Select Harvests Limited (SHV) Earnings Call Transcript & Summary

Good morning, and welcome to the 2021 Results Call of Select Harvests. My name is Paul Thompson, I'm the Managing Director of Select Harvests. And joining me today is Brad Crump, our CFO and Company Secretary; and Andrew Angus from Overland Advisory. Brad and I will present the 2021 results and an outlook [indiscernible]. At the end of the presentation, Andrew will [indiscernible] following the webinar for questions. If you feel uncomfortable using the webinar format, Andrew's e-mail address is on the next slide, and you will be able to pick that up. So it's -- so Andrew's email address is [email protected]. Please note the disclaimer and the basis of preparation of these results. [ 2021 ] was definitely a very challenging year. The U.S., where 80% of the world's almonds have grown, had a record crop, 21.6% up on last year. Market demand was erratic as cities went in and out and countries went in and out of lockdown during the COVID-19. Global freight has become increasingly challenging as the world has exited the pandemic. Market pricing dropped to its lowest point in the last 5 years. Operating orchards along the 3 borders with different state COVID [ regulations ] [indiscernible] operational and cultural issues. [indiscernible] side, we acquired the Piangil almond orchard, adding 20% to our volume. The Carina West processing facility operated at record production rates. Our investment in the new inshell sorters resulted in 50% more inshell product to supply the important Indian and Chinese markets. We continued to exceed our industry average yields across all age cohorts in our orchards. As a result, [indiscernible] sold our Consumer Brands business [indiscernible]. Our safety performance improved across the board. We published our second comprehensive sustainability report. Our value-added facility in Parboil continued to improve its cost position, its capacity and capability position. 30,000 metric tonnes of compost was recycled back into our orchards, and we were able to keep our Thomastown facility operating located in the Northern suburb [indiscernible] was at elevated levels [indiscernible] operation -- operational. In summary, what we could control, we managed well. What we can mitigate was mitigated, and the impact of the uncontrollables was minimized. If we turn to some of the key points of the result. As you can see, the impact of discontinuing operations has weighed heavily on our results. Our NPAT, including that, was [ 15 ] [indiscernible] continuing operations [indiscernible]. Our EBIT was $18.2 million. If you exclude the discontinuing operations, it was $32.3 million (sic) [ $32.6 million ]. Our EBITDA was $40.4 million. And if we exclude the discontinuing operations, it was $0.573 (sic) [ $53.7 million ]. Our earnings per share was $0.127. Recognizing the performance and -- the underlying performance, the directors have approved a fully franked dividend of $0.12. This also recognizes and reflects [indiscernible] the future earnings. We've been able to [indiscernible] a strong balance sheet, and net debt to equity was at 18.6%. You may recall last year, cash flows were delayed as a result of COVID where some buyers canceled or renegotiated contracts. You can see from our position sold and shipped, which is exactly the same level, around 80% this year with a 20% larger crop, our cash flows have returned to their normal cycle. We anticipate this to continue [indiscernible]. Let's just walk through the discontinued operations. After an extensive review by the Board and management, a decision was made to exit the Consumer Brands business, private label packing business and the non-almond industrial business. These business segments generated $5.5 million in EBIT. As a result of the sale of the Lucky and Sunsol brands to Prolife New Zealand, we had a $2.2 million write-off against the fair value of the brands. The impact of the discontinued [indiscernible] was $6.3 million, which was costs for the closure of Thomastown. The total impact was $10.2 million. There was working capital to be released, and this will be reinvested in our almond division, including the capacity and the capability of our value-added Parboil asset at Carina West. If you look at the operational review, our crop was up 5,000 tonnes. The vast majority of that was the Piangil acquisition, and Brad will share more with you on that in the future. [indiscernible] and market conditions, the price per kilo -- and due to marketing conditions, apologies, the price [ per kilo ] was down $0.70 or $0.094 -- 9.4%. If you go to Slide 38 of the pack, you'll see the pricing history in US dollars and see how low these prices have gone to. Water pricing has been relatively flat, but we are expecting significant benefits in the year as the temporary water price sits at around $100 a day versus [indiscernible] last year. Our cost [indiscernible] was up 2.9%. Brad will explain this in detail. Pleasingly, our lost time frequency rate has dropped 24%, which means we're operating a far safer business for our employees. If you look at this result in context, as you'll see, the scale and tight cost control is critical in our business. Backing out the discontinued operations gives you the true picture of the potential of our [indiscernible] water prices, the almond price [indiscernible] historical averages all bodes well for the future for Select Harvests. Again, let's reflect on the importance of maintaining strong cost control and delivering higher yields. I'd now like to hand over to Brad.

Thanks, Paul. I'll cover off on the financial performance of the group and also touch on our work health and safety performance and the yield performance for the year. So firstly, on our [indiscernible] as mentioned, [indiscernible] delivered a [indiscernible] 2021 reported NPAT of $15.1 million, made up of $25.3 million from continuing operations and an NPAT loss of $10.2 million from discontinuing operations. This result is made up of continued operations revenue recognized of $228.6 million. That's up 22.2% from last year. This is due to an increase in physical sales compared to the lower volume shipped [indiscernible]. The higher recognized revenue [ flowed ] through to the EBITDA as we unwound the fair value of the respective yielded crops, that is EBITDA as reflective of the crop yields' earnings. I'll talk through the drivers of the lower EBITDA shortly on the next slide. Depreciation charges were up 14.7%, and that's mainly due to the acquisition of Piangil and the assets coming on to the balance sheet. A modest interest expense of $2.2 million was up 14.7% (sic) [ 15.8% ]. And again, that's due to the debt funding portion [indiscernible]. The continuing operations tax rate of 16.8% was low due to an adjustment of $3.7 million that was made in the prior year tax accounting, and that's in respect to a conservative 2020 position that was taken on AASB16 impacts to the growing crop that year. Just touching on the discontinuing operations. An EBIT loss was in line with last year with increased volumes offset by lower margins, which were impacted by retail and private label competition. [indiscernible] had been recognized in 2021 year, with most of this being through the loss of the sale of the brands, redundancies and an impairment of plant and equipment that we currently hold at Thomastown. Just moving to Slide 11, which is the EBIT movement. This slide reflects the key impacts to Select's continuing 2021 results. The major impact was a $0.70 per kilo downward movement in the almond price. This was partially offset by a [ $5 million ] reduction. Production cost per kilo for the quarter increased by 4.5%. The main reason for this is the increased cost recognition of our immature orchards. They had exceptional yielding years in the prior 2 years. And as this flattens out, the cost recognition catches up. A modest lower water cost per kilo was achieved. Higher-priced 2020 water was carried over into the 2021 crop. So the full benefit of savings from lower water prices [indiscernible]. This will be approximately $6 million to $8 million or equate to about a $0.23 per kilo saving. Increased volumes of value-added material added $1.2 million, and increased external processing and wholesale volumes added a further $1 million. Just breaking down the costs a little further. The overall almond cost of production increased by 2.9% to $5.63 per kilo. As mentioned previously, [indiscernible] immature orchards. On top of this, depreciation also increased due to the tree depreciation related to the Piangil orchard acquisition. Just moving on to the balance sheet on Slide 13. The balance sheet remains in a very healthy position. The major movements all relate to the acquisition of the Piangil orchard such as increases in our current assets due to higher growing costs, which relate to the 2022 crop; inventory on hand, which relates to the 2021 crop. [indiscernible] seen the value of the [ acquisition ] to the balance sheet. And similarly, our borrowing costs have gone up, being the debt-funded portion of the acquisition. It's worth noting that the company's orchards and water assets are recorded at cost of purchase. Evaluation of the orchards was not undertaken this year. But given market movements, they are still considered to be valued at least $80 million higher than their book value. A market assessment was conducted on the company's water assets as at 30 [ September ] [indiscernible] was $106.9 million, which is $51.8 million higher than the book value. So in total, between the orchards and the water values, there's an additional $130 million to $140 million of value not recognized on the balance sheet. Just on Slide 14. Capital management is a key focus of the company. As shown, we scaled back and deferred some CapEx in FY 2021, and this was due to almond prices hitting historic low. [indiscernible] working capital [indiscernible] were well maintained. As a consequence, our bank debt gearing levels remained below 20%. Given the company's financial position and confidence in earnings going forward, a fully franked dividend of $0.08 per share was declared. Our cash flows on Slide 15. Two things to note are reflected on the 2021 cash flow. Operational cash flows improved. This was due to increased levels of [indiscernible]. While shipping remained [indiscernible], the company is managing a constant flow of product out through lengthening forecasts and corresponding space commitments. Secondly, investing cash flows jumped significantly due to the acquisition of the Piangil orchard. This was reflected in the water rights and bearer plants and plantation land. As shown, this was funded through a capital raising and an increase in debt levels. Moving now to our health, safety and well-being [indiscernible]. Focus on work-life balance is the company's #1 priority, and we continue to aim towards achieving 0 harm. There was a slight rise in our recordable injury frequency rate with a number of incidents being reported increasing through the implementation of an automated technology-based system. This was also shown by the 152% increase in the number of hazards identified. This is a positive result as the more hazards that are identified, the more actions that can be taken to prevent any [indiscernible] identification remains a key proactive strategy for [ Select ]. We continue to take actions to embed a strong safety culture in the business. FY 2021 was another challenging COVID-impacted year. The company, through measures put in place and flexible employees, operated throughout the year in all areas with minimal disruption. Our yield performance on Slide 18. Select delivered another strong yielding year in FY '21. [indiscernible] industry standard of [ 1.3 ] [indiscernible]. All regions would have achieved this if it weren't for a major power outage impacting one of our largest orchards in the central region. Piangil performed above our business case expectations, and South Australia again delivered exceptional yields. The immature orchards again produced positive results with the fourth and sixth leaf orchards performing very strongly. The lower growth rate of the fifth leaf orchards, while still well above industry, was what impacted some of the cost rise last year [indiscernible] since last year. Importantly, [indiscernible] of consistently high yielding results with implementation of frost fans and first-class horticultural program, ensuring consistent performance. I now hand back to Paul.

Thank you, Brad. The first point I'd like to make before we go into the pricing and the market conditions is that the demand and the consumption of almonds has continued on throughout the COVID period. Which channel has been consumed through this [indiscernible] macro of the business is very [indiscernible]. The second point I'd like to make, at this time of year, it's always the most difficult time to forecast prices as the U.S. growers are yet to understand the full size of their crop and they are unsure about the potential worth of next year's crop. As I said earlier, last year's crop was huge at 3.2 billion pounds. Our marketing program, to clear this, was disrupted with the COVID issues [indiscernible]. And so simply, at the end of the season, the supply chain was full. Adding to these difficulties is 100% of the U.S. crop has to pass through some of the most congested ports in the world, L.A. and Long Beach. But if you look to the future, you have to really consider the following. Prices for last year for many U.S. growers were at or below their cash cost. So there is upward price pressure from growers. The 2020 [indiscernible] in the 2021, any rain will not create additional nuts. The budding points for this crop was set back in May. Labor, like in Australia, is in short supply and more expensive. Costs of fertilizer, transport and fuel are increasing as they're global commodities. Some of the growers we've seen accepting these lower prices because they just can't afford to wait for pricing to recover as they need the cash to invest in their 2022 crop. [indiscernible] lock down their inventory. Innovation and future demand of almonds has been actually stimulated by these lower prices. Fortunately, in Australia, we don't have many of the challenges that they have, particularly water shortages and drought. We anticipate prices will recover. As a consequence, we are delaying our 2022 marketing program versus previous years. As I talked [indiscernible] we had a good pollination, particularly in Victoria and South Australia. We have been impacted by the recent storms in South Australia, but the impact was not material. We would like to see the rain stop, which is a little ironic for an agricultural company. But that's so we can actually deliver our horticultural programs as we'd like to do that in a much less challenging environment. We have just completed an upgrade of our Parboil facility, and it is back up and operational, which will give us more capacity. We are planning an upgrade [indiscernible] and packing area, which will allow us to improve the quality of the crop and put us in a position to take more advantage of market movements so we'll be able to process our crop quicker and either warehouse it or meet market demand immediately and in many ways, avoid some of the dynamic movement in the -- as a result of the U.S. crops. Now look, our business has a triple line focus. Our aim is to make sure we [indiscernible] passionate and engaged workforce, plus recognizing our role in regional Australia. We recognize the threat -- from a planet perspective, we recognize the fragile state of our planet. We are ensuring that we are both efficient and responsible when using critical resources such as land and water. Our objective from a profit perspective is to continue to provide shareholders with a positive and competitive returns. [indiscernible] activities from water, 100% of this are managed using the most advanced soil and water -- water, soil and tree monitoring systems. As Brad said earlier, at current prices, we're looking to save around $6 million to $8 million. Sustainability. We are concentrating on developing a more comprehensive strategy. And naturally, as a grower of almonds, we have some natural advantages in this space. Secure [indiscernible] retaining labor has been challenging, continuing to invest in our workforce, meeting their expectation of flexibility and development. Seasonal labor has definitely been challenging, but the recent change -- the recent opening up of the state borders has made it a little less challenging for us. From a profit, we continue to see further opportunities to increase our profit through cost control, innovation and commercializing everything we grow. Co-waste represents about 70% of [indiscernible] this resource is a huge opportunity [indiscernible]. Our biomass plant has become more efficient, pumping out more energy. But we see big opportunities to recycle its co-waste potash back into our orchards, even further closing the loop. Another exciting progress is through the gestation process, recovering the nutrients from the fruit mass of the hull and again, closing the loop by returning it to our orchards. Some of the [indiscernible]. If you look at our strategy, it remains unchanged: to be a leader in the supply of better-for-you plant-based foods. Our values have remained unchanged. And our operational focus remains on customer supply chain, people and capital. What we're looking to do is deliver sustainable shareholder value creation. And as you saw on this previous slide, our strategic proprieties remain optimizing our [ almond ] brands and expanding strategically. Optimizing our almond base means remaining a top quartile grower by delivering consistent high yields and controlling costs. Growing our brands, we are recognized through Allinga Farm and Renshaw brands as a Tier 1 ingredient supplier to food manufacturers throughout Australia and Southeast Asia and New Zealand. Expanding strategically, you've seen this year the impact of scale. If we can acquire or develop orchards at sensible prices, we will do [indiscernible]. Volume growth, you've seen [indiscernible] internal benchmarks. Our crop will be just under 30,000 metric tonnes, but this does assume normal growing conditions. And as I said earlier, we've got a good start on that. It's worth reflecting on where we've expanded in the last 3 -- 5 years, which is in the value-adding component of our business. You can see that the almond industry is moving more and more towards about being an ingredient as opposed to just a straight snack. We are set up to participate [indiscernible]. We will continue to look for ways to invest and innovate and increase our exposure to this because we can only see it expand. From our priorities, the food business restructure is important. It's about executing our exit from Thomastown efficiently and respectfully for those employees involved. The Carina West development is the upgrade of the sorting and packing facility, which we talked about. Strategic growth, I've touched. Safety and well-being is making sure that we have a safe [indiscernible] ecological perspective. Again, on horticultural programs, executing our programs to maintain our yield and cost position is a clear priority. Our marketing program to put simply is about price realization, which is about understanding the dynamics in the market and getting the sales of our -- the timing of our sales program right. Managing debt and cash. Management recognizes the importance of managing debt in such a volatile market. You can [indiscernible] able to steer our way through that successfully. Value adding. We have -- as I said, we've [ activated ] that strategy 5 years ago, and we continue to see research opportunities to continue in that space. I'd like to thank the Board and the employees for the contribution in a particularly challenging year. And also, I'd like to thank you, our shareholders, for your support. Andrew, I'd now like to open the floor to questions if you'd like to let people in or however you do that.

Well, we've got a question from James Ferrier with Wilsons Advisory.

Paul and Brad, can you hear me okay?

Yes.

Yes. Thanks, James. Yes, clear as a bell.

Maybe Brad, just one for you firstly. This is sort of 2 years in a row where the cash flows have been a bit disjointed for various reasons. What's your estimate of the value of inventory that's sort of sitting on the balance sheet now that maybe in a normal year would otherwise have already been turned into cash?

Sorry, I missed that, James.

He dropped out.

I think he's dropped out.

Can you give us an estimate of the value of the inventory that's sitting on the balance sheet currently that in a normal year would have already been shipped to customers and turned into cash?

Well, as Paul mentioned, we've sold -- we're at the same percentage that we've sold last year at around 80%. However, [indiscernible] 5,000 more tonnes this year. We had an additional sort of 2,000 to 3,000 tonnes of inventory. So that would equate to $7 million or $8 million of extra inventory on the balance sheet.

Yes. Okay. That's helpful. And Paul, the ultimate price you achieved for the year, the almond price at $6.80, just comparing that back to where your sort of earlier guidance was going back a couple of months and in the context of the remaining portion of the crop that was yet to be sold is generally lower quality grades, that $6.80 looked like a pretty good outcome. Was that just the sort of the vagaries of how the market ended up within the ranges of prices you quoted? Or is there something more structural that you achieved on a sort of a go-forward basis within that price?

I think that obviously protected us from a lot of what's going on. We had a favorable mix to the rest of the marketplace as well, because the Californian crop was biased to smaller sizes, and we didn't have that bias in our group. Just to give people comfort around that, we've basically marked-to-market the pricing in the last 2 weeks. So I'm pretty confident of achieving [indiscernible].

Paul, we've got Alex Paton from Citi. I've got -- sorry, everyone. Pardon me, Apoorv's gone through, yes, yes, from UBS.

Paul and Brad, a question around market -- can you hear me as yet? Sorry, you're just cutting out. Can you hear me?

Try your question. If we can't hear, we'll ask you to repeat it.

Okay. It's a question on market conditions. Your view in the release is that logistical issues sort of won't be resolved until the new year. Are you hoping for like a January-type resolution? Or do you think it could take several months along for those logistical issues to resolve? And then I guess from a pricing point of view in that context, do you think we sort of fall a bit further until the new year? Or just what sort of downside risk to current pricing do you see?

I mean, that's the -- yes, the million dollar question, isn't it? Look, I don't think the freight is -- from all the reading I've done, I don't think this freight issue is going to unwind itself particularly quickly, particularly out of the 2 ports, Long Beach and L.A. What I do know is that the destination ports are going to run out of stock. And some of those destination ports, we have a natural [indiscernible] China, New Zealand, Thailand, Southeast Asia is effectively -- we don't -- Indonesia. We don't [indiscernible] the U.S. generally goes through 2 congested ports, L.A. and Singapore, to get to many of those destinations. From a market pricing perspective, I think there is a group of growers at the moment who are accepting prices because they have to from a cash flow perspective. And then there's a group of buyers who don't need to accept that pricing. So -- and I think that the [indiscernible] there's a [indiscernible] in 2 weeks' time in America when most of the growers and buyers get together, and they'll either come out of that more optimistic or more pessimistic. And then it is about blossoming in February. It will have to be something phenomenal for them to get terribly much more confident. And I think what you'll see at the moment is the control of the market from the buyers to the growers is going to transfer around that February period.

Cool. One more sort of a separate question. Just a question on mature yields. Historically, you've quoted like 1.35 tonnes per acre excluding Piangil and 1.4 including Piangil. What was that for FY '21 in the end and your expectations on mature yields in FY '22, please?

Paul, we couldn't hear that answer. You will need to repeat that. Paul, we're still not getting you.

Can you hear us now?

Yes.

Sorry. There's a whole lot of technology things going on here, including the fact that my power pack's running down. Sorry. Look, we've put in -- 1.35 accommodates all of the various age cohorts we've got into maturity because we do have which are [indiscernible] growing slowly from that perspective. That's a baseline that we use. We've exceeded in the last 3 or 4 years, but there is the buy-in and the nature of the tree. So -- and it's too early for us to tell now at what point whether we'll exceed that. I mean, I have every confidence we'll exceed it. By how much, I don't know. Apologies about the technical glitches.

All right. Paul, we should have Alex now.

Can you hear me?

Yes. Clear as a bell, Alex.

Perfect. Paul and Brad, just a couple for me. Now that you're reporting on a consolidated basis, how should we think about the remaining industrial value-add side of the business? I think you said you're approaching net sales of $60 million in FY '21. But just keen to understand what the EBITDA contribution was from a continuing operations perspective.

I mean, if you -- we're looking at reasonable margins on the $60 million. I might talk to you off-line about that in terms of the margin that we're expecting on the revenue and the growth. But yes, you can work on it. From an EBITDA point of view, you can certainly work on 20%, 23% margins on that revenue number.

Okay. Great. And then on the market pricing, the $6.75 to $7.25 a kilo, you touched on, I guess, more favorable pricing mix before, Paul. But just keen to understand what variety and quality mix assumption sits behind that, given you're still seeing a bigger divergence between pricing for large nonpareil kernels and some of the smaller size or industrial nuts coming out of the U.S.

Yes. That's a good observation, Alex. One of the things that you're seeing is that the pollinator prices has eroded much faster than the nonpareil price, and that's really because of the quality of the U.S. crop. It's not a great quality crop from our understanding. There's a little bit of insect damage, which is probably -- pretty reflective of a smaller crop because generally, the insects win, and we have more insects in smaller crop. So more of it's impacted by the damage. And that means that, that product has to be used like a pollinator in the manufacturing grades and things like that. Our estimation is that this is a pretty stock standard crop, normal sizing, normal inshell yields, close to what we repeated this year. So there's no bias to it yet. And we have no reason to have any bias about it yet because if you visited one of our orchards now, we have -- the trees are just -- we know the physical length and width of the size of the nut. But at the moment, it's the weight accumulation stage, which is going on. And that really doesn't end until the end of December.

Okay. So just assumed, I guess, business as usual.

Business as usual, yes. Yes.

Okay. Great. And then sorry, one more for me. The marketing year typically begins in March for Australia, and you said you might delay marketing activities. Might be a bit too soon, but when do you expect to begin them next year at this stage?

No. Our marketing year, we would -- potentially at this point in the time, in November, we will probably start marketing our crop. And we've got some -- if forward pricing was more attractive, we'd be doing that. But at the moment, we don't see the pricing being reflective of where we think the market is going to end up. So we've delayed it. So we will start at the appropriate time, which we -- if theoretically, we could wait all the way until February, we don't start harvest 'til February, so we could wait until then. But practically, we'll have to start before that.

Right. So just those forward sales are being deferred?

Yes. I mean, we -- if you -- it takes -- we've got to put the product through the hulling and shelling shed. Then we've got to sort the product, and then we've got to pack it and grade it and test it. So it's not unlike -- it's not sitting in the warehouse. So there's a bit of a time frame that we have to work in advance of that. And the other important thing at the moment is booking freight.

Thanks, Alex. Paul, we got a question from Jonathan Snape at Bell's.

Can you hear me okay?

Clear like a bell.

Great. Look, Brad, this is maybe one for you. Can I just ask around the depreciation charges? I think the number you've put in the presentation deck is about $21 million. And in the segment notes, it's much closer to kind of $28 million, which I'm assuming is $7 million capitalized into the inventory positions. If I'm looking into next year, your cost base, if you're kind of 80% sold at the balance date on a crop that's kind of about this size, should your D&A charge that you expensed be up $7 million year-on-year?

In terms of gross costs, you mean?

I'm trying to figure out the difference between the $28 million in the segment notes, the $21 million that's taken to account as an expense, which I'm assuming is the difference has been capitalized.

Well, the difference is in the [indiscernible], sits in the growing crop, yes.

Yes. So when I'm looking into 2022, my depreciation, is that going to be closer to the $28 million than the $21 million, I guess, is what I'm trying to figure out.

Well, it's going to be -- it should -- if we had a similar profile next year, it shouldn't alter dramatically, right? Because we're going to have similar inventory levels. It's not capitalized. It's put into the growing cost as we release -- as we sort of -- as we sell it. But so if the growing crop is of similar size and our marketing profile is the same, it shouldn't really change too much next year.

Okay. Okay. So it stays around the $21 million and never kind of -- if it starts to close up, like when the supply chains get normal, is that when it starts to correct back up? Because historically, it's only been about $1 million difference, whereas this year, it's quite a material difference.

Yes. Yes. And that's because I think -- that's because of the additional tonnes that we produced and were holding. But yes, if we were further sold, you'd see it closing up.

Okay. And around the lease costs, a lot of those orchards now look like they're getting into year 6, year 7. And I think you're still capitalizing around about $4.7 million. How should I think about that additional moving from the capitalized the expense line?

Yes. We'll start fully recognizing those capitalized leases in 2024. So you're seeing uplift in costs there when those capitalized leases start getting released.

Okay. So your cost per kilo then next year, obviously, waters down. You wouldn't expect much in terms of additional D&A much in terms of additional lease costs next year. It's all pushing out to 2024.

We'll see. It depends on the volume, right? But if the volume stays fairly stable, you'll see a further uplift in cost because, yes, we'll be releasing more growing costs because of the age of the trees, the young trees. But if that is reflected in increased tonnages, then it should stay -- well, excluding water, it should stay reasonably flat. And if you include the water savings, we'd expect it to come down.

So Paul, we've got Mark Topy.

Yes. Can you hear me okay?

Yes.

Yes.

Paul, just to go back to the buyers and the demand. I'm just wondering, I suppose the missing kind of thing at the moment is understanding like markets like China and India, just how strong they are and robust. And you sort of talked about China being delayed by the year. Can you just -- can you give us a bit more of a sense on how those markets are looking? And is COVID rolling off there? Is there any impact there just from a sort of fundamental demand point of view?

Yes. I think that there's a slide there that shows when you combine the Australian and the U.S. crop, definitely, that shrinkage is not as great. There's still strong shipments going into there. We're seeing both the China and the India market as still pretty robust. We're hearing of closures of cities and things like that, but we're not seeing that from a demand perspective out of those 2 markets. They're markets where there is normally less products stored in the channel, unlike, say, the European markets, where there's been a reasonable amount of investing in inventory in that market.

Yes. So just trying to think through that dynamic. So is there a possibility that could -- that demand could come home in a rush in the next few months? And with Indian festival...

Yes. Well, I mean, it's getting the product there in time. I mean, basically, Diwali was 2 weeks ago. Chinese New Year is late January, I think, this year. So really, those markets have sort of set themselves already. It's -- and Ramadan is early -- late April, I think. So that's going to be another demand point, which we'll get some access to but not a great deal of access to. So yes, I think those markets are pretty well -- are still a -- demand is good. And certainly, the China market seems to be having far less disruption than anywhere else because the reality is that's where a lot of the containers are coming out of and they have to get home.

Okay. And just in terms of this current season, obviously, a wetter season, can you maybe talk through additional costs there in terms of whether it's crop protection or weed protection? And also, I think going back in time, you put some new drying gear in place. If we do get into next year, just how are you placed to manage this season?

I'll go backwards on that question. From a harvest perspective, yes, we've got our dryer. We've talked previously about conditioners. We've now got a full coverage of conditioners in all that farm, where the last couple of seasons like that, which was like the 2010 to 2014 seasons where there's a lot of rain, we didn't have as much on-farm wet harvest capability, which we do today. So still, we'll be hoping for a long hot summer. But we're in a better position. But it's never ideal to have a wet harvest. The other thing about what has happened with the rain is it has delayed some programs, and some of them we will miss because we don't need to execute them. But it has certainly delayed things like hygiene where we're getting out there and cleaning the orchard floor and then it rains. And then suddenly, weeds come up. We see it in the garden in [indiscernible], I'm sure. So that is probably some of the biggest challenges. And it's also getting the labor to align with that, that's a bit of a challenge. But we certainly -- as I said, certainly would like to see rains stop sort of -- certainly, we'd like to see the rains stop by Christmastime because that's when hulls would start to get a bit harder, and there's a bit more humidity in the trees. And that's not -- that does cause some additional challenges and additional sprays that we have to do. And one of the issues with the rain is we can't get on the orchard to deliver some of these sprays. And we haven't missed any critical ones.

And just on the U.S. side, there's a lot of commentary about just the extent of maybe what is being taken out. Can you give us any sense on perhaps how you see the sort of supply going forward now? And...

I mean, look, there's a couple of things here. I mean, California is arguably one of the greenest governments in the world. There was a lot of negativity towards Governor Newsom when he got reelected. They had a special vote about him. So they're not going to get any less passionate about this -- the environment. We've seen the Signal Water legislation. They've got their first reconciliation point in 2025. And I can see that if anybody is lagging, that they're going to be much more aggressive to deliver that. In the presentation, you'll see there's like 100 -- 800 extra acres of permanent crop sitting in the valley, which will consume per annum 3.2 million-acre feet a year. And in storage today, there's 6.4 million. I mean, there's a lot of -- that bucket's got a lot bigger, and there's a lot more pressure coming out. I'm hearing about orchards taking out. I'm hearing about people using -- only watering 50%, applying water to 50% of their orchards. People would like to hang on for a lot longer than you anticipate. I've spoken to a large grower who's going to take about 2,000 acres out, but he's got a lot of alternatives to do with his land. So look, Mark, I think it will be -- the attrition will be higher. Ultimately, all of the universities say that 25% of agriculture has got to come out of California. Does that mean 25% of almonds? I doubt it because they're one of the more profitable crops, but it's certainly a little like Australia. I can't -- there's just not the water to continue the expansion that's gone on in the last few years. And that water -- the amount of water is contracting, and that has to mean that some crops have to contract as well.

Yes. Got it. And just lastly then on pushing out the -- I suppose, the forward contracts. Just sort of looking at the currency where it is at the moment, Brad, I'm just wondering in terms of FX management, is there any scope to maybe take positions? Or how would you approach that in terms of the crop going forward now as well?

Yes. We're well into our hedging program for our crop next year, probably more advanced than we normally would be on prior years, and that's purely because of that reason. So we've been building up our hedge position as there's been dips in the market even as recently as this week.

And we've got policies that we have to adhere to and report to the Board. And it's a topical conversation that we -- and the Board, we've given the opportunity, if we think it's appropriate to go back to them and say we need to take a little bit more, which we can.

Right. So you can't give us a sense at this point in time how much you've covered or...

We've covered -- roughly half the crops are covered.

At prices around sort of level -- current sort of levels in terms of FX?

In terms of FX...

Brad, we have to publish that, I would say. Yes, we're smiling.

We got a question from Richard Barwick of CLSA.

I think the first question I've got would be to you, Brad. Just going back, you talked about the revenue from the value added. Actually, you make the distinction here. It's net revenues approaching $60 million. In the accounts, you've broken it out. The revenue is more like $89 million. So -- and also, consider that's a new disclosure. So I've got a couple of questions. What's the difference there? How do we think about that when you've got sort of 2 numbers, a $90 million and approaching $60 million? Will you be disclosing those numbers ongoing because it seems like we do have a different EBIT margin profile on that revenue, for instance? And captured within that is the value-added revenue. Has that always been within your almond revenue? Or has there been a shift from -- associated with the food restructuring and so on?

Okay. I'll start answering some of those questions. Might be in order, but we'll give an answer to all that. So in summary, the value-added proportion of the business has ended up in the food results. Now that occurs through internal transfer, pricing of almonds to the food division. So in the end, it ended up in the food division results.

From an earnings or revenue, Brad?

The revenue would have -- the end point revenue, this is where we get to a bit of a difference, yes, a difference in -- when we're talking about net revenue and what your -- the differential you're talking about because there's an internal margin generated from the sale of the almond through to the food division and then the value-added component. So going forward, all that will stop really because we'll have the almond -- obviously, the cost of the almond coming into the value-add business, the value added cost to it, and then we'll be selling it for whatever the margin may be. So it will be a lot clearer going forward. And it will be one revenue value because there won't be this sort of internal transfer that occurs between divisions. So that's -- yes. So I haven't concluded yet as to how we'll actually report this to the market at the half year. But having said that, I'm confident that we'll be showing fairly clearly how this business -- this area of the business is performing.

Okay. Yes, I think that will be helpful because it's -- like it's a material component of the revenue. And if it's on a different margin, then it's -- from a forecasting perspective, to able to split them out, I think, is valuable. And I think you've answered my next question, which is around the -- in your cost performance slide, Slide 12, you look at the total almond production cost, and there's been a restatement on last year. For instance, I think last -- so you disclosed last year's cost was $5.47 a kilo, whereas you disclosed it last year of being $5.36. Does that -- is this what we're talking about here, the value added being shifted in?

No. No. So the difference there is, even though we've finished sort of the cost -- most of the cost component of the crop at this stage, it still moves around a little bit based on processing, based on the final tonnage, based on some other activities that are still occurring. So for example, at the moment, yes, we've still got a few thousand tonnes of crop left to go. Now most of those, all the growing costs have been incurred. But we still have processing costs, and those tonnages may move around a little bit. So for example, if there was an issue with 200 tonnes of product, then we had to write it off. All of a sudden, the metric changes. So there is -- whilst it's not -- so it does still move around a little bit. But it shouldn't really -- traditionally shouldn't really vary much at all at this time of the year.

Okay. All right. And then, Paul, perhaps a bigger picture question. It was interesting. You had the slide in today's presentation with the history of all the acquisitions and your greenfield developments since 2010, which, I mean, it's an extraordinary slide when you look at the level of activities and what you've actually done over that time frame. How are you thinking -- how should we be thinking about further acquisition opportunities from here? I mean, at least, at the total level, the industry is actually still very, very fragmented, but a lot of small players probably that you wouldn't be interested in. Are there any -- or how many are sizable or sizable enough players are there that would make sense for you guys to still bolt on?

Look, you're right about the small -- our model doesn't work with small orchards. We just -- it just -- we can't operate -- we can't invest sufficient horticultural infrastructure to get the return on it and mitigate some of the risks that we have out there. Look, we've always got sort of 3 or 4 orchards which we are aware of because it is a small industry. But if they come on to the market or we keep close to them to have -- make sure that if they're looking to do something, we're there. I'd say in the history, if I look -- reflect on the history, one of the biggest changes is that it's about water security and where it's located. I think we've made it pretty -- and the last point of that is we made it pretty clear, we're not really interested in some of the stuff in -- atop of the Riverina because of the challenges of the growing and growing costs up there. Whereas in South Australia, Victoria and lower New South Wales, we're more interested. But it's also making sure that we have access to sufficient water, which is now probably the limiting fact of anybody's acquisitions and developments in the Murray-Darling Basin.

Paul, we look like we don't have any more questions.

Okay. Well, as I said, you've got Andrew's e-mail address. You've got -- my contact details are available on the website and Brad's. So if anybody has any questions, please don't hesitate to reach out to us. And thank you for your support from the 2021 season. Thank you.

Thank you.