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Cobram Estate Olives (ASX:CBO) FY23 full year results

Executive Directors Sam Beaton and Leandro Ravetti from Cobram Estate Olives (ASX:CBO) discuss the company’s FY23 full year results.

Paul Sanger: We are talking today with Cobram Estate Olives (ASX:CBO). CBO has a market cap of around $550m. CBO is Australia’s largest vertically integrated olive farmer and marketer of premium quality extra virgin oil, and is firmly positioned as a leader in the Australian olive industry and a global leader in sustainable olive farming. The company owns a portfolio of premium olive brands, including Cobram Estate and Red Island.

CBO’s olive farming assets include over 2.6 million olive trees planted on 7,000 hectares of farmland in central and northwest Victoria and 334,000 trees planted on 558 hectares of long-term leased and freehold properties in California, USA. The company also owns Australia’s largest olive tree nursery, three olive mills, two olive oil bottling and storage facilities, and the Modern Olives laboratory. With operations in Australia and the USA and export customers in 15 countries, CBO is firmly positioned as a leader in the Australian olive industry and a global leader in sustainable olive farming. We’re talking today with Cobram Joint CEO, Sam Beaton. Sam, welcome to the network.

Sam Beaton: Thank you very much, Paul. What I thought I’d do is just quickly give an overview of the business and, Paul, thanks for the introduction and you’ve certainly given a really good summary of our business. We’ve actually been around for 22 years, even though we only listed on the Australian Stock Exchange two years ago, and as Paul alluded to, that we’ve now become one of the world’s largest vertically integrated olive oil businesses. We started in Australia and then nine years ago we moved also to the USA to try and replicate what we’re doing in Australia.

The main difference between the Australia and the USA; in Australia, the majority or 90+% of the oil that we sell and market comes from our own groves. We produce around 60% to 70% of Australia’s olive oil. We have the number one brand, Cobram Estate, and the number three brand, Red Island, and between the two we have around a 35% market share of the olive oil category in Australia.

As I said, in the USA we’re much newer. We started that business from scratch nine years ago and we’re starting to get some real traction on a branded front, as Paul said. We’ve now got over 500 hectares planted and by the end of this year we’ll have over 700 hectares, and we also contract around 2,100 hectares from third party growers in California. Our brand in the USA is the number nine olive oil brand and in strong growth.

From a financial year perspective, so our financial year is 30 June, so financial year to 30 June 2023, we were very pleased with the result. We saw very strong sales across the group; sales increasing to $169 million, which was up 21% on the prior period. Pleasingly for us, we saw growth in sales in both Australia and in the USA and we also saw growth within all our main brands. So Cobram Estate in Australia and the USA grew strongly, as did Red Island in Australia.

From a profit perspective, our EBITDA was up 63% to $40.8 million. This was expected and that’s because this year’s an on-cropping year. Olives are naturally biannual bearing, and under accounting standard you recognize the majority of the profit relating to the crop in the year of harvest as opposed to the year of sale. We always encourage investors to think about our business on a two-year rolling cycle, so taking into account the lower and the higher cropping year. Because of that accounting treatment, our two-year rolling EBITDA was actually down to $30.1 million. And that’s because our last on-cropping year, we produced over 16 million litres of oil and this year we produced 12.5 million litres due to climatic conditions. And Leandro will touch more on that and the climatic conditions that can affect olive growing.

In terms of operating cashflow, this was really pleasing for the group, recording a record operating cashflow of $54.1 million. This was up 60% on the prior year. Our operating cashflow is much more consistent than statutory profit, and the reason behind that is because we as a business, we manage our inventory over two cycles, so over a low and a high cropping year. Because our customers purchase oil very consistently month in month out, olive oil’s not seasonal in terms of on the demand side. So as a business we have enough storage to store our full crop and then we manage it over a 24-month cycle. So a higher cropping year, we will supply the market for up to 16 months and then a lower cropping year, as little as e8 months. So you see operating cashflow being much more consistent than statutory profit. We had $56.4 million of available cash at the end of June ’23, which we will use to continue to fund growth investment.

From a profit and loss perspective, if anyone’s had a look at our annual account, you’ll see that we measure our profit into three different business segments; the Australian olive oil, the US olive oil, and our innovation and value add, which Leandro will talk more about. We saw growth in profit in all of those segments, it was really pleasing. The USA business recorded an EBITDA profit of $2.9 million up from a loss of $4.7 million at the EBITDA level last year. Pleasantly, this was driven by growth in sales and growth in margin.

We invested very heavily this year in growth capex projects, which we expect to deliver material growth in the medium term. We invested in growth production assets in both Australia and the USA, and increasing our milling or processing capacity, and Leandro will talk more around the specifics of those projects. And we’ve been paying a dividend for the last several years. We paid a dividend of $11.7 million (or 3.30 cents per share) 70% franked in the last financial year.

I think importantly, from an asset perspective, it’s important to understand that we own most of our assets. 96% of our grove assets we own outright, sit on our balance sheet, and only 4% of our groves are leased. We value our assets periodically for accounting purposes, typically every three years. We had them valued last year. Under accounting standards, we don’t recognize the fair value uplift of the olive trees and irrigation infrastructure, it’s recorded at written down cost and there’s around $121 million of value that doesn’t sit on our balance sheet. So if you include that amount, our gross assets sit at around $720 million compared to borrowing of $191 million at 30 June.

You may have seen that our gearing increased, or our debt ratio increased during the year. This was planned and expected. We raised equity in December ’21. We repaid debt ready for growth Capex projects, so we drew it down during the financial year. So we did expect gearing to increase and it did increase to 30% or debt ratio, noting that two years ago that was at 37%.
If you break up our sales into Australia and the USA, Australia, we saw a really strong second half of the financial year, and packaged good sales grew 14.9%. Cobram is 57% of our sales within Australia, but as I said in the opening, we saw growth across Cobram, Red Island and private label sales. Pleasingly for us, we sold an additional million litres through our packaged goods business in Australia.

The USA has been a really pleasing year for the business. Last year, disappointingly, we saw a decrease in sales. This was because of oil availability. We had been purchasing some oil on the spot market during Covid, which returned to food service in last year now. The oil that we manage and plan for now is all oil that’s either under contract or our own groves, but pleasingly we saw really strong growth. Cobram Estate in the USA (so this is Californian oil that we sell under the Cobram Estate brand in the USA) grew 69%, which was very pleasing. And we put through about a 20% price rise in November 2022, which we saw very pleasing results from in terms of continued sales momentum. Our sales in the US are just over $42 million for the year.

Most of our oil in the USA is sold, or our Californian oil, is sold through grocery outlets. We do both through Cobram Estate and private label. The best half of our oil goes into Cobram Estate. We saw growth at retail, so the retail data that we can buy over there doesn’t include some retailers like Costco and Whole Foods and other natural supermarkets, but it does include the majority of the big ones. Our sales grew 22.8% at the supermarket scan level and 19% in store counts. So we’re now in just under 18,000 stores or distribution points. We had some really good wins in the last few months of the financial year, where we got accepted into Publix and Kroger; two of the top seven retailers in the USA. So that increased our store count by 1800 stores.

Before I hand to Leandro, just a quick financial outlook. We’ve seen a strong start to the financial year, albeit it only almost two months in. The sales outlook in both Australia and the USA is very positive, certainly helped by the global shortage of olive oil, particularly European oil, and the price of European oil, which is at all time highs. And most of our competitors in the USA and in Australia sell European oil, so it certainly helps us in the marketplace. We do have sufficient oil for our packaged goods sales this year, despite having a lower than expected crop, which is pleasing. USA, we expect that this year’s crop will be significantly higher than each of the last two, and we expect that to continue to drive our sales momentum into this financial year.

And from a cost perspective, some of our larger input costs, such as water, fertilizer, and electricity either remain soft, in the case of water and below long-term average, or in the case of fertilizer and electricity, have returned more back to normal levels after a couple of elevated years of costs. Of course, wages is one of our bigger costs. We do have wage pressure like every other business would be experiencing at the moment. And then we haven’t formally announced the dividend, but we did announce that the board intends to pay a dividend again, 3.30 cents, so keeping that flat. That’ll be paid in early December ’23, and we’ll announce the details at our AGM in early November around ranking levels and the details of your dividend reinvestment plan.

So we can come back if there’s any questions. I’ll throw it to Leandro first, though, because you might cover off on some of those and talk through some operational highlights, and then we go from there.

Leandro Ravetti: Thank you Sam. Just in a very, very quick summary, the harvest in Australia this year was around 25% larger than what we had in 2022. We were always expecting that. In that biannual cycle of olives, we were expecting this year to be an on year, but regretfully still was about 24% below what we were expecting originally. Main reason for that drop against the expectations were the environmental conditions – pretty well known that we had a very particular year affecting the eastern seaboard of Australia, lots of rainfall, way above average levels of rainfall with widespread floodings. Fortunately, those floodings didn’t affect our groves but certainly have shortened the growing season leading to smaller than average fruit with lower than average oil content in the fruit, which ultimately end up having an impact on the oil yields. Fortunately, the quality was fantastic this year and combined with some of the oil that we produce from third party growers in Australia, Sam say we’ll have plenty of oil to supply our current size plan.

In terms of the outlook for the 2024 harvest, we’re just about to finish the winter period with the trees starting to come out of dormancy. Weather conditions were much better, or at least much more normal, and combined with a lighter crop of last year, we’re expecting a very reasonable off year in this harvest 2024 coming.

In the case of the US operations, the environmental conditions were much better. Good rainfall levels, good snowfall levels during wintertime really provided a fairly good welcome relief to most irrigators in California, including ourselves. A hundred percent water allocation, which is always handy despite the fact that our growers also have access to underground water, but it’s good to have access to that cheaper, better quality surface water. Crop expectation in the US, as Sam said, are actually quite good. The trees have already gone through the flowering period, they’re already starting the oil accumulation period and we’re expecting a significant increase in the production.

That’s really a quick summary on the operations in Australia. From the growth perspective and the Capex that has been invested, we always talk around four main growth pillars for the company. Quite simply, the number one is producing more oil from our Australian operations as a combination of a maturing profile of our trees, but also increasing our efficiencies. Second, to keep growing our business in the USA. Third, is to add more value per litre of olive oil that we sell. And the fourth one is around our sustainability and value add growth pillar.

In the case of the first growth pillar of more oil for Australia, it’s always important to highlight that our mature area of olive growing will be growing by over 64% in the next eight to nine years, and that’s because the company has invested quite heavily in new groves over the past decade and all those trees are going to be gradually coming into full production over the next 6/7/8 years.

Linked to that pillar, we invested over $30 million in our olive oil mill upgrade at the Boort facility. That mill is actually going to be one of the largest olive oil mills in the world, increasing our capacity by over 160%, and that will serve us well for the years to come, as soon as those new groves in Boort are coming back into production. The other investment was a 407 hectare greenfield site, just to the side of Boort, that increased the growing area of that grove by over 13%.

In the case of the USA, growing the business over there, we’re also in the process of expanding our mill over there, doubling its milling capacity, almost doubling our storage capacity, and upgrading bottling and warehousing operations, just to deal with the proportional increase in oil availability and sales in the short/medium term. We also finished planting a 205 hectare greenfield site, which is really helping us to grow our area under cultivation with olives from our own groves, that it’s going to be supplying fruit over the coming years.

I think in general terms, that’s probably the biggest summary. And the last point that I wanted to touch on had to do with the sustainability growth pillar, very active year around that. Our business has improved its performance in that area by nearly $2 million with a shift in the attention, the focus that we had there, from retail sales into more business-to-business sale of ingredients and biomass for energy production, renewable energy production. And they have done quite well with more than 7.4 million kilograms of biomass sold this year.

We have also registered our carbon credit project with Verra with the idea of capitalizing on the already well-known sustainability position of our groves, which are actually net carbon sinking according to independent reviews, around four kilograms of CO2 per liter of oil produced. And fortunately all those initiatives have been independently recognized by Australian Financial Review and Boston Consulting Group, naming us for second year in a row as ‘Sustainability Leader in Agriculture’, and also we won in 2022, the ‘Woolworths Better Tomorrow’ Award, which was formerly known as the ‘Sustainability Supplier of the Year’, and we won the 2023 ‘Coles Sustainability Supply of the Year’. So really, a great position to be in, particularly in our relationship with the retailers in Australia.

That’s it, Paul, I think I’m going to be handing it back to you now.

Paul Sanger: Thanks. Thanks gentlemen. Well, clearly a very, very good set of results. It sounds to me like things are really singing across your businesses. Got a question about the weather. It’s been pretty volatile the last couple of years. We’ve just seen in the Northern Hemisphere, certainly in Southern Europe, where there’s obviously a lot of olive growing, these bushfires. What sort of impact has that had on your competitors? And then looking forward, I’m reading the news the last few weeks, everyone’s talking that we’re going to have this long, dry summer here in Australia, the threat of bushfires, what are your views on that, and what’s the potential it can impact the business over the next 6 to 12 months?

Leandro Ravetti: On that point, I think it’s important to understand that we as an ag business, we’re actually quite unique in the sense that we have very low risk from currency and commodity point of view. Our product is quite different than the imported product in quality terms, and we manage to differentiate. Having said that, certainly the shortage of oil and the price tension in Europe affecting most of our competitors, both in Australia and in the USA, is providing a better environment, which we are aiming at capitalizing on medium/longer term deals and opportunities.

One of the important differences as well in comparison with how we do olives here in Australia and what happens in the Mediterranean, is the fact that a very large percentage of the olive growing in the Mediterranean is what we may describe as traditional olive growing, heavily reliant on rainfall with virtually very little or no irrigation at all. We are fully irrigated here in Australia and that sort of helps to sustain very good levels of production. Certainly with expectation of a dry year in Australia, from the growing point of view, is fantastic. Provided that you have the water to apply through the irrigation, it works really well, and certainly where we are located, that’s not an issue at all. Potentially, may have some impact on how much you pay for the water, but very little impact from the point of view of the yields. If anything, it’s more suitable for olives to have that nice dry, warm spell.

Paul Sanger: Fantastic. And looking forward, where do you see the key growth opportunities?

Leandro Ravetti: Twofold, and one is in Australia. We have a very mature business in Australia with a significant investment on new groves that we have done over the past 10 to 12 years. Very little additional growth Capex needed to actually be able to capitalize on that additional amount of oil that will be coming on board over the next 4, 5, 6, 7 years. What is important to highlight there, is that growing olives, the vast majority of your costs are relatively fixed, so any additional oil due to the maturing profile of your groves is going to flow very much into profit for us.

The other side of the growth, which is quite exciting, is what’s happening in the USA. I always make the same reference, the USA today has a market profile similar to what Australia had 20 years ago; consumption of one litre per capita, less than 5% of their supply coming from domestic production. And what happened in Australia in the past 15 years, mainly driven by us, the consumption of olive oil have doubled to more than two litres per capita with over 40% of that supply coming from domestic production. So the big difference is that the American market is eight to nine times bigger than Australia, so being able to replicate what has been a successful business model for us here over there can certainly prove quite the game changer for the company.

Paul Sanger: Yeah, you’re clearly well positioned to take advantage of that US market. That’s very, very impressive. And just one to finish up here, the company debt levels have risen somewhat over the period. Are you comfortable that the current balance sheet is adequately funded to continue to drive this growth?

Sam Beaton: The short answer is yes. We had, which I’ve touched on at the start, we have $56 million either in available debt or cash at 30 June. As Leandro touched on, we’re largely complete with our growth capital program in Australia and we have 39% of our groves yet to hit maturity. So the Australian business is in a great position because it’s already very cashflow generative, as you’ve seen from our results. And as that production comes online progressively or as the trees grow towards maturity progressively up to year eight, then we would expect that the profit and the cashflow continues to grow with that – particularly given that a lot of our costs are fixed when it comes to growing olives.

In terms of the USA, we plan to continue. This year we’re doing a major upgrade to our mill, storage facility and warehouse facility. And some of it was done in last financial year, some will be done this financial year, ready for the harvest in October and November this year.

And beyond that, it’s really around increasing the supply of olive oil to continue to grow our brand and sales. We do that a number of different ways, so we’ve always focused on working with growers that are already there and that makes up a portion of our supply. There’s other parties, such as institutions, that are keen to have exposure to the olive oil sector where we’d work with them, they put in the capital, we agree to process their fruit and market their oil. And we’ve done that very successfully here in Australia. And certainly, becoming a bigger business and a more relevant brand in the USA makes those type of deals much simpler to do.

And then we will continue to invest on our balance sheet. We think that land in the Central Valley of California that can be used for multiple crops, the proximity to San Francisco is a really good investment for the business. We’re certainly not going to risk the balance sheet, but we’d like to continue to increase planting every year. We’ve talked in the past, and we continue to, around 500 acres per year. So they’re not massive amounts of money, but continue to increase our own supply, and ideally we’d like to have 30 to 40% of the supply coming from our own groves in income.

Paul Sanger: And Sam, just to finish up, there’s many Australian businesses that are trying to crack and break into the US. Kudos for you guys, you are there and you’re reaping the benefits. What’s the secret sauce of breaking into the US market?

Sam Beaton: Well, I think we’ve actually been there nine years and there’s probably a couple of things. I think what we’ve seen over the last few years is really getting that management structure right; we’ve got some great leaders over there that are driving the business. But in essence, most things that work here have worked for us in the USA, both from a growing perspective, but also from a marketing perspective. If you think about, we’re growing Californian oil, we’re pushing, “It’s a local product. It’s fresh and therefore it’s healthy and it’s high quality.” So it’s almost identical to what we’ve done to grow Cobram over here, but of course the market’s 10 – 20 times bigger. So it’s been really exciting to see the growth in the last few years and we’re really excited with what’s ahead.

Paul Sanger: Gentlemen, it’s been an absolute pleasure to talk to you today and many thanks for your time.

Sam Beaton: Thanks Paul.

Leandro Ravetti: Thanks Paul.


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