Good morning, everyone, and welcome to the Select Harvests FY 2023 results webcast. My name is Andrew Angus, and I look after investor relations for the company. We will just pause for a moment while participants enter the webinar, and following that, I will hand over to David Surveyor, Managing Director and CEO, and Brad Crump, Chief Financial Officer and Company Secretary. All right, David, I think we are right to proceed. Over to you.
Well, good morning, and welcome to the Select Harvests 2023 full year results presentation. My name is David Surveyor. I've been the Chief Executive Officer and Managing Director of Select Harvests since the 20th of February this year, and joining me delivering this presentation is our Chief Financial Officer, Brad Crump. The 2023 full year results presentation will be delivered by webcast on the link displayed below, as advised to the ASX. After Brad and I have delivered the presentation, there'll be time for questions before we commence our investor roadshow. To ask a question, simply raise your hand via the button on your screen. We'll progress you through the queue, and you'll be given the opportunity to ask your question.
In the event that we have questions outstanding at the end of the allotted time, please contact Andrew Angus via the email on the screen, and we'll deal with those subsequently. This next slide simply outlines the disclaimer and basis of preparation of the information contained in this presentation. Now, I'll start by providing an overview of the business before handing over to Brad, who will discuss the financial results in detail. And then following Brad, I'll discuss strategy, transformation, and the forward outlook before we both take questions. So let's start with our business update, and specifically, we'll start on safety. Now, people are critical to Select Harvests, and safety is our most important KPI. We continue our rapid improvement.
Our TRIFR rate as of the full year was 6.7 injuries per million hours worked, an improvement of some 61% on the prior year, and similarly, our lost time injury frequency rate has shown improvement of 51% to 4.2 injuries per million hours worked. Or in other words, the severity and frequency of injuries is reducing, and if people get hurt, they are more often able to be at work the following day. We still have much to do, of course, to achieve our sustainability goal of zero harm, and we are driving a clear and deep sense of felt leadership to our people. We're raising the visibility of safety across the organization. We're building better safety systems and better safety processes, and we're ensuring we are measuring our performance. And I think worth noting that our focus on safety includes well-being.
The acceleration that we're making in safety is part of a step-up in cadence and culture of the company. Improving safety is improving operational efficiency, and it's improving business performance. At Select Harvests, safety makes money. If we move on to financial performance, it's clearly very disappointing to be presenting a poor financial result, a net loss after tax of $ 114.7 million. The results are, however, in line with our first half guidance and also in line with the market consensus, or in other words, there's no new bad news in today's results. A positive aspect is that we held to our guidance, I think, despite the deterioration we saw in pricing during the second half.
As previously communicated, the result has been materially impacted by three key drivers, the first of which was the revaluation of the 2022 crop in the first half of 2023, as wet product was impacted quality, primarily that was mold, with a write-off of $ 24.5 million. We saw a lower 2023 crop volume and a price impact of -$ 74.5 million on a crop of 19,771 tons. And it doesn't change the result, but our crop performance was consistent with the broader Australian almond industry. And finally, we had a non-cash impact of goodwill being written off to the tune of $ 26 million.
The company's balance sheet remains sound, with a net debt-to-equity ratio of 46%, albeit higher than we would ideally want, and we would expect this to reduce with the 2024 crop. Operating cash flows were -$ 8.2 million, with a positive shift in the second half as we actioned changes to customer and supplier terms, increased sales velocity, and reduced spend. I think it's important to remember that the market value of our assets is substantially above our book values by some $ 277 million as at the 30th of September. So when factoring in market values, the net asset value of Select Harvests is some $ 5.69 per share, significantly above the current share price.
With the gains we have made in processing capacity, we will likely consider the need to revalue the Carina West processing facility in 2024. We've also laid out a new strategy for transformation of the business, and I will cover this and our progress later on in the presentation. But the first thing I'd like to do is perhaps put a bit more detail on a couple of the key drivers. With respect to volume, we started the year with a large volume of our 2022 crops still as inventory, some 15,300 metric tons of low-quality inventory that has now been actively managed and sold. And all low-quality product allocated to value-added has also been consumed and converted to finished goods. So the 2022 crop hangover has now been dealt with.
With respect to the 2023 crop, this was materially impacted by the persistent La Niña weather pattern, which included record rainfall, cooler conditions, and major flooding events across our portfolio prior to harvest. In 2023, we saw lower field crop volumes across the board, combined with lower crack-out rates. This reduced Select Harvests' 2023 crop volumes, mid-year forecast to some 17,500 metric tons, but at completion of harvest, a small positive shift in pollinator crack-out percentage saw the volume increase to 19,771 tons. If we move now to talk about price, Select Harvests' financial models were based on a price of $ 7.45 per kg.
Prices looked promising in the lead up to harvest, but fell away as the year progressed, driven greatly by the USDA objective crop forecast of 2.6 billion pounds, and of course, owners of substantial inventory dropping their prices to quit inventory, to quit stock. At an average price of $6.42, the price was $1 below expectations and 40 cents below our prior year position. Realized prices were, of course, also impacted by a lower quality profile crop. We saw a substantial shift in mix, such that the proportion of in-shell was reduced to 15% of our crop from a five year average of 23%, and on lower volumes, this reduced the top end of our pricing mix, and it was also lower in value because we saw some insect damage impacting quality. Kernel made up 55% of our product mix.
The five-year average for that is 48%, and our manufacturing grade was higher at 37% of our mix, versus a five-year average of 29%. This is also due to insect damage, and hence price was impacted. In essence, with increased insect damage, that's the result of a smaller crop with fewer nuts and the same insect population. The profit benefit of an increase in volume to 19,771 metric tons from our initial forecast, was offset by the lower quality mix and global prices. If we move on to talk about our production costs, there were really three fundamental drivers. The first being the absolute cost increase that we experienced, exacerbated by a significantly lower crop volume in 2023, resulting in a substantial increase in cost per kg.
The chart shows you what our cost per kg would have been based on a 30,000 ton crop. The second driver being, production costs increased by some $ 25 million. Fertilizer is now our single largest cost. It increased by $ 12.3 million for the year, almost double the prior year's costs, and that was due to price rises as a result of, Russia, Ukraine, and world supply shortages. In more recent times, we've seen fertilizer prices have been falling, and we expect to give back part of their 2023 increase. The savings are likely to be $ 3 million-$ 4 million, subject to us, having increased fertilizer application going forwards. Chemical and fungicide costs were up $ 2.5 million. R&M costs were up $ 2 million, and that was in response to flood costs.
Water costs were down by $ 3.8 million, as water storage levels throughout the catchment area were high and temporary water prices were low, and we'd anticipate that to be the case for the next 12 months. The third issue we have is that three of our leased properties, being Amaroo, Mullroo, and Bungool farms, have now reached maturity. So capitalized development costs are now being amortized, and the impact of that is an increase of $ 9.4 million. I'll now pass on to Brad, to give you some more detail on the financial results.
Thanks, David. I'll now run through the company's full year 2023 financial results in some more detail. So Select has reported an FY 2023 full-year NPAT loss of $1 14.7 million. As David mentioned earlier, there were three key factors that were reported in the first half that have led to this result. One being the write-down of the 2022 crop, due to a deterioration of its quality profile. And this impacted also sales value and volume. And the value of that is, was $ 24.5 million. The fair value loss of the 2023 crop, as a result of volumes being over 30% lower than forecast, and the lower market price of that crop, had an impact of $ 74.5 million.
There was the decision to write off the company's $ 26 million of intangible goodwill due to its impairment. Now, in addition to the above, the result was also impacted by following the major floods that occurred in October and November of 2022. There was a detailed assessment and reconciliation completed on the company's tree assets. From this assessment, $ 4.1 million of tree assets were identified as being destroyed by the floods, and therefore they were written off. There was an increase in depreciation charges of $ 3.9 million, due predominantly to the 2016 plantings that have now reached maturity. There was an increase in interest costs of $ 6 million, due to a mix of higher average debt levels and interest rates increasing.
As a result of a sizable loss, a $ 44.8 million tax benefit has been recognized for the year as a deferred tax asset. An assessment's been completed, and it's been determined that this will be recoverable in against future earnings. This EBITDA waterfall shows the impacts that I've discussed on the previous slide in a little more detail. The other major factors shown here that have impacted profitability compared to FY 2022, are the year-on-year increases in production costs that, David touched on, earlier. 2023 crop production costs were over $ 30 million higher than the 2022 crop. The key movements have been: increase in lease costs.
This is due to some of the orchards reaching maturity, and therefore triggering the amortization of capitalized development costs, and an increase in lease costs due to the annual CPI adjustment that occurs every year. Additionally, fertilizer cross-costs increased by 74% or $ 12.3 million due to the increases in global prices, and this was related to the Russia-Ukraine conflict. Two other material increases were seen in chemical costs and also in repair costs related to the impacts of the floods. This was partially offset by lower water costs as a result of lower volumes used and lower pricing, and lower electricity costs due to lower pumping requirements, with less water being used.
As we indicated in the first half, most of the FY 2023 loss would be taken up in the first half due to the recognition of the full loss of the 2023 crop. This chart shows the movements between that announced first half loss to today's announced full year position. The key movements over and above normal non-crop operating costs for the six months have been an increase in the 2023 crop volume to what was estimated in the first half, being 17,500 metric tons, increasing to 19,771 metric tons. This occurred due to crack-out rates improving as pollinator varieties were processed. Offsetting this was a decrease in the 2023 crop sale price, from $7.45 to $6.42.
This has occurred due to the softening of global almond prices, particularly for lower grade material and larger sized pollinator varieties. Some additional flood-related costs were incurred to address some wet areas in orchards, and as I mentioned, there were some tree write-offs that I explained earlier. The key points to call out for the balance sheet, as at the end of September 2023 are: The company's working capital position has decreased by $ 72 million. This reflects the lower level of inventory on hand as a result of a lower 2023 crop. Also, a lower value of that inventory and the focus on increasing sales throughout the 2023 year. Additionally, there's been a focus on shortening customer payment terms through process and options for deferring supplier terms.
Our right of use assets and their corresponding lease liabilities have reduced in line with leases progressing another year. The non-current asset reduction is due predominantly to the write-off of the company's goodwill in the first half. The company's net debt position has increased by $ 55.6 million to $ 190.2 million, and this is driven by the lower 2023 crop. So we invested the money to grow a 30,000-ton crop, and we delivered a 19,771-ton crop. Low almond prices were the second contributor, and they are currently below our breakeven position. As a result, Select's net debt-to-equity is now 46%. This is higher than the company's target range. However, based on forward forecast, this is manageable.
The company has a waiver on its fixed charge cover ratio until March 2024, at which time it returns to two times. All other covenants have been met. Slide 16 shows the impact of the lower crop and lower almond price on the company's net debt position. In summary, the lower 2023 crop and lower pricing levels have led to a negative $ 52 million draw on our debt facilities. On a positive note, with a focus on cash improvement initiatives, we have been able to generate a positive $ 26 million from the company's operations. There remains reasonable headroom on our facilities. The company's debt levels will peak in April 2024 as we continue to grow and harvest the 2024 crop, after which debt levels will reduce once the 2024 crop sales start to commence.
The other notable point relating to the company's balance sheet is the market value of its assets. Select's reported net asset position is $ 411.5 million. We record all of our assets at book value. A number of classes of assets have increased in value over time, and this increase in value is not recorded in the company's financial accounts. All the company's orchards had a valuation completed in September 2022. This year, three orchards, one in each state, were valued to test the FY 2022 valuation if they were still valid. This was confirmed through our valuations this year. This confirms that the value of the company's orchards are $ 120.9 million higher than the value reported on the balance sheet. The processing center was valued at $ 5.5 million higher than book value.
Similarly, permanent water assets are recorded at cost. A mark-to-market valuation was completed at the end of September, which showed that Select's water assets are currently worth $ 60.7 million more than the recorded book value. Additionally, a discounted cash flow was applied to the company's leased orchards, based on the company's forward-looking assumptions. The value of those future cash flows is $ 90 million.
In total, the points above show an additional $ 277.1 million of value that is not recorded on the balance sheet. Using this revalued amount means the debt to equity position would be 27.6%, and there's an additional $ 2.29 per share, lifting the company's net asset per share to $ 5.69. The company's cash flow from operations for the year was -$ 8.2 million. On a positive note, despite the low almond price environment, the company generated a positive second half operating cash flow of $ 18.5 million. This was assisted by moving customer and supplier terms, reducing costs, and increasing the velocity of our sales program. Capital expenditure for the year was tightly managed with only $ 21.5 million spent. There were no major projects undertaken and no permanent water was acquired. Tree development costs were down in line with the maturity profile of the trees. Thanks, David.
Okay, thank you. So moving on to talk about strategy. The company has now completed its plan version one, and this slide lays out the direction and the clear path forward. The vision is broadly unchanged. The company retains its higher purpose as a leader in better for you, better for the planet foods. Our mission is pretty clear: Make money for our shareholders and rebuild confidence and trust as we deliver sustainable returns to those shareholders. We've committed to the delivery of the strategy over three horizons, and we work on all three horizons simultaneously. Where I want to focus today is on the delivery of our four very clear strategic priorities.
The first of those is to have substantially greater almond volume. The second is about leadership in processing, scale, and efficiency. The third is about maximizing the return from the crop, and the fourth is to innovate and drive out, step out growth of the company. Now, I'll talk to the progress against each of these four priorities, and then I'm going to connect it to our project management office and the value that's being created. But I particularly want to make the point that each priority needs to be delivered with financial discipline. That is core to creating value for our shareholders. So this slide starts to show progress against the four priorities, and I think it's fair to say that our maturity is higher on the left-hand side of the slide than it is on the right-hand side of the slide.
Let's start with the first strategic priority, which is a substantial increase in our almond volumes. In earlier presentations, we've discussed the work that we've been doing on cost or delivering more for less. That continues as per the original project management office projects. So gains in labor, gains in transport, gains in power. In fact, we're signing a new power contract for one of our farms later on today, but I'll show you the numbers in the PMO shortly. We have this year completed our water strategy review. It confirms that water ownership is strategic to Select Harvests. We've developed a financial model whereby we sell and or buy, based on optimal profit outcomes, based over the cycle, be that short, medium, and long-term horizons, and we're in the mode of execution with water. There are broadly three options for substantially greater almond volumes.
The first of those is volume expansion with third-party growers, and going forward, we will now have 9,000 tonnes per year, and so that is now a very material part of our total volume. The second is to improve our own on-farm practices. We are well through our strategic review of our horticulture division. It's similar to the work that we've done in manufacturing excellence, and we're expecting a very meaningful upside in both yield, cost, and quality. The target gain is at least $ 10 million. That is not yet factored into our PMO calculations that we will show you shortly. And then, of course, the third opportunity is through either leasing and/or acquisition of farms. We have reviewed several leases in recent times, and none thus far have met our financial discipline requirements, and they will only be brought forward if compelling.
The second priority is about leadership in processing, and as with the farms, we have a series of cost-down processing initiatives. They might include packaging, LPG gas, labor costs, et cetera, but the key issue has been focusing on getting the Carina West processing facility to 40,000 tonnes. We're looking to increase hulling and shelling capacity by 25% to an average of 10 tonnes per hour. We've proven to ourselves that's possible, and we have run at the required speeds. We do have some debottlenecking CapEx investments to make, such as in a hash sorting investment of $ 1 million. That has a payback of less than 1 year, and that investment has been approved. We have another around increasing drying capacity that is an $ 11 million investment with a 2-year payback, dependent on the weather, of course.
That CapEx is also approved, and we will have a future warehouse improvement project, which will not only debottleneck the plant, but also reduce asset risk from a fire perspective, and that will also come with some insurance savings that is yet to be costed and improved. This year, we've also increased the stability of our value-added processing to ensure that we are consistently able to deliver our production targets. We've done that through improvements in leadership, training in terms of manufacturing excellence, and shifting the machine reliability upwards. We've also commenced work on a major step shift in capacity that would create, in effect, a new plant, be it brownfield at Carina West, a new site, or an acquisition.
I think Select Harvests has demonstrated its ability to both construct and operate these kind of facilities, and we have growers that are telling us that they want to work with Select Harvests. I'm going to return to this topic in a bit more detail on the next slide. The third priority is about maximizing returns from the crop. I think it's fair to say we're not satisfied the business model is currently doing that. In 2023, we have taken care of the 2022 crop and managed all of that inventory through the system. In the short term, we've been focusing on driving more sales velocity. This has improved cash flow, it's reduced risk, and of course, the volume of carryover inventory.
However, our results suggest there's more to be done, and whilst we've sped up, it's not enough, and we need to expand our channels and routes to market. We have a full activity-based costing review underway to better understand customer and SKU profitability, and to provide more clarity on the points in the value chain where we generate money and where we lose money. In 2024, sales velocity will remain key as we substantially uplift our volumes, and we are actively recruiting for that capability at the moment. 2024, we'll also see increased focus on margin optimization, and just as with manufacturing and horticulture, a sales strategy review is well underway. The fourth priority is about step-out growth. We have a couple of step-out growth opportunities being progressed, but it's early days.
We're looking at new innovations in bio use, and we are looking at further development of value, of value-added foods that leverage our existing skills base. We're not ready to speak or put detail around that at the current time. So this next slide tries to give you a better sense of the transformation. We've done this previously with hulling and shelling speeds and explained that example to you. And so this tries to build on that and shows you how some of this starts to fit together. So firstly, what we've done is we've effectively created a substantive upshift in capacity from 30,000 tons to 40,000 tons. We've done that in a way that is effectively low or almost zero fixed cost increases by doing so.
So by definition, you know it's going to be pretty- pretty profitable business when we fill that extra capacity. Secondly, we have leveraged an existing capability and relationship in the market that we already play and, and confirm there is demand for our processing, and there is also demand for our marketing services. And as such, we've added third-party volumes, and as previously noted, we will process 9,000 tons in 2024 and going forward. The third connecting strategic priority, one and two, is that it shifts the Select Harvests business model. It, in effect, creates a new future revenue stream when our growth was becoming capped by our own farms starting to reach peak maturity. It scales attractive, profitable earnings, it reduces earnings volatility for Select Harvests, reduces our level of agri risk exposure, and brings more market-facing and distribution scale efficiency.
The value in this shift will start appearing in our 2024 results, and without declaring all of our thinking at this time, it's why we have signaled we're working on the business case to see if expansion is sensible, be that a new plant, brownfield, or acquisition. Let's move on to the project management office and how we're using that to drive outcomes within the business. As at today, we have 12 completed projects. We've added 34 projects during the year. Some of those are already delivering value for a total of 52 projects. Each initiative that we have is individually tracked each and every week. We have publicly committed to an $ 20 million profit improvement and an $ 30 million gain in our cash position.
The results for 2023 were a $ 9 million gain in profit and a $ 19 million gain in our cash position, and you can see we are now declaring we think there is more upside in both, with a further $1 5 million-$25 million in profit and $ 35 million-$50 million in cash available to us. However, however, as I've said before, it would be disingenuous of me to claim every dollar and not mention the challenge Select Harvests and all Australian businesses are facing with inflation, consuming some of this revenue. If we move on to talk about sustainability, we have reduced our emissions by some 25% since 2021. The largest gains have come from three areas, the first of which is a 70% reduction in emissions from fumigation.
So our fumigation emissions have reduced from about 48,000 tons down to about 14,500 tons. The second major change was the closure of Thomastown and the relocation of value-added processing through to our Carina West processing facility. That has seen a reduction of about 13,000 tons of carbon emissions. And the third area has really been some scope two reductions, driven primarily, in fact, by wetter and cooler environment, and so our requirement for electricity to pump water and irrigate our farms has been lesser. I think it's fair to say that reporting and managing our emissions is a developing space for Select Harvests. Climate change is on our risk register.
We are releasing our sustainability report alongside the annual report, and we're aligning our reporting with the IFRS sustainability reporting standards, and we've ensured independent assurance of our approach and our results. So I can now move to talk about the crop and the outlook going forward from a Select Harvests perspective. Given the challenges of forecasting the 2023 crop, the horticulture team have expanded the review process to incorporate four different approaches. The first is we have developed an AI learning algorithm to forecast crop. The second is that we're doing fruit counts using sensing imagery. The third is that we're historically mining our data for similar farming time and weather events to see how that affects our sense of forward forecast.
And of course, we've continued with our historic approach of bloom counts and orchard review. At the moment, each of those methods is giving confidence in the strong rebound to the crop for 2024, and the El Niño weather pattern is positive. With hot and dry weather, the tree health is positive. From a California perspective, the U.S. weather patterns have been unfavorable during both bloom and harvest. There is now very consistent commentary that the USDA objective estimate was too high, and I note Blue Diamond recently were quoting a view of 2.5 billion pounds for the crop size. We think irrespective of the quantity, the quality seems low. We think it is likely that we will see verification of the market with limited high quality product and possibly a glut of manufacturing-grade products.
Given the general view held around the Australian crop quality by the entire industry, we believe Australia could be very well suited at the top end of the market for the coming season. It's also worth noting, U.S. sales have been strong for the past three months, and we are seeing reducing inventory levels, and so the prospects of a good pricing environment seem positive. We have now, for the past couple of months, seen prices increase and given last year's pricing increase however, we will manage price risk by running our own race, and we will run a consistent sales approach. While price may not travel in a straight line, our long-term view remains: there is continued global growth in demand at 6%-8% CAGR, and over the long term, prices for almonds will continue to rise.
So if I conclude with some key messages. The 2023 result was clearly a poor year, and while you get them in agriculture, we need to ensure we are better and more robust at managing the business. The outlook is positive for the 2024 crop in terms of both volume and quality. The global market is increasingly positive, with supply and demand looking like getting back to a better balanced state. However, California, I think, remains a watch-out, but we are seeing positive price movements. And from a Select Harvests perspective, we're transforming. We're working to build a more effective business that is both more robust, financially disciplined, and capable of growth. So thank you, and I will now, pass back to Andrew, who will, lead us through the questions process.
Thanks, David. We've got a number of questions here, so I'll start putting the people through. In the first instance, we've got James Ferrier from Wilsons Advisory. James, you should be free to talk now.
Thanks, Andrew. I've unmuted myself. Can I just check if you can hear me okay?
Yeah, we can hear you, James.
Great. Thank you. Morning, David and Brad. Thanks for your time today. Congratulations. Clearly, an enormous amount of effort going into the business at the moment, and I think the results are pretty clear on the screen there on a look-forward basis. So, so well done. First question's around the earnings and cash flow improvement targets that you've set. That $ 9 million profit improvement and the$ 19 million cash flow improvement, those are actual realized results in FY 2023, or are they run rate numbers?
They are actual realized results in the 2023 year.
Terrific. And then taking that one step further, those adjusted future targets that you've provided today, are they incremental to the FY 2023 actual, or are they incremental to those original targets of $20 million and $ 30 million, respectively?
No, they are incremental to the actual results in 2023.
Okay. Terrific.
So, so yeah.
No, that makes sense. On the balance sheet, can you just talk about, I guess, the historical profile of the crop sales has typically seen the first half net debt balance, maybe somewhere between $ 20 million and $ 50 million higher than the full year. But obviously, you're making changes to your cash collection cycle, there's changes to the velocity at which you're selling a crop. So can you just give us a little bit more color around how you expect FY 2024 to unfold, relative to the debt position we've seen today for FY 2023, and where you think it's gonna peak in the first half and perhaps get to by the end of FY 2024?
Yeah. So you're correct in what you're saying in terms of, you know, the, the profile has been a little bit different this year because we did have quite a bit of 2022 stock to sell. And also, we've quickened the pace in which the 2023 crop has been sold. You know, the rest of this year, we've got limited stock remaining, going, you know, going forward. So investing in the 2024 crop until April next year, that's when our peak debt position will occur, and that'll be somewhere in the vicinity of about $ 220 million-$ 230 million.
From there, it starts to drop away reasonably quickly on the basis that our in-shell will start coming in early, and we'll get that away as, you know, as soon as it goes through the facility, which generally starts about March, and we're on ships in April. So by the end of the next financial year, we'll see that debt number reduce fairly in a fairly quick manner, down to, you know, the circa $ 100 million-$ 150 million mark.
Just to make a comment on headroom, will you, Brad?
Yeah. So we've got, as shown on our slide, I mean, we've got. When we peak, our debt position peaks at $ 230 million, we've got a facility limits of $ 260 million, so that the narrowest that headroom gets is $ 30 million based on our forecast at the moment.
Okay, Brad, that's, that's great. Thank you for that color. And then the last topic I wanted to ask you about was looking forward to FY 2024. You talked a bit about cost of production expectations. Fertilizer, in particular, you mentioned a $ 3 million-$ 4 million reduction, can I clarify, is that on a like-for-like volumes basis, or are you saying that you're expecting volumes to go up and then lower prices to more than offset that for a net three-four overall reduction?
Yeah, correct. So that's, that's exactly right. So, we expect that we will apply more fertilizer going forward, and so that will consume some of the gains in terms of the price come down that we're seeing in fertilizer. And of course, the reason that we're doing that is, whilst you're farming a sort of a year or crop or two in advance, we're trying to make sure that we're going to be going after bigger yields off our farms. So the upside for that is, of course, be obvious in the end.
Yep. And then post-farm gate, this is my last question. Post-farm gate, there's obviously plenty happening within your earnings improvement program. For the value add and on a like-for-like basis, so before you consider any of the changes you're making, I would assume the value add is gonna see an earnings improvement based on lower COGS washing through. Is that a fair observation?
Yeah. There, there's two factors that will drive and improve value add position. One is that lower COGS that you've just mentioned. Secondly is, we'll now utilize some of the very low-grade material from the 2022 crop. And in fact, as of two weeks ago, that 2022 crop is now finished, so we have no more 2022 crop going through value add. So now we can move to a 2023 crop, which is of better quality, so we can start making some higher value products out of our value add facility.
And then the last component on that is that now that everything's been transitioned and all our equipment is in place, the production levels that are coming out of that value add facility are now at the rate that we would expect, and therefore, the cost of production per kg has come down.
Yep. Okay, understood. That's good color. Thank you, Brad. And thanks, David.
Thanks, James. David, we've got a question from Josh Kannourakis from Barrenjoey. Josh, over to you.
Hi, David. Hi, Brad, Andrew. Can you hear me okay?
Yep, we can.
Yes, good morning.
Good morning. Perfect. Thank you. Just following on from a couple of prior questions. So, just on the cost side, if we're looking at on a theoretical basis, I mean, on going back to the dollar per kg, can you just help us bridge that out a little bit more? So you mentioned the fertilizer, some of the inflationary costs. Just a little bit more color in terms of, maybe also in terms of the lease, is there any more annualization of that to sort of come through in this period? Just maybe help us bridge that out a little bit clearer into next year, please.
In terms of next year?
Yeah.
Yeah. So next year, we're expecting to see another increase in our lease costs of circa $ 4 million-$ 5 million. In terms of fertilizer, as David mentioned, we're expecting that, you know, while fertilizer costs will come down, they won't come down. They'll be offset by some increased usage, but overall, our fertilizer costs will come down. Water pricing is expected to remain relatively low, but water usage will go up on the expectation that with El Niño in place, we will be using more water.
Okay, understand. So on the y ou're mentioning, so on the actual, on a theoretical basis, if you look for a like-for-like year, it's just ahead. I know you're providing before the sort of all-in number.
Yeah, correct. So based on a theoretical basis, I'm not anticipating our cost of production on a per kg basis to reduce next year.
Okay, got it. No, that's great. Just in terms of the external processing, and obviously you've got an investment there and some further potential to invest, can we just remind us a little bit of the economics and maybe some of the discussions, contractual discussions you sort of had, to give us some context around the economics around that, and, and, and I guess how that works if you can end up utilizing the full host of that extra capacity?
Well, yeah, I'll be slightly cagey in the way I describe this to you. In effect, what we've been able to do with our existing facility by jumping up the capacity from 30,000 to 40,000 tons, the cost of doing that is just about only the variable production cost. So hence my point that we'll make a fair margin on what we're doing, 'cause it's very useful. And the other way you could describe it, of course, is that we're lowering the cost of our base, Select Harvests own volumes, in terms of the way that it's processed. But that would be the other way to think about that piece.
But we've got a bit that says we can get a substantial upside in capacity, at very, very little to zero incremental cost in terms of our fixed cost position. And then what we're seeing is that we can get reasonably attractive prices in terms of the demand for external processing services. People are valuing the way that we go about processing, the way that we put it through our plants, and our ability to deliver product to end market. And so that's driving a lot of people wanting to talk to us around providing increased services to them. You can see that in that 9,000-odd tons that we're talking about. We think that there is a demand beyond that.
We think there is a demand that also goes to, over time, the increased total, bearing plant bearer volumes in the Australian market. And so the question really is, is whether there's the opportunity for Select Harvests to be able to structure a business model around either brownfields, or an alternate greenfield site, or acquisition, to access that opportunity.
Got it. David, have you got an idea in your mind, maybe another way of thinking about it, as on a sort of, maybe not a next year view, as, as you're just building this out, but on a 2-3-year view, what you think, you know, you can get in terms of incremental profit into the business from exploring this growth opportunity?
W e absolutely have a number. I'm just not prepared to put it out down the system today.
All right. All good. No, that's fine. That's okay. Just finally, on the value-added side of things, like historically, I think we're talking before, and James mentioned around obviously the lower COGS, which helped you provide some tailwind for that part of the business. How should we be thinking about that? I mean, what the actual net contribution was this year, and just what the delta could be into next year? Like, can that be a $ 10 million business, you know, as we would have thought once upon a time, in terms of getting there next year? Or is that a more two-year story?
Yeah. My, my, my view on that, Josh, is that that is a two-year story. There's no doubt from what we have in our forecast going forward, that that value add facility has a significant increase in its contribution from what it did in 2023 into 2024. But to get to that $ 10 million of baseline profitability, that'll occur in 2025, but it'll get well on the way, based on our forecast, in 2024.
Perfect. Okay. No, that's great. And very final one, just on balance sheet, like, you obviously seem very comfortable on that, which is great. You've got a lot, you know, a lot in terms of water rights, and the headroom that's sitting there. In terms of any other assets or things like that, if the year doesn't progress as you'd expected, can you just run us through a little bit about some of the liquidity you still have in terms of rather the headroom, in terms of the water that you mentioned about? Obviously, some of that is still available, and also maybe now, in view, like, just whether that's still an opportunity to sell out for some cash if that's required.
Well, I think if we were of the view that we're not going to have enough headroom, and we wanted to do something else, I think we've previously described this as having a series of lines of defense that we could use. We have no expectation or plan that we'll need to use any of them. But you are correct, you could sell some water, but we don't intend to. As I sort of signaled earlier, our review of water has really actually given us a sense of how strategic it is, and really our plan is to sensibly, over time, build that position. Obviously, we want to make sure that our headroom position is better than it is today before we start getting too excited with that piece.
But you could, if you had to, you could release some water, you could sell a farm, but again, we do not have a program in place that has any expectation of that occurring. Really, the solution for us, and the best solution is, we've got to keep on finding ways to run the business better. And what you hopefully see in some of that, and in the cash position, certainly in the second half, is we're getting more velocity into the way that we're managing that. And that's the best way to solve this problem, is to be more efficient and effective with the cash that we have.
Yeah, absolutely. No, that's really helpful, guys. Yeah, well done on the strategic initiatives. Cheers, bye.
Thank you.
David, next question we've got is from Max Andrews of PAC Partners. Max, off to you.
Hi, David and Brad. Good job on the result. Just on your gearing, just on paper, it's 46%, your covenants is less than 40. Would it just be fair to assume the banks are probably looking at that 20% number you mentioned earlier?
No, the calculation for our covenants for the banking, our gearing ratio for the banks, is a little bit different than just the reported market number. So it takes into account our finance leases as well, both above and sort of on the denominator and numerator. So that's why from a, you know, from a banking covenant point of view, we still sit below our required covenant requirements there. But they certainly don't take into account the market value of our assets. It's done. The calculation is done on our, what you see reported in our statutory accounts.
Thank you.
Max, David, we've got Apoorv Sehgal from UBS. Apoorv, over to you.
Hey, guys. A few probably pretty quick questions from me. Just checking, with the comment, Brad, you made earlier, that the theoretical cost per kg probably won't step down in 2024. That does take into account all the cost and efficiency related to the initiatives you've got in place?
Yeah, that's, that's correct. Yeah.
Yep, perfect. And then just with pricing, if assuming mix can return back to normal in FY 2024, just the tailwind that gives to your realized almond price, I think in the past you've talked about, like, $ 0.40 per kg theoretically?
It's a good question, actually. I don't have a numeric answer off the top of my head, but every $0.10 is gonna be. In every $0.10 improvement, if you thought of it as a rule of thumb, that'll be worth $ 3 million of profit upside. And so if you thought about that through the various sense of mix yield combinations, we're seeing price rise now, and that would flow through, but I actually don't have a numeric answer to your question. I know, Brad, sorry, is that. When you say, can you just be a bit more clear?
Oh, sorry. I meant the mix of products like kernel versus manufacturing grade, as that just normalizes that, just from that itself.
If you went back to a normal five-year average mix, what's the value of that change? I think is the question.
Yeah. So one of the key, one of the key factors, you know, when we're looking towards next year's crop, you know, based on the forecast that we have from a weather point of view, is that we, we would expect that our crop will return to a normal mix profile. And that, that not only does, you know, market pricing, an improvement in market pricing assist us, but just as much does our profile of our crop assist us as well from a, you know, from what we can realize for it. So if we return back to normal, a normal quality profile, then yes, we would expect, you know, that to enhance the pricing that we're gonna get for our- for next year's crop.
It won't do anything for the remainder of the 2023 crop, but certainly for the 2024 crop, it'll have an impact. Okay, if we, so I'm just thinking, what, you know, if this is slightly kooky math, but if you were to take the. If we had the FY 2024 crop today, which of course we don't, and we were looking to sell today, you'd probably be seeing a price in the sort of $7.15-$7.30 range across that sort of mix, standard mix.
Based on today's prices?
Based on today's prices. Now, of course, we've seen prices go up, so we'll expect that to keep that trajectory to continue. That might give you some sense of an answer.
Got it. Got it. Okay, and just one quick final one. Slide 26, there was a comment there that prices might rise in the first half, fall in the second half. Any particular logic to why that happens?
Just put 26, I'm not sure where,
Just at the very bottom of that slide, risk in 2024 surprises to increase first half, fall in the second half. I'm just wondering.
Ah!
If there's logic behind that.
Well, no, no. All that. Thank you for calling that out. All that reflects, or, is that essentially, that's what we saw happen. If you, if you can cast your mind back to this year, that's what we saw. We saw the prices were heading north, and then there was a correction to pricing in the second half. And so we're just simply calling that out as a risk. Because, you know, we recognize the importance of pricing to the financial result, and so we're just trying to be somewhat circumspect and not trying to present a view or a picture that is rosy. We're trying to make sure that we're balanced in our thinking about the situation.
Cool. Thanks, guys. Appreciate it.
Thanks, Paul.
We have a question from Jonathan Snape, from Bell Potter. Johno, over to you.
Hey, can you hear me okay?
Yeah. Hi, Johno.
Hey, Johno.
Hey, look, a couple of questions. Can I just follow up on the price one? I think in one of your segment notes, there's a reference to how the valuations have been determined, and I think you made a comment that you're anticipating a pricing adjustment greater than 15% in there. I think there's two references to it, actually, in the segment notes. Is that an accurate reflection of where your thoughts are for 2024?
Yes, it is. Yes. But so those, I think we've got you know, in this year's accounts, we've made it quite clear in our in what was released up there, that what our expectations are and our forecasts going forward. So, yes, that is correct.
Great. And look, I just want to try and bridge this stuff on, on value add. If I look at, I think the segment notes, there's a $7 4.5 million net fair value change, which I think is traditionally correlated pretty closely to what your core profit is. That was the loss that you would have taken on.
Yeah.
This year's crop.
Yeah.
And obviously, you've taken a $ 24.5 million odd impairment as well, in there, so you know, that's probably the biggest two delta. But it says there's probably about a $ 6 million negative move in your corporate and food division. On top of those two things, I think is what I've calculated. I'm assuming most of that was in the food. There's a little bit additional corporate costs this year.
Yeah.
So when you're looking forward, and I think that's what people are trying to figure out, should we be thinking. I think last year you lost kind of somewhere around $ 4 million-$ 5 million in food. Probably looks like it doubled this year. That can unwind in that value-added side?
Yeah, well, certainly. So value add this year, from a, you know, from an internal reporting point of view, value add this year was a loss, made a loss. So our forecast for next year is for that to move into profitability. So there is about, from this year to next year, there's a circa $ 5 million-$ 7 million swing in the profitability out of value add.
Okay, great. There you go. All right, great. Thank you.
Thanks, Johno. David, we've got one last question from Mark Topy at Select Equities. Mark, you should be able to speak now.
Yes. Yeah, good morning, gents. Yep, so just firstly, you talked about the velocity of sales. Can you give us some feel on sort of the forward sale program at the moment, the timing of that, when you might start to, if you like, lock in around that? And obviously with the currency where it is, just maybe on the FX side as well.
Sure. So, I think in terms of our sales profile, we have got a sales profile for the company that is broken down by week, where we have a program and expectation around where we'll sell both our value-added profile as well as in-shell kernel product. In terms of our in-shell kernel piece, clearly, we're now simply going through the final parts of our 2023 crop. So we would expect to see that consumed reasonably quickly or shipped to customers.
In terms of our forward profile for 2024, we are changing our selling approach for 2024, in the sense that we will do our first and initial selling of part of that 2024 crop, starting from probably around December of this year. And so we will make sure that we're forward-selling some of that, so that as soon as product's coming in from harvest, we'll be able to ship that out to customers. And that will be important to change that part of our selling approach to ensure that we get the velocity that we would like to see on some sort of 40-odd thousand tons worth of product sales. And then, and hence my comment about also reducing some additional sales capability and capacity into the business to support the existing team.
It's a big step up for them to collectively deliver in volume. And then, in terms of FX, the company has an FX position that is reasonably locked in for the next 12 months, and it's locked in at, I think, oh, Brad, I'm gonna get the wrong, guess around. It's about $0.67, but I might be wrong.
Yeah, below 66, yeah.
Below sixty-six.
Yeah, we're about 65% covered at the moment, now.
Okay, got that. And maybe relate then to that, you make mention that India's, you know, in terms of global demand, India's been strong and some reference to China and possible uncertainty there. Can you maybe expand on how you're seeing that global demand at this point in time, particularly what's happening with the sort of sales coming from the US?
Yeah, I think, two comments. One is, irrespective of whether it's India or China, the company is trying to increase, its direct selling relationships. So we've had a history of dealing with a series of traders. They're good and positive, and they've certainly, ensured access to markets, and we want to keep, those distribution customers operating as part of the company. But we are increasingly adding some direct sales capability, so we've added 7 or so, new direct customers. So that's sort of maybe 5%-10% shift in our sales volumes going through direct channels. And then the other thing that we're seeing, which I think is relevant to this, is, more a general comment on China, actually.
Which, whilst we think, China, large population, a lot of opportunity for almonds going forward, and we think the sort of macro drivers are positive. The sort of, as I think you know, the intensity or consumption per capita in China is well below that of, say, the U.S. and Australia. And so that creates a lot of upside opportunity. But I think that needs to be countered with the fact that we're definitely running a view, and I don't think we'd be the only ones with this view, that the China economy is now slower than it was. And so we think there are some risk potentially going forward with China, even though the direction of travel is positive. I think we need to be able to manage for the short-term variations within the framework of actually a growing demand base.
Sure. And
Sorry to, sorry to cut in, Mark, but we're gonna have to wind questions up now. We've got another meeting that we're due in now, and I think we'll be able to speak with you, shortly afterwards in our meeting, our scheduled meeting.
Very good. Thank you.
Okay. Thanks, Mark.
Thanks.
David, might be time to wind up now.
Okay, good. And, and, we'd just like to recognize and thank everybody for dialing in and getting a sense of where Select Harvests is at. So thank you.