Select Harvests Limited (SHV) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the webcast of Select Harvest 1H '23 results. My name is Andrew Angus, and I look after Investor Relations for Select Harvest. I'll just wait for a moment while [ guests enter the ] room, and then I'll hand over to Managing Director and CEO, David Surveyor; and Brad Crump, CFO to get the presentation underway. All right, David, we're good to go.

Well, good morning, and welcome to the Select Harvests' 2023 First Half Results Presentation. My name is David Surveyor. This is my -- of course, my first half year presentation. I've been the Chief Executive Officer and Managing Director of Select Harvests since the 20th of February this year. And joining me today, delivering this presentation is our Chief Financial Officer, Mr. Brad Crump. May we have the next slide, please. The first half results presentation will be delivered by webcast and the link displayed below, as advised to the ASX last week. After Brad and I have delivered the presentation, there will, of course, be time for questions and to ask a question, simply raise your hand via the button on the bottom of your screen, and you'll progress in the queue and we give them the opportunity to ask your question. In the event, we have questions outstanding at the end of the allotted time, please contact Andrew Angus via the e-mail on screen, and we will deal with them subsequently. Next slide, please. This slide simply outlines the disclaimer and basis of preparation of the information contained in the presentation. Again, next slide, and again. In terms of today's agenda, look, I'll start by providing an overview of the business before handing over to Brad, who will discuss the financial results in detail. And following Brad, I'll then come back to talk about sustainability, strategy and the forward outlook before taking questions. So let's start by talking about safety. People are critical to our business and safety is our most important KPI. Our recordable injury frequency rate continues to head in the right direction, and as if the half year, it was 21.2% and today, it is 15.7 injuries per million hours worked. Our injury severity rate also shows a substantive improvement with 35% year-on-year gain. We believe safety events are generally the result of operational inefficiencies and poor practices, such that when you solve a safety hazard or risk, you also solve a business problem, or in other words, safety makes money. We have in 2023 changed our reporting measures for safety to be in line with other Australian companies. This will improve the ability to compare and benchmark our performance. Now we still have much to do to achieve our sustainability goal of zero harm. We're driving a clear sense of deep and though leadership to our people. We are raising the visibility of safety across the organization. We are building better safety systems, better processes and measuring our performance. It's important to note our safety focus includes well-being. We have recently held a stop for well-being session, where we stopped the entire company across all locations with all employees. We also support our people with community service days and provide an employee assistance program, which covers psychological, financial and health components. The increased focus and acceleration we are making in safety, signals the next step-up in cadence and culture of the company. On to talking about our financial results, it's clearly very disappointing to be presenting a poor financial result with a net loss after tax of some $96 million and negative operating cash flows of $26 million for the first 6 months of the '23 financial year. Now this result has been materially impacted by weather patterns affecting both 2022 and 2023. There are 3 key drivers; the first of which being the '22 wet crop inventory quality impact. This had an impact of some $24.2 million. It was first communicated to the market on the 27th of January this year. The second impact is a lower '23 crop volume with an impact of some $69 million and 17,500 tonnes. This was previously communicated to the market on the 12th of May this year. And finally, a noncash impact of goodwill being written off of some $26 million, which also was previously communicated to the market. Now this does not excuse or change the result. However, our crop performance is understood to be consistent with the broader Australian almond industry. The company's balance sheet remains sound with a net debt-to-equity ratio of 44%, albeit higher than we would ideally want. And it's important to remember that our book asset values are less than market value. As of the 31st of March '23, the market value of the company's land assets are some $129 million higher than book value, and our water assets are $70 million higher than recorded book values. These assets continue to grow in value and provide the company with additional asset backing security, supporting our funding position. When factoring in the market value of our assets, the net asset value of Select Harvests is $6 per share, significantly above our current share price. Now we will, of course, continue to recover as much profit as possible for this year and into next year through a series of cost and profit initiatives that I will discuss later in the presentation. We'll now provide a bit more detail on each of the key result drivers. So let's start by talking about volume and the 2022 crop. During the first half of '23, the company completed a detailed review of the remaining stock on hand. Following this review, a significant proportion of the remaining industry -- a significant portion of the remaining inventory was downgraded due to quality issues, primarily related to mold from exposure to moisture in the wet 2022 harvest. That led to further stock deterioration in the first half of the '23 and the '22 crop volumes on the chart reflects the write-off of some 1,264 tonnes of products. All in-shell and kernel inventory has now either been sold or contracted for sale, with the balance of product allocated to be used through the company's value-added processing facilities. This crop downgrade had a $24 million before tax impact on the first half profit result. The '23 crop has seen lower field crop volumes across the average. This, combined with lower crack out rates has reduced Select Harvests '23 crop forecast to 17,500 metric tons. As previously noted, we believe our crop is consistent with the Australian industry's performance. The 2023 Australian almond crop was materially impacted by persistent La Nina weather patterns, which included a record rainfall, colder conditions and major flooding events across our portfolio prior to harvest. This resulted in unusual growing patterns and lower yields. Clearly, crop forecasting is an area for improvement for the company. Despite some rain during the harvest, there were periods of favorable conditions that allowed all available product to be harvested, and we have now improved our mechanical drawing capacity. The 2023 crop harvest is now complete. The quality of the crop has improved over 2022. Kernel sizes are larger, mold has decreased from 2022 crop levels, and whilst insect damage is potentially higher, this is a function of the lower crop size with effectively the same number of insects. Recent investments in the state-of-the-art X-ray sorting capability will ensure the final crop, the final product quality, the final crop profile and value will improve from last year. Let's move to talk about production costs. Total growing costs, while significantly higher were in line with expectations. The absolute cost increase has been exacerbated by a significantly lower crop volume in 2023, resulting in a substantial increase in cost per kilogram. The chart shows you what our cost per kg would have been based on a 30,000 tonne crop. Fertilizer is now our largest cost. It was approximately double the prior year's crop cost due to price rises, as a result of the world's supply shortages. In more recent times, of course, fertilizer prices have been falling, and we expect them to give back half of their 2023 game, saving some $6 million to $7 million. Water storage levels throughout the catchment area are high and temporarily water prices are low, and they are anticipated to remain so for the next 12 months. This year, there were additional costs recognized for our younger year orchards, as their maturity profile has increased, their costs are now being expensed rather than capitalized. If we move on now to talk about market prices, Select Harvests has forecast a market price range of $7.40 to $7.80 per kilogram. With our financial models based on a price of $7.45 per kg, is reflecting the actual price that we are receiving based on contracts in place, and it is fully hedged against the U.S. dollar at a rate of $0.6788. 60% of our F '23 crop is now sold. The increasing almond price has been driven by several factors. We've seen very strong demand from key export markets, such as China and India. The 2023 U.S. almond crop forecast is currently in the range between 2.2 and 2.5 billion. The number depends on whether you follow the recent NASS subjective estimate of 2.5 billion pounds, or various other industry-based crop forecasters. The NASS estimate is 2.5% lower than the '22 crop and 13% lower than the average of the last 3 years crops. And irrespective of which forecast you prefer the U.S. crop is lower, which is resulting in North American carryover inventory reducing, and that is supporting price increases. The next major information piece on the U.S. crop is the objective estimate which is due for release on the 7th of July this year. In terms of customers, Select Harvests is a geographically diversified global almond business. It's recognized by its customers for supplying superior quality products and services. We [indiscernible] to grow our market, customer and product diversity. Our key export markets are very attractive and with China out of lockdown restrictions, export demand has returned to pre-COVID levels. The company has grown its customer base in the key markets of the Middle East, Southeast Asia and allowing for improved sales profile and customer diversification. We're expanding kernel supply into India. We're reinvigorating our New Zealand business, while also looking to access of Japanese and Korean markets and increasing our value-added exports. Select Harvests is increasing food service focus in the baking, hospitality and beverage sectors, and growth in product expansion for the sale of paste is an example of this. We're fostering close customer relationships and increasingly direct supply where possible to maximize our margins. Recent automation of shipping processes and documentation demonstrates our intent to conduct business as efficiently and low cost as possible. I'll now hand over to our CFO, Brad Crump, to discuss the financial results in detail.

Thanks, David, and good morning, everybody. As you can clearly see, the first half of FY '23 delivered an EBITDA loss of $117.7 million, and this compares unfavorably with the first half of last year's EBITDA, which was a profit of $17.7 million. Overwhelmingly, the first half result was driven by 3 events that David touched on earlier on, mainly being the '22 crop fair value adjustment during the period as a result of a quality reclassification and inventory write-off of $24.2 million. This related to a further deterioration of the crop during the first half of 2023. An impairment assessment was also undertaken, and this resulted in our goodwill asset being written off of $26 million, and the largest impact on the first half results was the full 2023 crop fair value loss recognized within the half year result of $69.5 million. This is consistent with the requirements of the accounting standard AASB 141 agriculture. The harvested portion of the 2023 crop has been valued at the estimated fair value less the cost to sell. Now due to the 2023 volume forecast decreasing to 175,000 metric tons, the net realizable value of the crop is less than the total cost to sell the crop. As a result, the full loss of the 2023 crop has been reflected in the first half accounts. The recognition of the forecast full year loss has a material impact on the financial result of the first half. Assuming the assumptions used to estimate the fair value at 31 March, '23 remain the same as at 30 September, 2023, the second half result will not reflect any further impact of the 2023 crop result and therefore, is forecast to show a materially lower loss result, with the recognition of 6 months corporate and finance costs, partially offset by non-crop related income. While the improvement in the almond price to $7.45 per kilo, which is what we've booked for our fair value estimate is welcome, its impact is much diminished this year, due to the considerably smaller 2023 crop forecasted volume. The level of depreciation has stepped up, as leased farms reached maturity and their expenses are no longer capitalized and leasehold improvements of now mature orchards commenced amortization. Interest costs were also higher on the back of higher average debt profile and higher interest rates. The tax benefit is a result of the loss recognized as a deferred tax asset and assessed as recoverable against future years' earnings. You can see here from the EBITDA waterfall, the major drivers of our loss that we've recorded for this half. This shows a negative impact to the lower volume, which equates to $42 million, higher growing costs, which are due predominantly to increased fertilizer prices of $15 million, 2022 inventory write-off of $24 million, the biological asset write-off of $36 million and the goodwill write-off of $26 million, in addition to corporate costs, which are higher by $2.4 million. This far outweighs the positive benefits of the almond price, which delivers $7.1 million in benefit, resulting in an EBITDA loss of $117.4 million. The full 2022 crop fair value loss of 69.5% has been recognized within the half year result, as I mentioned earlier, 50% of that is in inventory fair value and 50% is related to the biological asset write-down. If we remove the impact of the full year loss recognition and the write-off of the goodwill, the underlying EBITDA result would be a loss of $55.6 million, still heavily impacted by the lower 2023 crop and the 2022 crop downgrade. Moving on to the balance sheet; the balance sheet position of the company still remains in a sound position. There is a $99.5 million reduction in equity compared to the same period last year, as a result of the company's reported loss due to the factors I mentioned previously. The company maintains its policy of recording land and water assets at their cost of acquisition. As at 31 March, 2023, the market value of the company's land assets are $125 million higher and its water assets are $70 million higher than their respective recorded book values. These assets continue to grow in value over time and provide the company with additional asset backing security. The company will complete a comprehensive valuation process again in September 2023 of its land and water assets, and this will be detailed in our full year financial statements in November. Debt levels at 31 March 2023 are as per normal approaching their seasonal peak, with almond prices at lower levels during the second half of '22 and the first half of '23, and higher crop growing -- 2023 crop growing costs, debt balances peaked for the FY 2023 year in May this year and are forecast to decrease during the second half of this year. The net bank debt-to-equity ratio currently sits at 44%. Now just moving on to give an update on our banking facilities and our cash position. The company signed a new 3-year facility agreement with its bankers, NAB and Rabobank on the 31st of March this year. This new facility incorporated a $30 million increase in facility limits, plus a further $20 million increase that rolls off in June 2024. A waiver on the company's fixed charge cover ratio covenant measure is in place to March 2024. As the post-balance sheet event, the company also secured its $20 million seasonal facility for our rolling -- for a fixed rolling 2 years. Additionally, the company's fixed charge cover ratio measure at March 2024 has been reduced from 3x to 2x. Despite the lower first half earnings, all required banking companies have been met with headroom remaining. Debt levels remain well managed, and the current facilities remain adequate for operations moving forward. These revised facilities give additional committed support to our forward cash position. Debt and gearing levels at the end of March are as per normal, approaching their seasonal peak, and as I mentioned earlier, that peaked in May this year. With almond prices at their recent low levels and a delayed 2022 sales profile, debt balances peaked at $210 million and will decrease during the second half of this financial year. The company has and is forecast going forward to meet all its covenant measures. Just touching now on the asset values of the company. All the company's assets are held on the balance sheet at the historical cost. The most recent orchard and processing facility asset market valuations were undertaken by Herron Todd White in September 2022. The property, plant and equipment, which is 10 orchards and our Carina West processing facility has a historical value of $331 million against a market value of $458.4 million. Additionally, the current historical value of the water entitlements on the balance sheet is sitting at $58.8 million. Management values the portfolio at 31 March at $128.6 million, and this is based on recent market -- transactions on the water market. It should be noted that the company's market value of net assets of [ 626 million ] does not include any value derived from our leased orchards. The lease orchards represent 45% of our portfolio. The future value of the forecast free cash flow of the leased orchards represents an additional $100 million in value. And now touching on our company's cash flow position. Our operating cash flow was lower than the first half last year. Lower almond pricing and the downgraded quality of the 2022 crop reduced cash inflows, while payments for the growing and harvesting costs for the 2023 crop continued at their forecast levels. Despite the lower forecast volume of the 2023 crop, operational cash flows are forecast to be positive in the second half from sales of in-shell and exported kernel. Investing cash flows were lower than the first half of 2023, as the company consciously lowered its level of capital expenditure, while cash flows were forecast to be lower due to the crop and market factors. Tree development costs decreased, as additional young trees reached their full maturity profile. Thanks, David. I'll hand it back to you.

All right. Thank you, Brad. And let's now move on to talk about sustainability. One of Select Harvests sustainability goals is to be a circular business. In practice, this means utilizing all of our farm production to minimize waste and increase efficiency, whilst lightening our footprint on the planet. We're well advanced on this front. We produce approximately 130,000 tonnes a year of biomass from our farms, and we aim to put all of this into sustainable use. We sell in a normal year, some 30,000 tonnes of this product as in shell and kernel protein to customers around the globe. The balance gets used -- gets put to productive use, with some 60,000 tonnes sold as animal feed. We use a further 10,000 tonnes of hull and shell in our biomass energy generation facility, to power our processing plant and our nearby farms. And we use approximately 30,000 tonnes to create a compost, which is then used back on our farms as a fertilizer and it also improves soil water holding capacity. We maximize water efficiency by using drip irrigation, soil moisture probes and monitoring. We use plant water stress technology called [ Phytech ]. This measures over time the trunk tree root, as it expands or contracts in line with water use requirements. We also apply liquid fertilizer through our irrigation systems to maximize the effectiveness of uptake. The company further uses high-resolution aerial imagery to identify inefficiency such as tread canopy stress, overwatering and leakage. We're starting to explore the possibilities for expanding our circular economy to include using our non-almond productive land for carbon value creation. There's more to come on this as we progress the work. Next slide, please. It's important to ensure that our sustainable practices are simultaneously supporting the environment and our financial sustainability. If you look at what we're doing to commercialize our biomass, we've already bedded down our almond hull to energy generation process. In the first half of this year, we've run a novel cleaning process to increase plant performance. This provides low cost and efficient energy to power our Carina West processing facility and neighboring farms. Select Harvests has also commercialized its own Compost, using ash from our cogen plant, recycling soil from our farms and the hole and shell biomass to create a low-cost potassium fertilizer solution. We're running 2 pilot processes to commercially produce fertilizer from almond hull and fly ash, using a patented digestion process. If successful, it will further increase circularity and the sustainability of the business and create new earning streams for Select Harvests. Next slide, please. Now let's move forward to talk about our strategy going forward. So F '23 is certainly a tough year for the company. But nonetheless, I think it's worth considering the investment logic for a moment. Australia is the second largest almond producer in the world, and Select Harvests is the second largest almond company in Australia. We are a significant global scale almond producer in a positive CAGR industry. Our orchards are rare, they're valuable and their long-life assets improve in Australian growing regions. Select Harvests is unique and that it is the only publicly listed pure-play almond company in the world. Importantly, we have a very unique proposition for our customers. Not only are we one of the largest almond farmers in the world, but we are also fully integrated, meaning that when one of our customers eats a Select Harvest almond, they are safety eating an almond that is sustainably farmed, hulled, shelled, processed, packaged and sold all by the one company. That almond is fully traceable back to the farm and the block on which it was produced. And in today's world, that is a rare and valuable prominence, not many can claim. The opportunity now is to capture value for that unique market position. We're commencing initiatives to increase profit from existing operations and starting to develop new and emerging growth paths. Given the financial performance of the company, we are partway through reviewing our strategy and cadence going forward. The working hypothesis has the company operating over 3 horizons. And in summary, the strategic path that the company will follow, will see us grow our almond volumes using external supply and lower our overall agri risk. It will scale up our processing capacity, will grow our organizational capability, and will balance out our portfolio with increased value-added processing and market investments. Importantly, you will see a financially disciplined business that is faster to cash, lower on the cost curve and tightly manages its working capital and has a very analytical approach to investing. As at the time of writing, and post our half year balance sheet date, the company has created a project management office and identified a suite of some 28 projects. 18 of these projects have now been financially valued. The project management office will drive the execution of these projects and the financial upside is material. In the short-term horizon, the company will focus on driving for cash and improving our ROIC, focusing on cost reduction, maximizing the value of our 2023 crop to achieve an optimal sales price, delivering our '24 founding program, to ensure that we get the maximum rebound in production levels and executing the 18 to 28 foundation projects identified to get the company fit. Horizon 2 is more focused on increasing almond supply, expansion of our capacity and efficiency, such that operational gains will drop directly to the bottom line. Identifying capital expenditure and growth opportunities that deliver favorable paybacks and improve the company's financial returns. And building out, of course, our organizational capability on strategy, supply chain and sales and marketing. The long-term horizon, Horizon 3 remains in development and will focus on more substantive transformative projects. We'll provide further detail on these projects at the appropriate time. But it's worth noting each initiative we have is individually tracked for profit and cash gains. We have thus far identified some $20 million in profit improvement and $30 million worth of gain in our cash position. Our performance in delivering this in the short time we've been working gives comfort and confidence. We have so far delivered some $4 million in profit and $8 million of cash gain run rate at an annualized basis into our performance. The speed of projects identification gives great confidence that there's more dollars and more value available to be captured for the company. If we turn now to look at our forward outlook and despite the impacts of the past couple of years, the company remains well placed to ensure it can operate throughout the current cycle and become more robust. The global almond market is active and has returned to pre-COVID levels. Previously high supply inventory balances are decreasing and the U.S. 2023 crop appears challenged. These factors are forecast to put increased upside pressure on the pricing environment. Our tree health is positive and forecast whether patterns are favorable with the likelihood of Australia moving into a more stable and dryer El Nino pattern. Select Harvests is developing a detailed strategy plan. We have profit and cash improvement initiatives that have started to generate positive returns. In other words, we're starting to set our own destiny. This will ensure the company operates effectively within its current banking limits without risking future operational performance. Next slide please. I think in summary, the safety performance of the business is continuing to improve. This is getting to key and keeping the best people and the best people are key to our performance. The 2023 year is a difficult year. You certainly get them in agriculture occasionally, and we are clearly feeling the impact of 2 poor years in 1 financial year. We will become more robust at managing our business. The [ founding ] outlook for Select Harvest is positive. The '23 harvest is complete and being processed with improved quality over the 2022 crop, and we are expecting a rebound to more normal crop in 2024. The market demand for almonds and pricing is moving to a more attractive level and this bodes well. We're operationally focused on cash and costs, accelerating the cash-to-cash cycle of the business, looking for cost reduction and a good 2024 crop will quickly generate cash. The balance strength of the business has supported operations, to what was a challenging period. Our bankers continue to support the business with new 3-year banking facilities in place and sufficient headroom to support operations. Asset values remain well in excess of book values. And finally, Select Harvest has a program as a program for driving growth, for driving return on invested capital with a pipeline of projects that will deliver $20 million of profit, $30 million of cash improvement. The projects are underway, they're delivering. There's further exploration of step-up opportunities to be pursued as we move forward. So thank you for your support, and I'd now like to open the floor to questions. To ask a question, simply raise your hands via the button on the bottom of your screen, and we'll progress you through the queue. You'll be unmuted and given the opportunity to ask your question. And as I said at the start in the event, if you have questions outstanding at the end of the allotted time, please contract Andrew Angus via e-mail on the screen, and we'll deal with them subsequently. Thank you. Over to you for questions.

David, we've got a question from Josh Kannourakis at Barrenjoey. Josh, you're good to talk.

Great. Just wanted to chat on that discussion on the $20 million of profit and $30 million cash benefit, obviously, quite material. Can you give us a bit of context? You've mentioned the projects have started, but just give us a bit of context on both the time frame, the expectations of that return when they come and any other sort of one-off costs that are necessary to extract that benefit?

Yes. Thank you very much for the question. Look, what we have is across those 18 to 28 projects. And so 18 of them are detailed financially and are starting to have meaningful timelines put against them. The other 10 are very much still in early development stage. So probably premature for me to try and put the specific numbers on them, but the $20 million is covered by those first 18 or so projects. Maybe one of the ways to answer your question is perhaps to give you a couple of examples of some projects. So one of the things that we are doing in terms of setting our own destiny and managing for ourselves, is we are reducing the amount of fuming that we're using for managing insects and we've got to the optimal position on that. That is now a complete project and activated and delivering cash benefits as we speak. Another example of a project is around shifting the way that we manage our supply chain logistics and moving to slip sheeting our product through and on to containers. That is a project that also comes with a review on carton sizes and carton materials for cost reduction as well as speeding the rate at which we can get containers loaded and increasing the total volume that we can put in the container. That's a project that's got material upside to it and has a timeline that we'll see it implemented during this financial year. So we've got a range of projects, different timelines, and as you say, they will come through over time. Some of the projects will, however, require some capital investment, and we are working through the finalization of some of those numbers. And if I give you an example of that, we -- if you look at our Carina West processing facility, we have a warehouse. That warehouse is currently constrained with capacity. We can make some changes by improving and -- some by operational improvement, I should say, and some through CapEx. When we make those changes, that will give us an upside in capacity out of the Carina West plant of between about 15% and 20%.

Got it. And just so I understand on that side, David, so in terms of that extra capacity, is there a strategy to get more external or third-party through there, and how do you sort of think about building out that side of the business again?

Good question. And you're absolutely right. We are going to increase the external supply volumes that we put through the company. We are in discussion already with a number of growers across Australia, and we are having -- have a couple of people already signed up, and we're looking to expand the number of external suppliers over time, so that aligns with the increases in capacity that we intend to bring on.

David, I have a question from James Ferrier of Wilsons.

Can I just follow on from Josh's question there to start with. I think I wrote this down correctly, but sort of the early stages are you've got $4 million of profit, $8 million of cash flow improvements sort of is your run rate implemented from now or up till now. Is that right?

That's correct, James. 100%.

And is that -- are those numbers that are in the first half '23 result, or is that an annualized FY '23 reference?

It's an annualized number, James. So the benefits are starting to flow through now. So they won't be in the first -- there won't be any recognized in the first half results. They will commence recognition in the second half results, but they are an annualized number.

Okay. Great. That's great to see and very pleasing to hear some of the initiatives that are being implemented and the urgency around them. Can I ask about the FX hedging? And I know that the FY '23 crop has been hedged from an FX perspective for a little while now. The fact that we're looking at volumes materially lower than what was expected earlier in the year, has that caused any complications around your quantum of overall hedge exposure?

I mean, we were going through our normal hedging procedures that we do each year, we were nearly 80% hedged for the 2023 crop before we realized the extent of the lower volumes. That's now led us to be 100% hedged for the 2023 crop. There is some overflow, which we have pushed out, we deferred those hedge contracts, and they will be now put forward into the 2024 crop.

Okay. That makes sense. And then lastly, and probably speaking of the FY '24 crop, I think it's Slide 12 from memory, where you talk about the cost of production. If we look at the FY -- sorry, Slide 9, we look at FY '22, $5.88, the FY '23 theoretical $6.66, and you referenced, I think, David, an expectation that the uplift in fertilizer costs experienced in FY '23, about half of that's expected to unwind in '24. Is there any further color beyond that, that you could perhaps share with us in relation to your expectations for production costs in '24?

And just give me a sense of what you're looking for by way of further color, just sort of paint out the question a bit more.

Are there any other notable cost lines there that we should be taking into consideration or focusing on beyond fertilizer, up or down, when we think about where production costs are going in '24?

In terms of sort of upward pressure on costs, if I start there, I think the one real question that all Australian businesses have relates to sort of wage and salary inflation. And it will be very interesting to see where things like the national wage cases turn out to be. And so that will no doubt -- if it is large, we'll know that will put some increased wage pressure into the organization. On the other hand, it looks like, essentially, I think wage and salary pressures seem to be coming off as right across Australia and globally as we're starting to see some change in the environment occurring, including, of course, things like government interest rates putting pressure on these types of things. So I think that wages are the ones perhaps upward unknown that immediately springs to mind. In terms of downward inflationary or cost activity across those 18 to 28 projects, you can be very sure that cost is one of the things that we are targeting. And if I was to give you an example of that, one of the things that we will be doing is changing the way that we think about our management of insurance this year. That doesn't mean that we're increasing our risk profile. In fact, we are going to reduce our risk profile with a more comprehensive insurance pattern and package, but we've been able to identify across our range of insurers, cost savings of about $1 million that will come to the business.

David, we've got a question from Apoorv Sehgal at UBS.

First question, just on the sale of the Mountview orchard, is that still progressing? Or have you sort of decided to keep that in the business?

Well, that's a good question. You'll certainly see in the accounts that it remains listed for sale, but we are, in fact, starting to consider our position on that, and we will likely retain that asset because we think it's fundamentally actually a good performing asset. The logic for selling it remains, of course, which was really that it was a small asset and somewhat stranded from some part of the rest of our business. But the reality is it's a high-performing farm, and so we're very tempted to hang onto it, and we have a pending decision to make, but it will likely remain within the portfolio.

Perfect. Okay. And could you just give some color on the performance of the value-added business in the period? Any color on the EBITDA contribution would be appreciated.

Well, we don't -- I mean, I want -- again, Brad to answer this, but we don't tend to hand out individual business unit results. But I will say that we've made some investments in that part of our business. So we've put in some new roasting capability, increasing our blanching capability, and we're looking to squeeze more out of that asset at the moment. And it is part of an overall manufacturing excellence review that we're running through the business at the moment, which will create a substantial upside in value for the company. And that's part of the various projects that we've been talking about. Brad, do you want to make any specific comments?

Yes, sure. So on the value add, we'll start increasing the visibility on the performance of value add going forward. But what I would say is this is that if you base it on the market value of the low-grade quality product that's being put into value-add, then it is contributing a growing EBITDA number. Now at the moment, through our pricing that we have, it's -- the pricing is being fed through, is a little higher than market price. So it's at a breakeven position at the moment from an EBITDA point of view. But as I mentioned, from a market pricing point of view, it contributes -- it's starting to contribute significantly to the bottom line of Select Harvest.

Just actually one more thought. One of the things that we are looking to consider doing as part of our thinking on forward strategy and debt strategy development is we are really interested to ponder what further sort of bolt-on capital investments we might be able to make in the value-added space. That would be relatively low cost, but significant in terms of the additional value creation by way of new product and new process application going forward. So we think there's some real upside in that part of the business and it's a place for further investment.

Okay. No, great color. And just one final question, specific for you, Brad. I think in the past, you indicated -- just as a follow-up to the cost per kilo question for '24. I think in the past, you've indicated a bit of a step-up in lease costs in FY '24, just with the writing back of those leasehold improvement costs that were previously capitalized. Is that still sort of the right way to think about it from a D&A perspective into '24?

Yes, correct. So that started in '23. So some of those costs will be reflected in the numbers you're seeing at the moment. But they'll be recognized in full in '24 when all our orchards have hit full maturity.

We have Jonathan Snape from Bell Potter.

Look, can I just ask, can you step me through Slide 14 and the reconciliation from EBITDA to underlying EBITDA, which if memory serves me is 117.7% I guess is a starting point. There was, what $24.2 million in inventory impairments, $26 million in goodwill impairments, which is like $50 million or thereabouts. But the difference between the 2 is like [ 62% ]. What's the other [ 12% ]?

The one-off items that represent the differential was a goodwill impairment of $26 million and an impairment portion in biological assets of $34 million, which represents the write-down because of the full year loss recognition. And then there's another $1 million or so in bearer plant impairments that we took. So that gives what rounds out to $62 million reduction.

So hang on, is the $24 million inventory impairment, is that in your underlying EBITDA?

Yes.

Yes. So it's not a $55 million, it's more like $31 million?

Yes.