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Select Harvests undeterred by decline in first half results

Drought and Covid-19 present challenges

Select Harvests has reported a fall in first half profit and earnings, citing drought and Covid-19 supply disruptions as key challenges over the period.

In the first six months of the 2020 financial year (FY), net profit after tax was 13.4% down year-on-year at AUD17.4 million (USD11.42 mln) from AUD20.0 mln earlier. Earnings before interest, taxes, depreciation and amortisation dipped 10.4% to AUD34.5 mln from AUD38.5 mln. 

Paul Thompson, Select Harvests’ managing director, said: “The first half has delivered a good result considering the challenges of the drought and the disruption to the supply chain caused by Covid-19.” 

Select Harvests expects the 2020 crop to be of a similar size and high quality as that of last year at 22,600 tonnes. This would be only 0.4% behind the 22,690 tonnes produced in 2019.

Thompson added that the 2020 growing season was excellent in all regions.

“Continued investment in our horticultural staff and practices, infrastructure and maturing orchards, enabled the company to achieve another year of above-industry standard yield.  Harvesting is now complete, and with 40% of the estimated crop processed, gives the company a good line of sight on both quality and quantity,” he explained.

Investment in processing technology delivered further improvements in productivity and quality.

“The global demand for almonds remains strong,” Thompson observed.

Australian almond exports are up 25.7% (2019/20 marketing year) and US almond shipments are 5.5% ahead for the current season so far (August 2019-April 2020). 

Select Harvests has contracted commitments for 70% of its estimated crop. 

“Market access has been challenging with Covid-19 lockdowns in key export markets disrupting our shipping programmes. In addition, the recently announced estimate of a record almond crop grown in near ideal conditions in the US (to be harvested in August 2020) has contributed to prices softening. We now estimate that we will achieve a price of AUD8.20/kg for the 2020 crop,” Thompson noted.

The company has started shipping almond kernel and in-shell. However, as previously announced, some shipments have been delayed which will impact the timing of cashflows.

The Food Division’s results were broadly in line with last year, with the highly competitive domestic retail environment continuing to impact margins. Industrial margins were affected by an extended maintenance closure of our Parboil value adding facility.”

Almond Division

H1 2020 FY earnings before interest and taxes (EBIT) were AUD28.1 mln (compared with AUD31.5 mln in H1 2019 FY).

As of March 31 2020, harvest activity was approximately 50% complete, so half of the fair value of the 2020 crop was recognised in the company’s income statement. Harvest has now been completed and around 75% of the crop has been delivered to Select Harvests’ Carina West processing facility.

Consistent yield and quality performance have been achieved through the combination of improved on farm practices and new technology at this facility.

Overall production costs for the 2020 crop have increased. 

Excluding water, horticultural costs per kg have increased by 7% reflecting the increasing maturity profile of the company’s young trees. The price of water continued to increase in 2020, with the prices of temporary water reaching close to AUD1,000/millilitre. The company’s water ownership and management strategy has limited the impact to the 2020 crop to AUD9.5 mln. Processing costs are forecast to be in line with those of 2019.

Food Division

H1 2020 FY EBIT of AUD1.7 mln compared with H1 2019 FY EBIT of AUD2.3 mln.

Select Harvests observed that the domestic retail market remains challenging.  While sales remain relatively strong, margins continue to be eroded with the introduction and expansion of major retailer house brands.  New product development is a key focus to ensure continued growth in this area.

The industrial food sector is increasingly active. The Parboil value adding facility is enabling the company to meet growing customer demand for almond value-added products, such as paste for almond milk. Demand for industrial product is expected to increase as the foodservice sector, domestically and internationally, recommences activity post current Covid-19 shutdowns.

Select Harvests stated that it is continuing to invest in people, brands and distribution relationships to build a strong export and domestic food business.

Cashflow

H1 FY 2020 negative operating cashflow of AUD32.2 mln (H1 FY 2019 negative AUD14.4 mln) was in line with expectations. 

The first half of the year delivered a negative cashflow as Select Harvests invested in the crop’s growth.  The company stated that the second half will deliver a strong positive cashflow as the crop is processed and sold and third-party processing income is generated.  Consequently, the reported debt position at H1 FY 2020 is at a seasonal peak and expected to reduce substantially by the end of H2 FY 2020.

Strong results

Thompson stated: “The first half of 2020 has delivered a strong operating result on the back of a good crop. The ongoing focus on improved horticultural practices in the Almond Division and targeted investments across the business has led to consistent financial performance. Our balance sheet remains strong. The company has contracted commitments (including internal use) for 70% of our estimated crop.  As a result, an almond price of AUD8.20/kg has been forecast for the 2020 crop.”

Looking ahead to the 2021 crop, tree health remains good.

Current weather forecasts, water market conditions and storage levels are expected to generate a significant drop in the price of annual water allocations. Water and associated costs this year represented more than 50% of Select Harvests’ growing costs. 

“Almond pricing remains difficult to forecast with continuing strong global demand for almonds being offset by the impact of Covid-19 related lockdowns, and the estimate of a record US almond crop (to be harvested in August),” Thompson added.

The Food Division, through new product development and improving efficiencies, is forecasting improved returns in the second half of the year. 

“In the industrial area we are anticipating increased volumes as markets come out of lockdown,” Thompson concluded.

 

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