13 August Dear Shareholders UPDATE. I am writing to update shareholders on the profit impact of the recent poor harvest and associated matters.

Transcription

1 13 August 2014 Dear Shareholders UPDATE I am writing to update shareholders on the profit impact of the recent poor harvest and associated matters Profit Due principally to the lower than average oil accumulation in the fruit this year, the total oil from the 2014 harvest was 7,954,218 litres which is 16.5% lower than our January forecasts of 9.5m litres. A key driver of our annual profit is the valuation of this oil (see below for more detail). Consequently, this will result in a trading loss before tax for 2014 financial year of approximately $1.7m. Please note this result is still subject to audit. The audited annual accounts will be sent to shareholders prior to 30 September. The result was also negatively impacted by the world bulk price of olive oil falling to near record lows during the first half of the financial year with steep discounting evident at retail level and bulk sales prices softening during the year. Pleasingly, the world price has recovered significantly in the last few weeks. Boundary Bend s full year profit result is principally driven by the volume of oil produced from that year s harvest and the estimated net realisable value of that oil at 30 June. This valuation is a book entry for calculating the net financial result for the year but does not align with the company s cash flows. Cash is generated as the oil is sold over the following 12 months. The actual profit from the production of the oil will not be known until the oil is sold in the following financial year. Therefore if the oil is sold for a higher price a profit is recorded (at the point of sale) and the reverse happens if the oil is sold for less than the value attributed at 30 June. Operating cashflow 1 In contrast to the reported loss, Boundary Bend had positive operating cashflow of $10.6m for the 2014 financial year and despite the disappointing 2014 crop result we are expecting an operating cashflow surplus for our Australian operations of approximately $10m for the 2015 financial year. Our USA business is expected to require approximately $1.2m to fund the operations during its first full year. 1 Operating cashflow is the cashflow generated from operating activities and therefore excludes items such as capital expenditure, debt repayment, equity raising and dividends.

2 Final Harvest results Naturally the Board shares your disappointment with the lower than anticipated harvest. Although it does not change the result, it is worth noting: The crop was expected to be lower (as outlined in previous correspondence) due to the nature of the production cycle of olive trees which usually deliver a large crop one year followed by a smaller crop the following year. Fruit tonnage was approximately 49,414 tonnes, down 6.4% on our January estimates which are based on physical fruit counting from representative areas of the groves. The oil content in the fruit in 2014 was significantly lower than our long term average with the total oil extraction being 16.1% (volume of oil extracted as a percentage of fresh fruit weight) ( V/W ) versus our average long term extraction rate of 18.1% V/W. This is the second lowest oil accumulation and therefore the second lowest extraction rate recorded since harvests first began at Boundary Bend in Below is a graph showing total fruit and oil produced at Boundary Bend s groves since Note 2012 was the harvest impacted by floods. Environmental reasons behind low oil yields Even though the factors that determine oil accumulation rate in olives are well known, it is difficult to evaluate precisely and predict which of them have had or will have more influence and to which extent. Nonetheless, it is very likely that higher than average temperatures at the start of the oil accumulation period (Jan/early Feb) and heavy February/March rains that increased fruit moisture just before harvest played a major role in the lower than average oil yields. The following graph compares the actual maximum daily temperatures for Boundary Bend in 2014 (in red) vs. the maximum daily averages for the site. As can be seen in the highlighted blue zone, temperatures during most of January and the first half of February were well above average.

3 In the case of olives, temperatures above 35ºC lead to a sharp reduction in their photosynthetic ability and consequent capacity to accumulate oil in the fruit. eratures above 40ºC are known to completely shut down the oil accumulation process. The following table compares the average number of days at Boundary Bend when the temperature reaches 35ºC and 40ºC against the records of this summer. As we can see from the table, this season there has been a significantly higher number of days with temperatures above 35ºC (+ 61%) but, most importantly, there has been an even more significantly higher number of days with temperatures above 40ºC (+221%), particularly in February. Outlook Looking forward we expect a significant crop increase in This view is based on a number of reasons, which include: our areas of younger groves still coming into mature production, and the natural cycle of the trees to produce a bigger crop the year following a light crop as can be seen by the earlier graph of historic production.

4 Frost Many parts of Victoria have experienced record low temperatures for extended periods over the last 10 days and our groves were no exception (see graphs below). At Boundary Bend we experienced 5 consecutive nights with temperatures well below zero including 19 hours of frost recorded on the 3 rd of August. Nearby bureau of meteorology weather stations at Swan Hill, Mildura and Balranald all broke records for the lowest recorded August temperatures. Although the trees are not budding up or particularly susceptible to frost at this time of year, extremely low temperatures for extended periods can still cause bud damage which has the potential to reduce normal flowering in spring. We have 23 frost fans that were running continually during this period and hired a helicopter to assist, but the extent of damage, if any, will not be fully evident until early October. Full daily data for Boundary Bend Date Air Air Air 31/ / / / / / / Date Solar Rad W/m 2 Wind Min Wind Avg Wind Max Rain mm Frost Hrs Day Degs ET ref s mm 31/ / / / / / / Note: The temperatures above are taken 1 metre off the ground in an official weather station and therefore temperatures in the coldest parts of the groves were at least 2 degrees lower than those recorded.

5 Dividend We have again forecast to pay 10 cents per share dividend this financial year. However, the Board will not make a final decision and declaration until our AGM in October. AGM Please be advised that the Annual General Meeting of shareholders is proposed to be held at 151 Broderick Road, Corio, on Friday the 24th October 2014 at 11.00am. A formal notice of meeting will also be posted to shareholders closer to the time. Packaged Goods Sales In line with our strategy to participate in all parts of the value chain and sell the majority of our oil as branded products to reduce price volatility and maximize our margins, sales of packaged goods grew 40% from $52.7m in FY2013 to $73.5m in FY2014 with about half this growth coming from the full year contribution of the Red Island brand which was acquired in November Cobram Estate Sales Cobram Estate sales grew 28% from $37.5m in FY2013 to $48.0m in FY2014 (as highlighted in the chart below). Highlights for the year included our most successful exhibitor results at the New York International Olive Oil Competition and Olive Japan, together with the successful launch of new products including First Harvest, Mixed Herbs and Roast Onion Infused. Source: BBL 2014 International olive oil prices Global olive oil prices were disappointing during the last year, with bulk prices falling from a high of EUR 2.90/kg in July 2013 to circa EUR 2.00/kg in December, and remaining flat through to June Recently, however, prices have risen back up to Euro 2.50/kg in anticipation of a smaller Spanish crop in Please feel free to contact me at any time by or should you have any questions or comments. Kind regards ROB McGAVIN