All right, David, we're good to go.
Well, good morning, welcome to the Select Harvests 2023 H1 results presentation. My name's David Surveyor. This is of course, my H1 year presentation. I've been the Chief Executive Officer and Managing Director of Select Harvests since the 20th of February this year. Joining me today, delivering this presentation, is our Chief Financial Officer, Mr. Brad Crump. We can have the next slide, please. The first half results presentation will be delivered by webcast on 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 through the queue and be given 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 email 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'll 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. 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. As of 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 operation 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. We still have much to do to achieve our sustainability goal of zero harm. We're driving a clear sense of deep and felt leadership to our people.
We're 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 wellbeing. We have recently held a Stop for Wellbeing 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. 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 AUD 96 million and negative operating cash flows of AUD 26 million for the first six months of the 2023 financial year.
This result has been materially impacted by weather patterns affecting both 2022 and 2023. There are three key drivers, the first of which being the 2022 wet crop inventory quality impact. This had an impact of some AUD 24.2 million. It was first communicated to the market on the 27th of January this year. The second impact is a lower 2023 crop volume, with an impact of some AUD 69 million and 17,500 tons. This was previously communicated to the market on the 12th of May this year. Finally, a non-cash impact of goodwill being written off of some AUD 26 million, which also was previously communicated to the market. 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. It's important to remember that our book asset values are less than market value. As at the 31st of March, 2023, the market value of the company's land assets are some AUD 129 million higher than book value, and our water assets are AUD 70 million higher than recorded book values. These assets continue to grow in value and provide the company with additional asset-backed security, supporting our funding position. When factoring in the market value of our assets, the net asset value of Select Harvests is AUD 6 per share, significantly above our current share price.
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. Let's start by talking about volume and the 2022 crop. During the first half of 2023, the company completed a detailed review of the remaining stock on hand. Following this review, Sorry, 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 to 23. The 22 crop volumes on the chart reflects the write-off of some 1,264 tons of product. 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 an AUD 24 million before tax impact on the first half profit result. The 23 crop has seen lower field crop volumes across the Wemen. 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 Niña weather patterns, which included record rainfall, cooler 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 drying 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 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 ton 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 gain, saving some AUD 6 million-AUD 7 million. Water storage levels throughout the catchment area are high, temporary water prices are low, and they're 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 AUD 7.40 per kilogram-AUD 7.80 per kilogram, with our financial models based on a price of AUD 7.45 per kg.
This 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 F23 crop is now sold. The increasing almond price is being 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 billion-2.5 billion pounds. 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 2022 crop and 13% lower than the average of the last three years' crops.
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 seventh 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're seeking 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 the 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. Good morning, everybody. As you can clearly see, the first half of FY23 delivered an EBITDA loss of AUD 117.7 million. This compares unfavorably with the first half of last year's EBITDA, which was a profit of AUD 17.7 million. Overwhelmingly, the first half result was driven by three events that David touched on earlier on, mainly being the 2022 crop fair value adjustment during the period as a result of a quality reclassification and inventory write-off of AUD 24.2 million. This related to a further deterioration of the crop during the first half of 2023. An impairment assessment was also undertaken. This resulted in our goodwill asset being written off of AUD 26 million.
The largest impact on the first half results was the full 2023 crop fair value lost, recognized within the half year result of AUD 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 crop volume forecast decreasing to 17,500 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 March 31, 2023 remain the same as at September 30, 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 a recognition of six months corporate and finance costs, partially offset by non-crop related income. While the improvement in the almond price to AUD 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 reach maturity and their expenses are no longer capitalized, and leasehold improvements of now mature orchards commence 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 of the lower volume, which equates to AUD 42 million, higher growing costs, which are due predominantly to increased fertilizer prices of AUD 15 million, 2022 inventory write-off of AUD 24 million, the biological asset write-off of AUD 36 million, and the goodwill write-off of AUD 26 million, in addition to corporate costs, which are higher by AUD 2.4 million. This far outweighs the positive benefits of the almond price, which delivers AUD 7.1 million in benefit, resulting in an EBITDA loss of AUD 117.4 million. The full 2022 crop fair value loss of AUD 69.5 million has been recognized within the half year result as I mentioned earlier. 50% of that is in inventory, fair value, and 50% relates 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 AUD 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 AUD 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 March 31, 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 March 31, 2023, are, as per normal, approaching their seasonal peak.
With almond prices at lower levels during the second half of 2022 and the first half of 2023, and higher 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 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 an AUD 30 million increase in facility limits, plus a further AUD 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 AUD 20 million seasonal facility for a fixed rolling two years. Additionally, the company's fixed charge cover ratio measure at March 2024 has been reduced from three times to two times. Despite the lower first half earnings, all required banking covenants 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, they've peaked in May this year.
With almond prices at their recent low levels and a delayed 2022 sales profile, debt balances peaked at AUD 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 AUD 331 million against a market value of AUD 458.4 million.
Additionally, the current historical value of the water entitlements on the balance sheet is sitting at AUD 58.8 million. Management values the portfolio at 31 March at AUD 128.6 million. 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 AUD 626 million does not include any value derived from our leased orchards. The leased orchards represent 45% of our portfolio. The future value of the forecast free cash flow of the leased orchards represents an additional AUD 100 million in value. Now touching on the company's cash flow position. Our operating cash flow was lower than at the H1 of 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 export kernel. Investing cash flows were lower than the first half of 2023, as the company consciously lowered its level of CapEx, 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. 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 tons 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 tons of this product as in-shell and kernel protein to customers around the globe. The balance gets put to productive use, with some 60,000 tons sold as animal feed.
We use a further 10,000 tons of hull and shell in our biomass energy generation facility to power our processing plant and our nearby farms. We use approximately 30,000 tons to create 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 width 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 tree 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 a hull and shell biomass to create a low-cost potassium fertilizer solution. We're running two pilot processes to commercially produce fertilizer from almond hull and fly ash using a patented digestion process.
If successful, it will further increase the circularity and sustainability of the business and create new earning streams for Select Harvests. Next slide, please. Let's move forward to talk about our strategy going forward. 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 they're long life assets in proven Australian growing regions. Select Harvests is unique in 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 Harvests almond, they are safely eating an almond that is sustained, 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 provenance not many can claim. The opportunity now is to capture value to 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 three 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. We will scale up our processing capacity, we'll grow our organizational capability, and we 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 run, 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 2024 farming program to ensure that we get the maximum rebound in production levels, and executing the 18-28 foundation projects identified to get the company fit. Horizon two 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. Building out, of course, our organizational capability on strategy, supply chain, and sales and marketing.
The long-term horizon three, 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 AUD 20 million in profit improvement and AUD 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 AUD 4 million in profit and AUD 8 million of cash gain run rate at an annualized basis into our performance. The speed of projects identification gives great confidence that there is more dollars and more value available to be captured for the company.
If we turn now to look at our forward outlook, 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 industry 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 weather patterns are favorable, with the likelihood of Australia moving into a more stable and drier El Niño 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, thanks. 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 one financial year. We will become more robust at managing our business. The farming outlook for Select Harvests is positive. The 2023 harvest is complete and being processed in, with improved quality over the 2022 crop, and we are expecting a rebound to a 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. A good 2024 crop will quickly generate cash. The balance sheet strength of the business has supported operations through what is a challenging period. Our bankers continue to support the business with new three-year banking facilities in place and sufficient headroom to support operations. Asset values remain well in excess of book values. Finally, Select Harvests has a program for driving growth, for driving return on invested capital, with a pipeline of projects that will deliver AUD 20 million of profit, AUD 30 million of cash improvement. The projects are underway. They're delivering. There's further exploration of step-out opportunities to be pursued as we move forward. 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. As I said at the start of the event, if we have questions outstanding at the end of the allotted time, please contact Andrew Angus via email on the screen, and we'll deal with them subsequently. Thank you. Over to you. For questions.
David, Andrew here. We've got a question from Josh Kannourakis at Barrenjoey. I'll put him through.
Josh, you're good to talk.
Great. Hi. Hi, David and Brad and Andrew. Can you hear me okay?
Yeah, good morning. Morning, Josh.
Perfect, morning. Just wanted to chat on that discussion on the AUD 20 million of profit and AUD 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 timeframe, the expectations of that return when they come, and any other sort of, you know, one-off costs that are necessary to extract that benefit.
Thank you very much for the question. Look, what we have is, across those 18-28 projects, and I'll say 18 of them are detailed financially and are starting to have meaningful timelines put against them. The other 10 are very much still in the early development stage, so probably premature for me to put, try and put the specific numbers on them, but the AUD 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.
One of the things that we're doing in terms of setting our own destiny and managing for ourselves is we are reducing the amount of fumigate 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 onto containers. That is a project that also comes with it 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 will see it implemented during this financial year. We've got a range of projects, different timelines, and as you say, they'll 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. If I give you an example of that, we, if you look at our Carina West processing facility, we have a WIP warehouse. That WIP warehouse is currently constrained with capacity. We can make some changes by improving it and some by both operational improvement, I should say, and some through CapEx.
When we make those changes, that will give us a upside in capacity out of the Carina West plant of between about 15% and 20%.
Got it. Just so I understand on that side, David, in terms of that extra capacity, is there a strategy to, you know, get more external or third party, you know, through there? How do you sort of think about building out, you know, that side of the business again?
Good question. 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 have a couple of people already signed up, and we're looking to expand the number of external suppliers over time so that it aligns with the increases in capacity that we intend to bring on.
Got it. Okay, I'll jump back into the queue. Thank you, guys.
David, I have a question from James Ferrier of Wilsons, so I'll put him through. James, you're away.
Thanks, Andrew. Morning, David and Brad. Thanks for your time.
Morning, James.
Can I just follow on from Josh's question there to start with? I think I wrote this down quickly, sort of the early stages are you've got AUD 4 million of profit, AUD 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%.
Is that, are those numbers that are in the H1 2023 result, or is that an annualized FY23 reference?
It's an annualized number, James. The benefits are starting to flow through now. There won't be any recognized in the first half results. They'll commence recognition in the second half results. They are an annualized number.
Okay, great. That's great to see and very pleasing to hear some of the initiatives that have been implemented and the urgency around them. Can I ask about the FX hedging? I know that the FY23 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?
When we were going through our normal hedging procedures that we do each year, we were, you know, 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 23 crop. There is some overflow, which we have pushed out. We deferred those hedge contracts, and they'll be now put forward into the 2024 crop.
Okay, that makes sense.
Mm-hmm.
Lastly, and probably speaking of the FY 2024 crop, I think it's slide 12, from memory, where you talk about the cost of production. If we look at the FY 20. Sorry, slide 9. We look at FY 2022, AUD 5.88, the FY 2023 theoretical AUD 6.66. You referenced, I think, David, an expectation that the uplift in fertilizer costs experienced in FY 2023, about half of that's expected to unwind in 2024. Is there any further color beyond that you could perhaps share with us in relation to your expectations for production costs in 2024?
Just give me a sense of what you're looking for by way of further color. Just sort of paint that impression 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 2024?
In terms of sort of upward pressure on costs, if I start there, I think the one real that all Australian businesses have, relates to sort of wage and salary inflation. It'll be very interesting to see where things like the national wage case turn out to be. That will no doubt, if it is large, will no doubt 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.
I think that wages are the one perhaps upward unknown that immediately springs to mind. In terms of downward, inflationary or cost activity, across those 18-28 projects, you can be very sure that cost is one of the things that we are targeting. 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. We've been able to identify across our range of insurers, cost savings of about AUD 1 million that will come to the business.
Great. Thanks, David. Thanks, Brad. Appreciate your insights.
Thank you.
Thanks.
David, we've got a question from Apoorv Sehgal at UBS. Apoorv, you're good to ask the question.
Perfect. Hey, good morning, guys. Can you hear me?
Yes, we can.
Good morning.
Good morning.
Morning, guys. Fantastic. 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?
That's a good question. You'll certainly see in the accounts that it remains listed for sale. We are in fact starting to consider our position on that. 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 our rest of our business. The reality is, it's a high-performing farm. We're very tempted to hang on to it, and we have a pending decision to make. It will likely remain within the portfolio.
Perfect. Okay.
... Can 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, I mean, I'd like to get Brad to answer this, but we don't tend to hand out individual business unit results. I will say that we've made some investments in that part of our business. 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. 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. That's part of the various projects that we've been talking about. Brad, do you want to make any specific comment?
On the value add, we'll start, you know, increasing the visibility on the performance of value add going forward. 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. At the moment, you know, through our pricing that we have, it's the pricing that's being fed through is high, a little higher than market price, it's at a break-even position at the moment from an EBITDA point of view. As I mentioned, from a market pricing point of view, it's starting to contribute significantly to the bottom line of Select Harvests.
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. We think there's some real upside in that part of the business, and there's some place for further investment.
Okay, no, great color. Thank you. Just one final question, specific for you, Brad. I think in the past you indicated... This is a follow-up to the cost per kilo question for 2024. I think in the past you've indicated a bit of a step-up in lease costs in FY 2024, just with the writing back of those leasehold improvement costs that were previously capitalized. Is that still sort of right, the right way to think about it from a D&A perspective into 2024?
Yeah, correct. They started in 2023, so some of those costs will be reflected in the numbers you're seeing at the moment. They'll be recognized in full in 2024 when all our orchards have hit full maturity.
Yeah. Cool. Okay, thank you.
Thanks, Apoorv. We have Jonathan Snape from Bell Potter. Jonathan, are you good to talk?
Yeah. Can you hear me okay?
Yeah, good.
Yes, we can. Good morning.
Yeah, sorry about that. Thanks. Look, could I just ask, can you step me through slide 14 and the reconciliation from EBITDA to underlying EBITDA, which I, if memory serves me, is supposed to be AUD 117.7. I guess it's a starting point. There was, what? AUD 24.2 million in inventory impairments, AUD 26 million in goodwill impairments, which is like AUD 50 or thereabouts. The difference between the two is like AUD 62. What's the other AUD 12?
The one-off items that represent the differential is the goodwill impairment of AUD 26 million.
Yep.
The impairment loss on biological asset of AUD 34 million, which represents the write-down because of the full year loss recognition. There's another AUD 1 million or so on some bearer plant impairment that we took. That gives, that, what rounds out the AUD 62 million reduction.
Hang on, is the AUD 24 million inventory impairment, is that in your underlying?
Yes.
-EBITDA?
Yes.
It's not a 50%, 55%, it's more like 31%.
Yeah.
Okay, gotcha. All right, thank you. The second bit, can I just ask, because you've changed the way the half years kind of work now. If I go through your accounts, AUD 69.5 million loss or fair value loss, that's an EBIT loss, correct? That's the CAGR number-
Yeah
... that you would have traditionally reported as the almond division. You know, that kind of makes sense to me. When I'm looking into the second half, your guidance comment around, I guess, a modest loss, you're talking PBT level, I assume, given you made the distinct reference to interest in corporate, is that correct?
Yes.
I'm just trying to figure out how the DAs flowed between the halves and the waterfalls, because you can correct me if I'm wrong, but AUD 69.5, I assume that includes the entire depreciation cost?
Yes
... in there? Yep.
Sorry, other than, you know, depreciation, which would sit outside what we'd have in our fair value numbers, which wouldn't be much.
Yeah, I know. That's what I'm getting at. When you waterfall back to the first half EBITDA number, are you adding back just the AUD 15.8, or are you adding back the full AUD 31 it should be? It says it should have quite a positive second half EBITDA if you're gonna knock AUD 16 million of DNA off in there. I'm trying to understand how the change in the half years is affecting the EBITDA to EBIT flow, because it looks like you've taken the full cost in calculation of crop fair value, but then you've kind of only added back six months of it to the dollar level, if that makes sense.
Yeah, I'll come back to you on that, John, because I need to just break out what's sitting in the, in the fair value number.
Yeah
as to what's outside the fair value number.
Okay. Just so I'm 100% crystal clear on this, that AUD 55.6 million you reported today underlying, it includes the AUD 24 million crop impairment in it?
Well, the part, yeah, that relates to the biological asset, yes.
Okay, great. Thank you.
We have Mark Tobin from Select Equities. Mark, are you there?
Hear me now?
Yeah, we can hear you, Mark.
Sorry about that. Too many buttons. Just the first question, just around the cash flow and inclusive of the sort of projects you've mentioned in terms of run rate, can you give us a feel just how debt looks at the end of the financial year? Maybe some thoughts around where you want to get debt back to come FY 2024, and the sort of plan around that?
Our debt profile will start dropping now. The FY 2023 number will be quite a bit lower than what we're reporting for the first half, given that that's the lowest low cycle in our year. The FY 2024, or the first half of the FY 2024 number will go back up to similar levels as to where it is now. Yeah, we'll start investing in the 2024 crop. Even though whilst we've got some improvements in cash and profit, built in, it'll still, you know, with our full horticultural program underway, our FY 2024 number will peak again in April or May, at similar levels to what our debt position is reported now.
Okay.
just, sorry, Mark, let me just add one line to that. When you look at our sort of forward cash flow forecast that Brad's referring to, the only things that we have in there at the moment in terms of these projects, is that which is our annualized rate, so the AUD 8 million. The balance of 22 to get to, you know, the AUD 30 million worth of cash gain that we're looking for, we have not, in any optimistic sense, put that into our forward forecast. We're making sure that we are only predicting forward that which we have certainty over.
I guess what that might mean is that there's some more upside to be had in terms of our cash position, but you should understand, in any case, that we're only putting in that which is certain and known to us.
Great. I'm just trying to get to down the track, where, you know, the comfort level, where you'd like to get gearing back to, into course.
Well, in due course, I mean, we've as a company, we've always stated that we want to sort of be sitting around our, you know, gearing position of circa 30%. If we work backwards from there, that's sort of where we'd like to get to in the longer term. You know, that may change depending on, you know, on the profile of the company.
Sure.
You know, as you've probably seen in the past, Mark, you know, if we have a good crop and reasonable pricing in 2024, that debt position, you know, changes, starts to change pretty quickly with the level of cash that's generated through the business.
Yeah, of course. Just to add to that, in terms of CapEx and any spend on these new projects, or what sort of CapEx expectation we think about the second half, and?
There's nothing material in the H2 , this H2 , that you need to take into account in terms of CapEx. There might be some minor asset adjustment type CapEx, but that's only it won't be material. We're still very conscious, obviously, of our, you know, of our debt position moving forward. All that will be reviewed on a case-by-case basis, but we don't have any plans to do any material capital expenditure in the next six months.
I think what you would see in the way that we're trying to think about our operational improvement projects, we're clearly trying to be as capital light as we possibly can in any of those projects. As we get sort of further out into horizon two and three, and we get more transformative in the way that we think about things, it's possible that the capital intensity of some projects might increase. That'll of course, be subject to the further development of our program as we go along. As I mentioned earlier, we'll share that as we progress so that you and the market are fully informed of our program and how we expect our CapEx spend to be going forward.
As Brad says, the next six months, will not see any material shift.
Yeah, fair. Just on the orchard's maturity and, still about 11%, can you talk to, I suppose, and you've given us a theoretical number, but how is the remaining portion of the orchards developing, and how do you see 2024 in terms of yield going forward if we have a normal year?
Well, the vast majority are now, as you've seen in the graph, in the appendices of the presentation, are now into maturity with those final, that final portion in their final year of being, you know, classified as non-mature. They'll slip into maturity for this 2024 crop coming up. As David outlined in his presentation, everything at this stage suggests that, you know, that 24 should go back to being a theoretically normal crop with a fairly, you know, with a strong rebound from where we are this year.
Obviously, it's still very early days, so, you know, we've got a number of key milestones to move forward through yet.
I think where we see a lot of our growth coming forward in terms of almond supply going forward, is actually through external almond supply. As our, as our own farm profile gets mature, we're still looking to grow our business, but we want to do it by increasing our external almond supply. We'd still buy additional farms as and when we saw terrific assets that warranted good investment and had good paybacks. If we think about a mature profile, it says growth in the short term comes from increasing our external supply of almonds. We think there is a meaningful upkick to be had in that, both in terms of volume and in terms of the final financial flow through to the bottom line of the company.
Very good. Just lastly, you've given us a breakdown of export markets by different countries, and obviously there's a strong reliance there on China. Just wondering, you know, some slowdown in China, but are you seeing the demand and with the benefit of the lower or beneficial position for Australia, is that China market looking pretty robust from that point of view?
Yeah, look, our sense of the China market is that it's fairly robust. The relationships between Australia and China seem to be improving and improving across multiple sectors at the moment. We're seeing our customers looking for product, wanting demand, and I think the reduction in inventory out of North America, a lower crop out of Australia, all lead to a view that we're in positive territory.
Great. All right. Thanks for your time today.
Thank you.
David, I've got some questions that have come through on the Q&A panel. They relate to third-party provision of almonds, and that we now have this in horizon one or two. The question was: Why the pivot? Separately, how would third-party growers have confidence in this strategy, given that we've previously not looked to that as a business?
Thank you. I think the first part of the answer to this question is, Select Harvests is very much remaining focused on keeping being a farming business, growing almonds and being successful in that space. I think we'd be recognized externally as being a good farming, capable organization. You shouldn't see us as suddenly suggesting in any way, shape, or form that we're going to exit almond farming. That's not what we're talking about at all. What we are saying is that we can see continual growth in almond volumes in Australia over time. We have had conversations with a number of players that ultimately are looking to have their almonds processed. We think that's a service that we can provide.
We've got world-class processing assets, we've got world-class capability in sales and marketing of almonds, and so, we think there's the opportunity to leverage that capability to maximize the return on our existing asset base.
One second.
Andrew, are you there? Did you have any other questions, or maybe the link-.
Yeah, sorry. I have Stephen Scott from PAC Partners, who's just been put through to talk.
Good morning, gentlemen. Just following through on slide 25 with the project management office, are the projects discrete or do they rely on one versus the other? How do they sort of sit together?
They're generally reasonably discrete. Now there will be some that have some interconnection between them, but generally speaking, they are reasonably discrete. The example I gave about slip sheeting and cartons, you could separate them and run them separately from a cost perspective, but they do effectively optimize when run together. I think the key point about them being reasonably discrete, of course, is that it means that if any fail, and I think the reality of running any project office model such as this is over time, we will see some projects that do not deliver the results that we want. I'm not overly concerned about that. I've seen that before.
We will see some projects over-deliver what we expect, and we will continue to generate an increasing number of projects over time. But I think the advantage of them not being too intersected or too dependent on each other is that the failure of one, as and when that occurs, does not see the entire value of the opportunity start to crumble away. In fact, what I expect to see, as I say, is that we'll see increasingly a number of new projects come along that will give more robustness to our numbers over time.
Thank you.
All right, guys, I've got another question online here, related to the extent that Californian producers sell at a loss or a small profit. We're keen to understand how your theoretical cost per kilogram of AUD 6.66 on page 9 compares to an estimated cost for US producers, if you have one, or if you could speculate.
Yeah.
That's a difficult one to answer. We don't have any clear data to assess that other than to refer back to some work, you know, that was done two years ago that sort of had us in the bottom quartile from a cost point of view. Yeah, it's very difficult to tell because there's not a lot of data out there from a U.S. point of view as what their costs, their growing costs and cost to sell is.
Well, we do think it's a, that said, we do think it's a very good question, and it's one that we've been asking ourselves as well. We intend to have some work done going forward that really starts to compare where Select Harvests sits on the cost curve, relative to the rest of the industry, specifically including North America. I think if we're going to accept that there are aspects of this industry that are commodity-based, being at the correct or the right end of the cost curve is a prerequisite to being successful. We're very keen to make sure that we are actually in the right quartile, as Brad speaks to.
Thanks, David. We've got one more question online. That is: What strategies are in place for pollination coverage in the coming season?
Thank you. It's a good question. I think in terms of pollination coverage going forward, I'd make a couple of points. One is that Select Harvests, I think, to my point about being recognized as good farmers, we have a very good understanding of the number of hives that we need per hectare, and how we might optimize those hives to ensure that we get maximum result. That's point number two. Point number one, sorry. Point number two is that with hives, our farming team run a process to optimize the environment that hives exist in when they are on our farms, and that's around making sure that there are no fungicides, pesticides, that might create issues for bees.
Making sure that we've got a feed and water regime that optimizes the environment that they're operating in. Thirdly, I think the point about hives is that this year we are seeing a increase in the movability of bees across state boundaries and borders. We're expecting to see better access to hives across the various locations. That said, I think the downside that's sitting in front of us is there is... I should have thought about this to, in answer to an earlier question, actually. We are also starting to see some upward inflationary pressures as it relates to the cost of bees and managing our relationships with bee suppliers.
Thanks, David. That's all the questions in the Q&A panel. I've got one last question from Apoorv Sehgal at UBS.
Thanks, guys. Sorry, can you hear me?
Yes. Yes, we can, Sehgal.
Brilliant. Oh, thanks for taking the last follow-up question. It was just a quick one on, just on slide 25, the point on customer price increases. I just wanted to understand that properly. Is the message here effectively, that the quality profile of a Select Harvests grown almond is superior to your peers? You obviously gave that example of the way you were sort of creating insects. Based on that, you've started negotiating a better pricing outcome, or is it alternatively, that something more about like customer mix, dealing with sort of better customers, maybe going more direct to customer and bypassing traders? Just like, what are the elements that feed into that higher price per kilo that you might be able to realize?
Yeah, look, I think that's a good question. I think there are a number of elements, that go to, go to this, of which you've touched on a couple as you were talking, actually. One of them is, as we increasingly try to have direct supplier relationships with customers, that allows us to take out, in some cases, the middleman, and therefore immediately bring some margin directly back to the business. That's one element of what we are doing. Another element relates to actually this issue of the product quality that we have relative to others, in terms of the way that we, provide products. One of the things. And let me give you an example of that.
One of the things that Select Harvests does, which I believe nobody else in Australia does, is that we nitrogen gas flush our products, so that when it goes into a box, it ensures that anything that could lead to a reduction in the quality of the product can't survive in that environment, and we stabilize the flavor and taste profile of the nuts by virtue of the process that we're running, and get some more longevity out of our nuts through nitrogen flushing the product that we're providing. I think we've got a number of things that go to product quality. Another one is that we've invested in X-ray sorting technology, and that allows us to top grade the quality of products that are going to our various customers around the world.
That's another piece of this issue of quality and difference. The third area is, I think, very formative for us, but we need to do some work around better price and margin optimization by more effectively using our data. We will start to do some work come August around a tighter sense of activity cost, basing the nature of the company, and then we will use that data and apply it against the various sell prices that we're seeing from different customers around the world, to try and make sure that we're maximizing the price for any given customer, product, geographic mix that we've got.
I'm expecting, having done this a few times over the course of my career, I'm expecting that we will see a meaningful upside, where we had just not maximized price by virtue of our selling processes, and upside exists for us. I think it's those three things that drive the opportunity around further margin optimization.
Very interesting. Thank you.
David, that exhausts all of the questions from the Q&A panel and the webcast participants, so I'll hand back to you to wind up.
Great. Thank you, and thank you, everybody. That concludes the presentation. We've enjoyed the opportunity to speak with you. Thank you for taking the time to listen, to participate, and ask questions. If subsequently, of course, you have any further questions, do please feel to make contact with us, and we'll try and ensure that we answer them as promptly as we can. Thank you once again, and enjoy your day.