carina West processing facility, selling it into other horticultural industries. Labor has been challenging, particularly in regional Australia, as you have seen. We're very dependent on casual and manual labor when we do harvest. We had no concerns with this -- no issues with it this year, but we're already planning for that next year as COVID seems to be continuing with closing the borders. As we've grown, our systems have been -- have become inadequate. If we want to be -- to get great people and have engaged people, we need to improve our systems. And also we need to have -- make sure we have the appropriate developments and plans in place. And clearly, the investment in Carina West to make sure it can take on both the capacity and the future capability that we're moving from Thomastown. If I go to our top 10 priorities, our safety and well-being, it's making sure that our horticultural programs are in place to deliver a big crop in 2022, completing the execution of the Food business restructure, adding further -- as I said, further capacity into our processing facilities, managing both absolute cost and cost per kilo, marketing programs to ensure we're the preferred supplier of our product into the marketplace. Clearly, with our sort of volatility, managing both our cash position and balance sheet is critical. Growing strategically as opportunities come up, selling the -- completing the sale of this crop at the price we forecast and managing our capital investments. Andrew I'm open to questions. Thank you.

Thanks, Paul. We've got a question here from Paul Jensz from PAC Partners. So I'll allow him into the room. Paul, can you hear us?

Can you hear me?

Yes. I'll hand over to you.

Okay. Just wanting to talk about the, I suppose, the M&A opportunities in Australia. With the prices where they are [ it appears to me at present ] at the places both here and looking into the U.S. that are making money, is opportunity opening up for you in this low-price environment?

We're aware of several assets which are for sale at the moment, Paul. We obviously have to be conscious of where we sit from a balance sheet perspective and actually the value that these properties deliver to us. We're very conscious that the cost of growing is different in different regions, and they bring different issues with them. Some of the properties we put a line through without looking at. If there's something that's attractive, we'll certainly have a look at the mature orchards. I'd say most sellers' expectations are probably above where we sit today. And there's probably a need to recognize where the market prices sits and the sort of cost in prices there are potentially looking forward in the industry.

And then on the U.S., any comments on the U.S., Paul?

Look, we're not engaged in anything in that area at the moment, Paul.

Paul, we have another question from Alex Paton from Citi.

Can you hear me?

Yes.

Awesome, in your release, when you say you anticipate the second half '21 result to be similar to the first half, are you talking about EBITDA or NPAT or another line item? Or am I reading that incorrectly?

Well, across all of -- because we recognize half of our result from a fair value point of view in the first half, and obviously, the second half has the other 50%. Unless one of those factors that we spoke of earlier changes, then the second half will be very similar to the first half. Across all that -- across EBITDA, EBIT and NPAT.

Okay. Cool, I just wanted to make sure that was the case. So think in the March update, you said you'd sold -- or committed 20% of the crop at $6.60 a kilo. This $6 average price kind of implies a big shift for the remainder 30% you've committed, probably implies a price around $5.60 a kilo. Is this just due to different quality grades? Or has pricing really deteriorated that much in 2 months? Because the export data would suggest otherwise.

It's mix. It's mix. We -- as I said earlier, I mean our export program's like 75-25, and the majority of that is in-shell orientated. So it's a mix issue, Alex. There is a chart in the back of the presentation that shows you that pricing has improved, particularly for nonpareil varieties, whereas the other grades have pretty much stayed the same.

Okay, yes. So I would have assumed you guys would have benefited from some of that nonpareil strength. Is that right?

Yes. Yes.

Okay. One for me. With the Food business, treating that brand -- those branded sales and non-almond stuff as a discontinued operation. The EBITDA margin seems to have improved markedly to about 13% in the first half. Is this level of margin appropriate for that food business going forward?

Yes, it is. So that's all -- that component of our Food business going forward is all our value-added components. So for example, it's your paste line, that's your sliced and slivered that's overseas. So yes, those margins going forward are right, bearing in mind also that our production facility in Thomastown will no longer be part of that. So that's all product that's produced up north in our factory in Robinvale.

Paul, we've got a question from Jonathan Snape, Bell Potter.

Can you hear me okay?

Yes, Jon.

Look, just a couple of questions. Maybe first, just following on for the pricing one earlier, that 50% of the crop that you've committed, at what price point have you actually committed that?

So the 50% that's committed is -- well it's committed at a price over $6 at the moment. But as Paul mentioned, we obviously also have a trial of manufacturing grade product that will come in into the mix later on that will draw that price back down to the $6 that we estimate.

Okay. And where are you seeing spot pricing at the moment?

Well, that depends on what product or what grade we're looking at. I don't have...

I think historically, you kind of -- in the last update, I think you said it was like $5.50 to $6 is where the spot has -- was. Has that moved up since then? Or is it kind of a [indiscernible] still.

Jon, if you refer to the graph at the back of the slide, the non-par price has definitely moved up a little bit. The other stuff stayed about the same. So it's -- and then you've got to back out a little bit of currency there because of currency depreciation. So look, it's in the -- it's similar zone.

Okay. Look, can I just ask a question around the cost structure. And in particular, I guess I can reference the depreciation rates. And as well the kind of comment in there that you bring on some of the younger trees, and so it's creeping up the cost per kilo. And obviously, you guys capitalize some of these costs as the orchards are maturing. But the PP&E particularly lifted a lot. The depreciation really hasn't followed suit, which would kind of suggest that there's probably a fair bit of Piangil depreciation still being capitalized. Is there any way you can give us an idea of how you expect, say not just this year, but looking out next year and the year after, as those orchards mature. How do we think about that shift in capitalized costs coming on to the P&L as an expense line item?

Yes. That's something that I can go through in a bit more detail with you offline, Jon. But fair to say that we had a -- some of our immature orchards had a spike up in production in the last couple of years. So there were some -- sort of some cost benefits that flowed through from that. And now they're flattening out to a level which was sort of more expected. So that's why there's been -- from 1 year to another, there's been a bit of an increase in that cost per kilo from immature orchards. With our capitalization that we do over a 7-year period for younger trees, we try to average that out. So the capitalization of cost increases with the level of production that those trees produce. But as I said, some of these immature orchards that were put in place recently have exceeded their production in their younger years, which meant that their capitalization, right, and the production has sort of -- hasn't quite matched up as it has previously.

Is there a simple way where you can say, I guess, this year's cost per kilo moved. How much of it kind of reflected costs that, say, were capitalized last year in terms of water and I guess, operating, which were then expensed this year? Is there like a simple number we can reference? Is it that 3 that's in the bar chart? Or is there a little bit more in there in addition to that?

Sorry, which 3 are you talking about?

I think you had one further where you had the movements year-on-year in the EBIT. I think it was the EBIT waterfall one right back, yes that one, yes. Is it simply that growing cost that $3 million? Is that the number I should be looking at? Or is there other components of it fixed and elsewhere in there?

Yes. So that growing cost, that's the pure - that's the costs that have come on to the -- that's the increase in costs that have come under the income statement for the half. So it's $5.8 million for the year increase in growing costs that have been recognized.

Paul, we've got a question from Simon Conn of Investors Mutual.

Can you hear me now?

Perfectly.

Cool. Okay. Quick question on the balance sheet. Can you just -- you quote your PP&E quota as $430 million. Because it's a half year account, you've got a breakdown. I think in the slide, you say some of that's a cost and others at market. Can you give us a breakdown of the $430 million in terms of what's in there and then just in terms of what the market value might be, more reflective of the current asset prices in agricultural assets?

If you go -- if you have a look at our annual report, we sort of break it out there. That was at the year-end is at the end of September. If you bear in mind that market prices and permanent water prices probably haven't shifted much from that point, then that will give you a good indication as to what the variances are between what's in there at cost. We don't -- so we don't -- we don't revalue any of our assets on our balance sheet. So anything that we've applied in prior years is still there at the acquisition price. The only recent thing that would have come on board would have been the Piangil acquisition that we did that we brought on board in December, and that's all sitting there in our noncurrent asset line that you've got there. And you can see there, if you look at the cash flow, it will give you a bit of a breakdown in terms of what -- when we've done the PP&E, what the uplift in the investing cash flows are, what we paid for the -- or went out for the Piangil acquisition of $138.3 million, which includes some water as well.

Isn't it 124, sorry? Oh, the 138 -- actually the 1, the 10 -- 870.

Yes. So if you have a look on the cash flow slide there, the acquisitions $138.3 million. So that was $129 million for the actual orchards. Apart from that, there are other costs on top of that relating to the capital raising and so forth. So included in that number is $13.5 million orders for [indiscernible]

Okay. So Piangil was -- was it in the half, Brad? Or no it wasn't, was it.

Yes, it's the half, yes.

You're referring me to the annual report in September, Piangil wasn't in it.

Yes, so that wasn't in there. So if you take Piangil, we paid market price for Piangil. So assume that hasn't moved. If you look at the annual report, that's all our other own orchards, we give an indication there as to what values came in at as opposed to what our cost price is.

And those valuations you think are current?

Yes.

Yes. Nothing much has changed since that time. And in fact, we did valuations again of our orchards when we did the -- for bank purposes when we acquired Piangil. And if anything, those valuations have gone up a little bit from what's in the annual report. But that's a non-audited valuation number.

Okay. And just, obviously, India is obviously the -- with the COVID issues over there. Can you just talk about logistics getting product into India and payments and how that's going?

Look, I mean, it would be fair to say logistics generally is pretty bound up. I don't think I'm telling anybody they don't know about the evolution and logistics of moving stock around at the moment. But we're definitely getting product into India. Initially, when COVID was announced, there was a real concern that all the ports would close down and the ships wouldn't go in there. That's sort of freed itself up, we think. So tried to transship into -- we also -- which port we can ship into is not necessarily a 1:1 too, but we can get the product moved internally. So there is a slight delay. Looking generally, Indian market from talking to the people in the market is very buoyant still, and they ironically feel that they're sort of on the other side of COVID, in some parts, some of the people we're talking to. So it seems very strong. And there's no real inshell left in the U.S. market. So we're really having pretty good run at it at the moment.

Right. And dare ask, can you just give us an update on China? What's going on there?

Look, China, there's no direct interference from the governments in us trading in almonds. We haven't got any concerns such as other industries have at the moment and hopefully we won't have. Definitely, some of the anecdotal stories you hear about challenging getting stuff through ports and things like that. We're certainly aware of that. Really, what we're having to do is make sure whatever product goes in there is in -- all the documentation is right, everything is pristine. There's no quality concerns. So we're having a higher level of governance around ensuring that what is in the documentation specifically matches the documentation, which might sound pretty -- yes, don't you do that every day? But it's the little things like if a label is supposed to be printed in black, it's printed in black, and dark blue doesn't do. It's that sort of stuff. That's the sort of detail we're going to. And we haven't experienced any issues to date. And they're an important market to us. And the product appears to have strong demand still.

Paul, we've got Mark Topy from Select Equities. Mark, are you there?

I might answer a couple of the investor -- retail questions while we wait for Mark, yes?

Yes.

Somebody asked -- I've got a question here, what would the impact be if the almond price was $7.50? Look, just take -- it's $1.50 times 28,000 tonne -- 250 tonnes, I mean. The cost would be pretty much the same. All of that would drop through to the bottom line. I don't think you feel any different about that, Brad, that answer?

No. Exactly. That's right.

Another question is would we consider developing orchards in Western Australia. Not at this stage. There's still opportunities in the Murray-Darling Basin. Issues with infrastructure support. It's 3,000 kilometers away from that processing center. There isn't enough industry infrastructure to support investing in greenfield acres in Western Australia at this point in time. I think that's the only 2 questions I've got so far.

Well while we're waiting for Mark, I'll put James Ferrier here, who's from Wilsons Advisory. James, can you hear us?

Yes, I can. Andrew, can you hear me?

Yes, perfectly.

Apologies, I did join late. So if I'm going to ask you a question that you've already answered, tell me to move on, and we can take it up later. On Slide 12 of the presentation, which shows a profile of production costs. Can you just clarify the definition of that production cost? Is it as simple as saying crop volume times price equals revenue, less EBIT is your production cost? Is that how you calculate it?

Roughly, James. These costs are actual costs that were -- that go through our income statement or that we -- costs that we recognize. So these are actual costs. But yes, the cost per kilo is obviously our total cost bucket divided by the number of kilos that we produce.

Yes. So I guess, is it a number that we can reconcile based on the account that you disclosed to the market? Or are there balancing items that we'll sort of never see?

There are some other factors that aren't included in here. So for example, if we process our product for third parties, if we -- our wholesale, sale on assets, a number -- this is just purely on the actual crop that we've produced and the costs that relate to that crop. So that will give you -- the fair value on the crop, so the profit for the actual crop, I think is around about $12 million. And then there are other factors that are on top of that.

Yes. Okay. Good. That's helpful. And the outlook for farming costs or production costs in the year ahead. I think you made reference specifically to water costs and the quantum of benefit you're looking at there, but beyond water?

We're not seeing -- at this point, we're not seeing any major uplifts in our costs. So other than the fact that our lease costs will rise year-on-year with CPI increases. But all our other costs should remain relatively flat. What will impact the sort of cost per kilo, if you like, is our yield performance going forward.

Yes. Okay. So when you -- essentially, if I can paraphrase what you're saying there, is on a cost per acre, you're talking pretty flat. But if yield performance improves or sort of stays at these reasonably good levels, then the cost per kilo can come down?

Correct. Yes. That's right.

Yes. Okay. The Food business, I can see in the accounts, you've presented the continuing and discontinued earnings. Is the continuing business earnings for Food, is that indicative of its full potential post the changes? Or are there still a bunch of other changes that you can make that could potentially see further improvement there?

That number that's in there is sort of -- is a like-for-like, if you like. So if we transfer what we're looking to transfer up north, that's the sort of numbers that we'd be looking at. It doesn't take into account any further possibilities of additional products we may be able to do up north. That hasn't -- but there is no large expenditure items that still need -- that will be in there.

Okay. Great. And then last one, can you just explain the difference between the P&L interest expense and the cash flow interest cost? It might be an AASB 16 thing. I'm not sure but that just sort of pretty small number versus about 7 or 8 on the cash flow statement.

Yes. That's exactly -- the differential is through the recognition of AASB 16.

Paul, we've got Mark Topy. And again, I think he was having some issues before. But Mark, can you hear us?

Hear me?

Yes.

Sorry about that. But Paul, you did mention you see globally this increased demand with the lower almond price. I'm just wondering if you might be able to expand on perhaps where you see it coming from and how sustainable that might be going forward in terms of the total of demand picture?

Yes. Look, if I go through the regions, India has been the star performer. It's become the second largest market in the world. And that's definitely, you'd have to say India and China are the more price-sensitive markets. But every time we as an industry grow, it sticks. And I think you can't underestimate the -- if the government comes in and encourages you to eat these products, you can't just underestimate that. China has definitely bounced back to pre-COVID type volumes. So that's going well. Europe has been a very constant despite all of their market closures. It's continued to grow at that sort of 6% to 8%. America has been a little bit softer. But what if you have to look at the underlying numbers there, it's manufactured products. So it's ingredients product, its beverage products have been very solid on the way through. So all of those markets we can see ongoing growth there. Looking at domestic market, ironically, grew 10%, which is pretty unusual. And a lot of that is put down to baking and more people working from home. And some of the European markets have experienced the same thing. And it seems that if people stay at home rather than -- in all economies they actually eat healthier than when they eat out nowadays. So that's where we see it, Mark. And it's in the -- and a lot of it is driven in what I'd say is more price -- less price-sensitive areas where we aren't 100% of the product cost.

Yes. Okay. And you alluded to the lower water costs as is at the moment, can you just maybe talk us through what you see is in that component of your, if you like, spot purchasing going forward? Or what's the sort of strategy? Do you try and lock in at this point? Or do you wait and see how the season unfolds in terms of water prices? Can you talk to that or perhaps a little bit?

Yes. The reality is we have to carry some water over. And more -- it's just as much of a risk mitigation thing as anything because the allocations don't come out the first day of the year. So we do need to carry some water over and we always do. And we'll -- there's a certain rump of water, which we'll always carry between season and then we may well top up on that. This year, the outlook is for the next quarter for above average rainfall. So we'll be carrying stuff over. You'll see that all general allocation water in New South Wales and Victoria, some of them have had no allocations where we sit today. You've got to say there's a couple of years of that water there, which will keep a ceiling on pricing. Entitlement pricing hasn't moved at all. So that's, I think, a function that there's more permanent cropping in the valley. So people are acquiring water as a risk mitigation strategy similar to ourselves.

Yes. Okay. And if I recall correctly, just in terms of what you deem to be your optimal mix. Did you have to acquire some more permanent water for Piangil going forward?

Yes. We've acquired a little bit of that. We're probably -- we're below our strategic number at the moment. And we're just taking the time to accumulate at that over time rather than rush out into the market, looking at our current profitability. And also when we go into the market, we don't want to signal the level of activity we've got or what we want to get.

Is it fair to say, looking at your commentary on that water side, some of the more frenetic sort of activity around water purchasing might be slowing down a bit there? Or is that kind of sort of takeaway from that chart on future water purchasing?

I think the market -- look, the people getting full allocations and high allocations, the pressure on the water market is clearly a lot less.

Yes. I'm just trying to think through some of those major projects that we're kicking around that -- whether some of those have gone away or not?

Major projects by us or by...

Oh, no. Almonds, olives, the whole kind of...

There's still plantings going there. They're definitely coming down the number of -- there's a lot less new plantings from nursery sales going forward than there are today. I think we're a little bit like that chart that we show in the U.S., where I think we've gone through a similar level of activity, and there'll be a similar level of flattening because people are concerned about water availability and water deliverability. I mean -- and you've got one state government that's not issuing any licenses, the Victorian government. So that's potentially affirmed the opportunity there.

Yes. And there's no negative sort of implications to you from this whole Murray River review and so forth that you can see?

No. I mean, probably didn't get our wish list on it. But no, there's no need to be negative about it.

And just perhaps lastly, so historically, in terms of where you're positioned now on your forward sales of almonds is probably a little bit less than historically. So I'm just -- your confidence level around that selling the balance of 50%, you're feeling pretty confident around that. And maybe seeing a little bit of a positive price movement there?

Look, I think what I outlined in supply and demand is in theory, that pricing should move in an upward direction. The only thing that -- the only thing that can -- there's only 2 things that can disrupt that. One is the currency appreciates faster than price. And the other one is that we don't have the quality that we think we have on the crop.

Paul, we are all out of questions.

Okay. All right. Well, I'd like to thank everybody for connecting up. And for those of you we're going to see in the next couple of days, look forward to seeing you via Zoom or Teams, as unfortunately as Victorians, we're not moving too far. Have a safe weekend.