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Harvest Update

Harvest Update

By email

Dear Shareholders

Harvest Results

You will recall that our 2018 harvest was forecast to be detrimentally impacted by severe frosts. Our Australian harvest has now been completed with 30,500 tonnes of fruit milled, producing 5.42 million litres of oil and disappointingly behind our internal post-frost forecast of 7 million litres.  Estimating crop levels and resultant oil is always very difficult but the frost resulted in extreme variability from variety to variety and from tree to tree.  Overall the oil accumulation was in line with long term average but the number and final weight of the fruit on the trees was about 20% lower than our post-frost estimates.  Although it does not change the outcome, this crop was expected to be lower (as outlined in previous correspondence) for three separate reasons:

  • the biennial nature of the production cycle of olive trees which usually deliver a large crop one year followed by a smaller crop the following year (this year). This is inconvenient but does not impact our ability to manage brand/customer requirements from year to year.  For example, from a high cropping year we will supply the market for say 14 months and from a low cropping year we may only supply the market for 10 months. Therefore, our stock levels vary greatly but our monthly sales are reasonably stable.
  • A number of severe frosts in spring last year causing cumulative bud and flower damage. In fact, the Bureau of Metrology weather station at Swan Hill airport recorded the lowest ever September minimum temperature on the 16th of September -1.7degrees.
  • The major replanting program of replacing non-preferred varieties undertaken over the last few years means 31% of the grove area is not mature and 21% is under 3 years old and has not produced any crop.

For comparison, in 2016 and 2017 we produced 9.7 million and 13.2 million litres of oil respectively.

Nothing that has occurred this harvest in any way impacts next year’s expected production; in fact subject to normal agriculture risks we expect a very large crop as the trees compensate for the small crop this year and the recently planted trees will further mature.

A small consolation is that the overall oil quality this year was high, with a record percentage of the total production being Extra Virgin.  We also have enough volume to fully supply our Cobram Estate and Red Island brands until new season oil is available in May 2019. This oil is from a combination of our own groves, 3rd party purchased oil and careful 2017 harvest oil stock management (since the frost).

Price rise

On a positive note, we have finalised negotiating a price rise of circa 15% across the entire market for our packaged goods including Cobram Estate, Red Island and Private label effective 1 July 2018.

Financial Result

Once we have finalised full year management accounts in late July, we will send through a comprehensive report including the expected full year financial result and a more detailed operational update.  This update will also include a summary of earnings associated with the core business (normalised earnings) and those costs associated with new business development including the USA and olive by-product value add business.

Post the frost event, we advised shareholders that our full year result would be around ‘breakeven’. However, the lower than expected crop will certainly result in a full year loss.

Taking into account the lower crop together with the impact of the price rise, we expect the value of the oil produced to be approximately $11 million less than the last forecast, although the final valuation of the oil at 30 June is yet to be finalised (in accordance with Accounting Standards).

Operating cashflow

As previously explained, Boundary Bend’s reported full year financial result in any one year is substantially impacted by the volume of oil produced from each year’s harvest. Under the Accounting Standard AASB 141 “Agriculture” (with which Boundary Bend must comply), the oil is required to be measured at fair value less the anticipated selling costs. This means that the expected profit or loss relating to the sale of oil is recognised in the year of harvest, as opposed to when the oil is sold, meaning that the reported result will not typically align with the company’s cash flows.  So, our end of year profit or loss is not easily predictable as it is very sensitive to each year’s harvest yields but conversely trading each month is highly stable and predictable as customers purchase consistently throughout the year.

Although we will record a full year loss, on a positive note Boundary Bend is forecasting to report a positive operating cashflow[1] of approximately $17 million for the 2018 financial year and expects the 2019 financial year to produce a surplus of more than $20 million.

Dividend

We are still forecasting to maintain our dividend of 12 cents per share to be paid in February 2019.  As per usual the board will assess all the information at hand and announce details at our October AGM.

In summary, despite a lower than anticipated crop for 2018, operating cashflow is strong and we are pleased with the price rises that we have achieved. Thank you for your support and understanding and do not hesitate to contact me anytime if you have any questions on 0418955363.

Kindest regards

Rob McGavin

Executive Chairman

[1] Operating cashflow is the net cashflow generated from operating activities and after deducting payment of tax and interest. Operating cashflow excludes items such as capital expenditure, debt repayment, equity raising and dividends.