Select Harvests Limited Annual Report 2020

Plain-text annual report

ANNUAL REPORT 2020 Y E A R E N D E D 3 0 S E P T E M B E R 2 0 2 0 P L AT F O R M E D F O R OUR ORCHARDS BLOSSOM LATE JULY TO EARLY SEPTEMBER 2 GEOGRAPHIC DIVERSITY The strategy to have geographic diversity between our orchards limits our exposure to the weather, the spread of disease and insect infestation. Geographic diversity also enhances the availability of labour. SOUTHERN REGION PARINGA WAIKERIE LAKE CULLULLERAINE HILLSTON EUSTON Adelaide LOXTON ROBINVALE NORTHERN REGION GRIFFITH Sydney CENTRAL REGION THOMASTOWN Melbourne PROCESSING CENTRES SELECT HARVESTS ORCHARDS PIANGIL ALMOND ORCHARD Sale and Implementation Deed entered in October 2020 1,566 hectares planted almond trees (NOT INCLUDED IN ACREAGE FIGURES BELOW) AUSTRALIA 7,696HA (19,016 ACRES) TOTAL PLANTED AREA 2,670HA (6,597 ACRES) 3,078HA (7,605 ACRES) 1,948HA (4,814 ACRES) SOUTHERN REGION PLANTED AREA CENTRAL REGION PLANTED AREA NORTHERN REGION PLANTED AREA Select Harvests Annual Report 2020Select Harvests Annual Report November 2019 3 3 Company Company Profile Proﬁle CONTINUED BRAND INVESTMENT CONTINUED STRATEGIC INVESTMENT IN OUR BRANDS TONNAGE TOTALS WEIGHT OF KERNELS PER ANNUM TONNAGE TOTALS WEIGHT OF KERNELS PER ANNUM 7,135 HA 15,700 MT 14,500 MT 14,200 MT 6,687 HA 14,100 MT 5,389 10,500 HA MT 5,597 HA TM TM 22,690 MT 23,250 MT 7,677 HA METRIC TONNES 23,000 22,000 METRIC 21,000 TONNES 20,000 19,000 19,000 18,000 18,000 17,000 17,000 16,000 15,000 16,000 14,000 15,000 13,000 12,000 14,000 11,000 10,000 13,000 9,000 12,000 8,000 7,000 11,000 6,000 10.000 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 our is one of Australia’s Select Harvests largest almond growers and a leading manufacturer, processor and marketer of Select Harvests is one of Australia’s nut products, health snacks and muesli. We largest almond growers and a leading supply the Australian retail and industrial manufacturer, processor and marketer markets plus export almonds globally. of nut products, health snacks and muesli. We supply the Australian retail largest almond We are Australia’s second and industrial markets plus export producer and marketer with core capabilities almonds globally. across: Horticulture, Orchard Management, Nut Processing, Sales and Marketing. These We are Australia’s second largest almond capabilities enable us to add value throughout producer and marketer with core capabilities the value chain. across: Horticulture, Orchard Management, Nut Processing, Sales and Marketing. These Our Operations capabilities enable us to add value throughout Our geographically diverse almond orchards in Victoria, South Australia located are Our Operations and New South Wales with a portfolio that includes more than 7,696 Ha (19,016 acres) Our geographically diverse almond orchards leased almond of company owned and are at or near maturity. Located in Victoria, for planting. land suitable orchards and South Australia and New South Wales our independent These orchards, plus other portfolio includes more than 7,689 Ha supply state-of-the-art orchards, (19,000 acres) of company owned and facility at Carina West near processing leased almond orchards and land suitable Robinvale, Victoria and our value-added for planting. These orchards, plus other in the processing facility at Thomastown independent orchards, supply our state-of- Northern Suburbs of Melbourne. the-art processing facility at Carina West near Robinvale, Victoria and our value-added Our Carina West processing facility has the processing facility at Thomastown in the capacity to process above 30,000Mt of Northern Suburbs of Melbourne. Our almonds in the peak season and is capable of Carina West processing facility has the meeting the ever increasing demand for in- capacity to process 25,000 MT of almonds shell, kernel and value-added product. Our in the peak season and is capable of meeting processing plant in Thomastown processes the ever increasing demand for in-shell, over 10,000Mt of product per annum. kernel and value-added product. Our processing plant in Thomastown processes Export over 10,000 MT of product per annum. Select Harvests is one of Australia’s largest almond exporters and continues to build Export fast growing strong relationships Select Harvests is one of Australia’s largest India and China, as well as markets of almond exporters and continues to build maintaining established routes to markets in strong relationships in the fast growing Asia, Europe and the Middle East. markets of India and China, as well as Our Brands maintaining established routes to markets in Asia, Europe and the Middle East. The Select Harvests Food Division provides a capability and route to market domestically Our Brands and around the world for processed almonds The Select Harvests Food Division provides and other natural products. It supplies both a capability and route to market domestically branded and private label products to the key and around the world for processed almonds retailers, distributors and industrial users. Our and other natural products. It supplies both market leading brands are: Lucky, NuVitality branded and private label products to the key and Sunsol in retail; Renshaw and Allinga Farms retailers, distributors and industrial users. Our in wholesale and industrial markets. market leading brands are: Lucky, NuVitality, In addition to almonds, we market a broad Sunsol, Allinga Farms and Soland in retail; range of snacking and cooking nuts, health Renshaw and Allinga Farms in wholesale and mixes and muesli. industrial markets. In addition to almonds, we market a broad range of snacking and Our Vision cooking nuts, health mixes and muesli. To be a leader in the supply of better for you plant-based foods. Our Vision For Select Harvests to be recognised as one of Australia’s most respected agrifood businesses. in the Select Harvests Annual Report 20204 4 Contents Contents 3 Company Profile 4 Contents 1 Company Proﬁle 5 Performance Summary 2 Contents 6 Chair & Managing Director’s Report 3 Performance Summary 12 Almond Division 4 Chairman & Managing Director’s Report 13 Food Division 8 Strategy 14 People & Diversity 10 Almond Division 14 Communities Food Division 11 14 OH&S 12 People & Diversity 14 Sustainability & Environment 12 Communities 16 Executive Team 12 OH&S 17 Board of Directors 12 Sustainability & Environment 18 Historical Summary 14 Executive Team 19 Financial Report 15 Board of Directors 20 Directors' Report 16 Historical Summary 28 Remuneration Report Financial Report 17 40 Auditor’s Independence Declaration 18 Directors’ Report 41 Annual Financial Report 24 Remuneration Report 43 Statement of Comprehensive Income 37 Auditor’s Independence Declaration 44 Balance Sheet 38 Statement of Comprehensive Income 45 Statement of Changes in Equity 39 Balance Sheet 46 Statement of Cash Flows 40 Statement of Changes in Equity 47 Notes to the Financial Statements Statement of Cash Flows 41 77 Directors' Declaration 42 Notes to the Financial Statements Independent Auditor’s Report 78 71 Directors’ Declaration 85 ASX Additional Information 72 Independent Auditor’s Report 87 Corporate Information 79 ASX Additional Information 81 Corporate Information Using technology to improve water eﬃciency Making the best use of the water available to our orchards is vital for productivity and cost-eﬃciency. Technology to help us achieve this has been evolving rapidly. Several of our orchards are now using data from Phytech to deliver the precise amount of water required, when it is needed, avoiding run-oﬀ. Amaroo Farm Amaroo in South Australia has saved over 600 megalitres of water a year, amounting to cost savings of more than $250,000 using this data driven approach. BELOW: Amaroo farm data transmitter locations Select Harvests Annual Report 2020Performance Summary 5 Results - Key Financial Data $'000 (EXCEPT WHERE INDICATED) REPORTED RESULT (AIFRS) VARIANCE VARIANCE (%) Revenue Almond Crop Volume (Mt) Almond Price (A$/kg) EBITDA1 Depreciation and Amortisation EBIT1 Almond Division Food Division Corporate Costs Total EBIT1 Interest Expense Profit Before Tax Tax Expense Net Profit After Tax (NPAT) Earnings Per Share (EPS) (cents) Dividend Per Share (DPS) - Interim (cents) Dividend Per Share (DPS) - Final (cents) DPS - Total (cents) Net Debt (inc. lease liabilities) Gearing (inc. lease liabilities) Share Price (A$/Share as at 30 September) Market Capitalisation (A$M) (50,211) 560 (1.10) (37,410) (3,929) (40,428) (1,663) 752 (41,339) 1,893 (39,446) 11,425 (28,021) (16.8%) 2.5% (12.8%) (39.3%) (26.0%) (49.2%) (33.2%) 10.5% (51.6%) 47.8% (51.8%) 49.5% (52.8%) (29.5) (53.2%) FY2020 248,262 23,250 7.50 57,783 (19,057) 41,807 3,348 (6,429) 38,726 (2,064) 36,662 (11,661) 25,001 26.0 9 4 13 322,311 79.6% 5.57 538.3 FY2019 298,474 22,690 8.60 95,193 (15,128) 82,235 5,011 (7,181) 80,065 (3,957) 76,108 (23,086) 53,022 55.5 12 20 32 27,426 6.6% 7.69 736.2 Note: It should be reiterated that, as is always the case at the time the Company develops the crop value estimate, there is the potential for changes to occur both in yield outcomes (as the crop harvest and processing progress) and the pricing environment (driven by almond market or currency) shift. Definitions: 1 EBITDA & EBIT are Non-IFRS measures used by the company are relevant because they are consistent with measures used internally by management and by some in the investment community to assess the operating performance of the business. The non-IFRS measures have not been subject to audit or review. BELOW: Data collected from the trees delivers the precise amount of water into the root zone Select Harvests Annual Report 2020 While sales were higher for our Industrial value-added segment in FY2020, higher private label penetration and commodity costs negatively the overall segment result. We expect volumes to increase in 2021. Our focus will be to expand our existing customer base. impacted The external environment this year has clearly shown how unpredictable events can and do occur, emphasising the importance of a sound business base, flexible thinking and understanding the things we can control. Accordingly, Select Harvests is focused on the key internal value drivers of our business and remains committed to our long-term growth strategy. To this end, on 1 October 2020 Select Harvests announced it had entered into an Implementation Deed and Sale Agreements 1,566ha Piangil Almond to acquire the Orchard, along with a $120 million capital raising to assist in funding the acquisition. Anticipated to be completed in the 3rd week of December 2020, this exciting development will add significant scale to our orchard portfolio. FINANCIAL PERFORMANCE Select Harvests produced a reported Net Profit After Tax (NPAT) of $25.0 million and Earnings per Share (EPS) of 26 cents per share (cps). FY2020 operating cash flow was $13.2 million. This was impacted as a result of COVID-19 market access issues and related timing of customer payments (to flow through in H1 FY2021). The company paid a total dividend of 13cps (comprising an interim dividend of 9cps on 3 August 2020 and a final dividend of 4cps to be paid on 5 February 2021). At 30 September 2020, Net Bank Debt (excluding lease liabilities) was $57.5 million and Net Bank Debt to Equity was 14.2%. 6 Chair & Managing Director’s Report FY2020 has been a year of internal achievements and external challenges for Select Harvests. Like businesses the world over we have been impacted by the COVID-19 global pandemic, although when COVID arrived we were quickly declared an essential food producer. At this point the 2020 crop harvest was well underway and we were commencing the processing of a record 23,250Mt 2020 almond crop. Select Harvests’ almond orchards are in three Australian states that were quickly subject to border closures, limiting movement. Our food processing facilities and head office are at Thomastown in Melbourne, Victoria, a city that by November 2020 was just emerging from two extensive lockdown periods. While the federal and state governments moved relatively quickly to ensure that employees in essential industries could go about their work with fewer restrictions than the general public, the pressure on our employees and their families has been enormous. It is to their great credit that the team of people who make up Select Harvests responded quickly, at every level, to adapt operations to the new environment. It meant that harvest was completed, all almond and food processing facilities were kept going, sales and shipping of product went ahead. Timing is important in sales of agricultural for products. Select Harvests’ marketing our 2020 crop secured significant early sales commitments. strategy In the beginning stages of the pandemic, short- term reduction in export demand caused buyers to delay shipments from Australia, although by July Select Harvests was able to report that our customers had commenced taking shipments at near normal levels. Forecasts of a record U.S. almond crop and aggressive selling by some marketers around mid-year resulted in a significant softening of prices, however Select Harvests’ early sales insulated our results from the worst of this price drop. Our sales campaign is complete, leaving no carry-out almond stock, which is a substantial achievement. The upside from almond prices falling to historic 10-year lows was a significant uplift in short-term demand, with early indications of price recovery. Select Harvests’ ability to optimise our almond yields, manage costs & inputs and add value to our growing almond crop, through our Carina West Value-Adding Almond Processing Facility, will position the company well as the market recovers. While the impact of the ongoing pandemic remains unpredictable, early market access interruptions have now subsided, with increased momentum evident towards the end of FY2020. The Food Division continues to operate in a challenging domestic market. We are seeing strong underlying demand, both domestically food manufacturers, and overseas, confectioners and consumers for our value- added industrial almond products. from Select Harvests Annual Report 2020Business Highlights 7 Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) of $57.8 million Net Proﬁt After Tax (NPAT) of $25.0 million Total dividend payment of 13cps fully franked Almond Crop: 23,250Mt up 560Mt Average SHV Almond price A$7.50/kg Net Bank Debt to Equity: 14.2% Safety Record: Total Recordable Incidents down 23% Agreement to acquire Piangil Almond Orchard (October 2020): 1,566ha planted (1,177ha mature & 389ha immature) and 1,877ML of high reliability water entitlements for A$129m Capital raising of A$120m (October 2020): A$38.7m retail entitlement oﬀer and A$81.3m institutional placement and entitlement oﬀer Select Harvests Annual Report 20208 Chair & Managing Director’s Report Continued ALMOND DIVISION FOOD DIVISION The Almond Division delivered Earnings Before Interest and Tax (EBIT) of $41.8 million in FY2020. A record 2020 almond crop volume of 23,250Mt (2019 crop 22,690Mt) represented the third consecutive year of increasing harvests, although the production increase was offset against lower almond prices and higher water costs. In general, all orchard age cohorts across all Select Harvests’ growing regions yielded at levels higher than industry average. The third consecutive year of increasing yields is very pleasing, validating the company’s targeted horticulture program and on-farm investments in risk-mitigating frost fans and productivity-enhancing technology. Cost management continued to be a focus during FY2020, with total almond production costs per kilogram (excluding the impact of higher water prices) increasing by 6.5%. Our industry benchmarking activities indicate that Select Harvests remains in the bottom quartile of almond farming and processing costs globally – a most favourable position. Recent investment in technology at our Carina West Value-Adding Almond Processing Facility has resulted in improved efficiency, higher quality, and lower processing costs per kilogram. USD almond prices softened on the back of a record 2020 U.S. almond crop estimate and challenges relating to COVID-19 market access. Due to the timing and strategy of Select Harvests’ FY2020 marketing program we were able to secure significant sale commitments prior to prices softening, achieving an average sale price of A$7.50/kg. The water market remained challenging for the 2020 season, with record, or near record, water prices across the Murray-Darling Basin. Select Harvests’ water strategy is to meet our annual surface water requirements through a mix of 1/3rd ownership/control of water entitlements, 1/3rd long term leases of water entitlements and 1/3rd purchases of annual allocation water on spot markets. This water strategy enabled us to limit the financial impact of higher water prices during the 2019/20 water season. The start of the 2020/21 water season has featured higher annual water market allocations and a movement of water prices back towards long-term averages. We have been acquiring lease and temporary water in recent months given the favourable market conditions. The Murray-Darling Basin water markets inquiry interim report was released by the Australian Competition & Consumer Commission (ACCC) on 30 July 2020. Select Harvests is pleased to see that the ACCC has taken on board the feedback we provided in our initial submission to the inquiry. The ACCC’s preliminary view is that the current governance of the Basin and the regulatory frameworks for water trading do not meet standards expected in modern markets. Select Harvests has provided feedback on the interim report, with a final ACCC report due by February 2021. The Food Division produced an EBIT of $3.3 million in FY2020. While sales were higher for our value-added Industrial segment in FY2020, higher consumer private label penetration and commodity costs negatively impacted the overall result. In FY2020 there was further investment in the Sunsol and Lucky brands, with new national ranging of products achieved. Sunsol domestic sales growth was strong, with very positive early responses from major customers to our new product development. Consumer demand for healthier food products is growing in Asian markets. These markets remain a focus for Select Harvests. However, our in-country export market development was held back in FY2020 due to COVID-19 related travel restrictions. The Thomastown processing facility, warehouse and corporate office lease expires on 30 June 2022 and as advised previously, Management is currently undertaking a comprehensive review of the Food Division. This review covers both strategic growth options and supply chain solutions to support the various options under consideration. The review is expected to be concluded by the end of 2020. SAFETY, SUSTAINABILITY & WELLBEING Select Harvests’ number one objective is to ensure the safety of our people, by preventing injuries before they occur. The aim of the Select Harvests Zero Harm Safety and Wellbeing strategy is to improve our safety performance by 15% per annum until we operate in a zero- harm environment. Overall, total recordable incidents reduced by 23% in FY2020. Due to the COVID-19 global pandemic, Select Harvests was designated by government as a ‘permitted business’, with no restrictions other than the requirement to operate under a ‘COVID-19 Safe Plan’. We have been able to operate throughout the pandemic period and during the Stage 4 Victorian lockdown. Appropriate protocols and procedures have been put in place to protect our employees and manage the health and wellbeing risks associated with COVID-19. MARKET OUTLOOK The estimated record 2020 U.S. almond crop of 3.0 billion pounds (1.4 million tonnes) and challenges relating to market access due to COVID-19 resulted in a significant softening of the almond price in mid-2020. Amidst this, global demand for healthy plant- based foods, like almonds, continues to grow. Recent monthly U.S. almond shipment data shows that demand responded strongly to historic 10-year low almond prices, with record monthly shipments to key world markets, India in particular. This represents significant growth in consumptive demand and should avoid any large, long-term surplus remaining in the market. Select Harvests’ next crop will begin harvest in February 2021, with early deliveries reaching the market in April. By this time, a more definitive market and pricing environment is likely to have appeared, supporting our next marketing campaign. STRATEGY The underlying fundamentals of our business remain for almonds, including raw almonds and value-added almond products, is increasing globally. strong. Demand Achieving consistent high yielding performance from our mature almond orchards and efforts to increase immature yields underpins the multi-year growth strategy for Select Harvests. Our strategic priority to ‘Optimise the Almond Base’ has been further strengthened with the October 2020 agreement to acquire the Piangil Almond Orchard.* Select Harvests’ average orchard age, with the inclusion of Piangil, is 12.3 years, with 95% of current planted hectares cash generative. Almond orchards remain economically viable for +25 years, providing Select Harvests with a solid foundation for long term growth. Demand for value-added industrial almond products has been increasing in recent years. Not only are these products sold at a premium to other almonds, but demand is more stable and less price sensitive, as value-added almond products are often a key ingredient in consumer plant-based food and beverages, like almond milk. Select Harvests’ strategic investment in our Carina West Almond Value-Adding Facility is targeted at meeting these trends. We will look to make further strategic capital investments in our Carina West Facility, as the demand for innovative and value-added almond products is increasing. Optimising our almond based business through increased productivity and achieving sustainably high yields remains our key strategic objective. We continue to assess options to increase our almond production base through acquisitions if suitable orchards become available. We also continue to assess opportunities to diversify into other tree nuts, where we can utilise our expertise around multi-site orchard management, processing, and strategic marketing. * On 1 October 2020 Select Harvests entered into an Implementation Deed and Sales Agreement to acquire the Piangil Almond Orchard. The transaction is subject to a number of conditions, with the acquisition expected to be completed in the 3rd week of December 2020 Select Harvests Annual Report 2020 9 THANK YOU This year has had its challenges, yet the business has emerged with newfound strength in adaptability and innovation. We have achieved another consistent high yielding performance from our almond orchards in 2020 and water availability is positive leading into the summer irrigation season. The core fundamentals of our business and industry remain strong and have given Select Harvests the confidence to expand and raise capital. We remain committed to executing on our growth strategy, underpinned by a world class portfolio of almond assets. As one of the world’s largest vertically integrated value adding almond producers, Select Harvests is well positioned to take advantage of the growing demand for plant- based foods. We would like to thank our shareholders, suppliers and employees for their support and commitment during the current pandemic. We are in a period of considerable, sustained business growth that should make for an exciting journey over 2021 and beyond. Michael Iwaniw, Chair SOURCE: COMPANY DATA Feb Apr Jun 2020 Aug Oct Paul Thompson, Managing Director Commodity Price Trend 2016-2020 - AUD$/KG CFR $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec 2016 2017 2018 2019 Vietnamese Cashew WW320 Pistachio Inshell R&S California Walnuts LH&P Almond Kernel SSR SHV Theoretical Harvest Volume 2021 – 2028* SOURCE: COMPANY DATA +19% +33% ) s e n n o t ( e m u o V l 0 0 7 , 5 1 0 9 6 , 2 2 0 5 2 , 3 2 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 Yield from Existing Portfolio† Yield from Committed & Immature New Plantings† Piangil Orchard‡ * The almond crop is biennial in nature with expected +/- 10% per annum variation in tonnage. † Assuming a 3.3Mt per ha (1.3Mt per acre) maturity profile for Select Harvests orchards and immature yields based on the average of the 2019 and 2020 crops. ‡ Assuming a 3.5Mt per ha (1.4Mt per acre) maturity profile for Piangil Orchard. Select Harvests Annual Report 2020 10 In control of our destiny In control of our destiny In control of our destiny Select Harvests – In control of Our Destiny VISION To be a Leader in the Supply of Better for You Plant Based Foods VALUES STRATEGIC PRIORITIES THE PATHWAY TO ACHIEVING OUR VISION OPERATIONAL FOCUS WHAT WE DO EVERYDAY TRUST AND RESPECT INTEGRITY AND DIVERSITY SUSTAINABILITY PERFORMANCE INNOVATION DO THE RIGHT THING BE ONE TEAM PROTECT AND GROW OWN IT THINK OUTSIDE THE SQUARE Optimise the Almond Base Increase productivity and achieve sustainably high yields from our growing almond orchard base Grow our Brands Grow our consumer and industrial brands, aligned to the increasing consumption of plant based foods Expand Strategically Pursue value accretive acquisitions that align with our core competencies in the plant based agrifoods sector Customers Exceed our current customer’s expectations and grow our customer base, focused on the Asian marketplace almond orchard base Supply Chain Optimise our end-to-end supply chain to achieve maximum value for the business as a whole People Focus on a safe working environment, well-being, company culture, leadership development and staff training, attraction and retention Capital Target capital discipline, balance sheet strength, superior shareholder returns and long term growth GOAL Sustainable Shareholder Value Creation LEFT: Compost rows at Carina West Our work has demonstrated that LEFT: Compost rows at Carina carbon-based fertiliser is able to be West used at scale in our orchards and has the potential to recycle most of our Our work has demonstrated that hull waste. carbon-based fertiliser is able to be used at scale in our orchards and has the potential to recycle most of our hull waste. RIGHT: Upul Gunawardena TECHNICAL OFFICER, CARINA WEST RIGHT: Upul Gunawardena “We have created a closed loop by TECHNICAL OFFICER, using the waste hull ash from the CARINA WEST CoGen power plant, which is high in potassium, as an important “We have created a closed loop by ingredient to our fertiliser program. using the waste hull ash from the CoGen power plant, which is high in All natural, recycled and low cost, potassium, as an important our fertiliser program is the only ingredient to our fertiliser program. project of it's kind in the almond industry, world wide.” All natural, recycled and low cost, our fertiliser program is the only project of it's kind in the almond industry, world wide.” CASE STUDY Carbon Based Fertiliser Sustainable Almond Production Select Harvests is using a waste product from its almond production to replace expensive chemical fertilisers in its orchards, increasing soil nutrient balance and carbon level and reducing our carbon footprint. More than 70% of the almond fruit we harvest is hull (the hard outer shell), which is inedible for humans and when stored can become a ﬁre risk. While some of this waste has traditionally been sold as cattle feed, demand for this varies considerably and we wanted to ﬁnd a better solution. Co-Gen Power Plant In 2018, commissioning was completed on our co- generation plant to power our operations by burning the hull waste. We quickly realised that there could be other beneﬁts as well - a by-product of the co-generation process is considerable quantities of ash, which contains a high percentage of potassium as well as other nutrients. High Grade Ash We developed a process to convert the ash into a high- grade carbon based fertiliser that could be used on our almond orchards. Working with our South Australia partners, Rash Engineering, our technical team developed a method to deliver this fertiliser direct to the rootzone of the almond trees. Research ﬁndings have conﬁrmed that the application of soil carbon signiﬁcantly improve the soil health, which in turn improves the almond quality and yield, reduces the aging process of the crop and suppresses various soil borne disease organisms. Key beneﬁts include: (a) Replacement of 25-30% of expensive imported chemical fertilisers with recycled nutrients (b) Moderates soil structure, through retention of nutrients, soil moisture & temperature (c) Is reducing erosion (d) Increases soil carbon level (e) Eliminates almond waste into land ﬁll (f) Signiﬁcant reduction in the carbon footprint of almond production (g) Improved soil health, root biology & crop health (h) Improved Select Harvests long term asset value Our work to date has demonstrated that carbon-based fertiliser is able to be used at scale in our orchards and has the potential to recycle most of our hull waste. At present it has enabled us to replace up to 30% of expensive imported chemical fertiliser in our orchards, and signiﬁcantly improve soil health, root biology and crop health. At the same time, it has been cost-neutral – a real win-win for our business and the environment! Select Harvests Annual Report 2020 11 CASE STUDY Carbon Based Fertiliser Sustainable Almond Production Select Harvests is using a waste product from its almond production to replace expensive chemical fertilisers in its orchards, increasing soil nutrient balance and carbon level and reducing our carbon footprint. More than 70% of the almond fruit we harvest is hull (the hard outer shell), which is inedible for humans and when stored can become a ﬁre risk. While some of this waste has traditionally been sold as cattle feed, demand for this varies considerably and we wanted to ﬁnd a better solution. Co-Gen Power Plant In 2018, commissioning was completed on our co- generation plant to power our operations by burning the hull waste. We quickly realised that there could be other beneﬁts as well - a by-product of the co-generation process is considerable quantities of ash, which contains a high percentage of potassium as well as other nutrients. High Grade Ash We developed a process to convert the ash into a high- grade carbon based fertiliser that could be used on our almond orchards. Working with our South Australia partners, Rash Engineering, our technical team developed a method to deliver this fertiliser direct to the rootzone of the almond trees. Research ﬁndings have conﬁrmed that the application of soil carbon signiﬁcantly improve the soil health, which in turn improves the almond quality and yield, reduces the aging process of the crop and suppresses various soil borne disease organisms. Key beneﬁts include: (a) Replacement of 25-30% of expensive imported chemical fertilisers with recycled nutrients (b) Moderates soil structure, through retention of nutrients, soil moisture & temperature (c) Is reducing erosion (d) Increases soil carbon level (e) Eliminates almond waste into land ﬁll (f) Signiﬁcant reduction in the carbon footprint of almond production (g) Improved soil health, root biology & crop health (h) Improved Select Harvests long term asset value Our work to date has demonstrated that carbon-based fertiliser is able to be used at scale in our orchards and has the potential to recycle most of our hull waste. At present it has enabled us to replace up to 30% of expensive imported chemical fertiliser in our orchards, and signiﬁcantly improve soil health, root biology and crop health. At the same time, it has been cost-neutral – a real win-win for our business and the environment! Select Harvests Annual Report 202012 Almond Division 2020 Crop EBIT Movement vs 2019 Crop EBIT ($M) 100 90 80 75 60 50 40 30 20 10 0 2019 Crop EBIT Almond Volume Almond Price Water Cost Orchard Cost Processing Costs Rents/ Depn/Other 2020 Crop EBIT 2020 Crop - Cost Per KG (A$/KG) +63.4% 0.93 0.57 Orchard Water Harvest Rental Processing Depn/Other SOURCE: COMPANY DATA 2019 Crop 2020 Crop +13.3% 5.36 4.73 Total Production Costs 2020 Yield Performance MATURE IMMATURE e r c a / g k 1600 1400 1200 1000 800 600 400 200 0 1600 1400 1200 1000 800 600 400 200 0 Southern Central Northern Overall 3rd Leaf 4th Leaf 5th Leaf 6th Leaf Industry Standard Yield SOURCE: COMPANY DATA SOURCE: COMPANY DATA The Almond Division delivered an EBIT result of $41.8 million. Strong yields and a record crop were offset against lower almond prices and higher water costs. The 2020 crop's total production costs per kg increased by 13.3% (6.5% excluding water costs) technology The 2020 crop volume of 23,250Mt was up 560Mt on FY2019’s crop volume of 22,690Mt. This record result was due to good growing conditions, the commitment and dedication of our employees in executing targeted the company’s horticulture program, further investment in frost fans mitigating the impact of frost events on our trees and increased adoption of on-farm to monitor and guide the performance of our orchards. The overall higher crop volume had a positive impact on EBIT of approximately $4.8 million. The positive impact of a higher crop was offset by a reduction in almond prices and higher water costs which impacted EBIT by $25.0 million and $8.7 million respectively. Both our mature and immature orchards continue to yield at a rate significantly higher than industry standard yields. The yield performance of our immature greenfield orchards is particularly pleasing and supports the long-term strategy to grow our almond orchard base through a combination of greenfield developments and mature orchard acquisitions. Immature orchards yielding above industry standard delivered an additional 2,029Mt in FY2020. Higher water prices increased water costs per kilogram by 63.4%, accounting for approximately 17.4% of total per kilogram crop production costs in FY2020. Another year of yield outperformance and Select Harvests’ balanced water ownership strategy helped contain the overall impact of higher water prices on our per kilogram crop production costs, which increased by 13.3% compared to the 2019 crop. Hulling and shelling was completed in mid-October and crop quality was similar to last year. Sorting and packing continues. in new sorting Recent technology and factory productivity improvements will pay dividends as Select Harvests crop volume increases in the coming years. Water is a critical input for the ongoing health and productivity of our trees. With our increasing productive acreage, improving water use efficiency, along with the use of on-farm technology, remains a key focus of our experienced water team. In FY2020 we remained below our water use budget across our orchard portfolio. The targeted use of water to consistently maximise yield potential is a key focus moving forward. investment Select Harvests Annual Report 202013 Sunsol sales growth was particularly strong, with sales increasing by 45% in FY2020. Further development of our PRO-biotic range was well received by our major retail customers, with national ranging achieved. An extensive Sunsol’s marketing campaign, first ever TV advertising, delivered strong consumer engagement. including are being International opportunities pursued across both our industrial and consumer Food segments. In country export market development was held back in the second half of FY2020 due to COVID-19 related travel restrictions. Select Harvests’ lease on the Thomastown processing facility is due to expire on 30 June 2022. The facility primarily processes our Lucky and Sunsol consumer product ranges and private label consumer products, as well as housing Select Harvests Melbourne based corporate staff and a warehouse. A comprehensive review of strategic growth options and supply chain solutions for the Food Division was commenced in FY2020 and is expected to be concluded by the end of 2020. Food Division The Food Division delivered an EBIT result of $3.3 million. Food Division The result was below expectations. Strong demand for Industrial value-added almond products was not enough to offset the margin impacts of higher overall imported non-almond commodity input costs and ongoing domestic private label penetration in branded nuts. increased in The Industrial business sales FY2020, accounting for over 25% of Select Harvest’s 2020 almond crop. Value-added industrial almonds are a key ingredient in an increasing number of consumer products. These value-added almonds both sell at a premium, and are less price elastic, than raw almonds. Recent investments in the Carina West Value- Adding Facility will enhance our capacity to produce industrial almond products thereby increasing the value of the lower grade portion of our crop. The core Lucky cooking range is performing well in Woolworths with 6 additional products being ranged in the last quarter and has been supported by an interest in consumers home baking activity due to COVID-19 related lockdowns. Lucky snacking nut product deletions in Coles and ongoing private label penetration resulted in a reduction in branded snacking sales in FY2020. increased ABOVE: Sunsol Kids PRO-biotic cereals To develop our Sunsol Kids PRO-biotic Cereals we conducted consumer research to understand what parents and kids wanted in a cereal. We then formulated our product and developed a set of clear messages for the packaging which aligned with the research results. The company has sold or committed for sale 82% of the FY2020 crop with most of the balance held to cover internal value-add processing requirements. An average price of A$7.50/kg will be achieved, 12.8% lower than the FY2019 almond price of A$8.60/kg. 82% OF THE FY2020 CROP SOLD OR COMMITTED FOR SALE The recent change in financial year, to better align the company’s reporting cycle with the almond crop cycle, has resulted in no prior year crop adjustments being required in FY2020. No new almond orchard planting, or replanting, was conducted in FY2020. Subject to the completion of the October 2020 acquisition of the Piangil Almond Orchard, Select Harvests’ almond orchard portfolio will increase from 7,696ha (19,016 acres) to 9,262ha (22,886 acres). The tree health and outlook for Select Harvests’ FY2021 crop remain positive, following good pollination and growing conditions to date. There has only been one significant frost event, which was mitigated by our frost fans. Good seasonal rainfall has led to higher allocations and lower temporary water costs. Given Select Harvests’ high levels of 2019 carry-over water and higher lease costs the benefit of this lower pricing will flow through in FY2021 and the majority in FY2022. Market pricing will remain somewhat uncertain until a clearer picture of Californian almond shipments emerges at the end of 2020. A record 2020 U.S. crop of 3 billion pounds, significant 2019 U.S. crop carryover, a strengthening AUD and the ongoing market access impacts of COVID-19 are all factors that will impact the 2021 global almond price. Global demand for almonds has responded well to the lower almond price environment. Raw almond shipments to key consumer markets like India and China are significantly higher than prior periods. The inclusion of value-added almonds as a key ingredient in consumer products is growing as consumers become more conscious of their food choices, and demand healthier options. Select Harvests is one of the world’s largest almond producers, with a world class portfolio of high performing almond leading value- industry orchards and added processing capabilities. We provide millions of consumers around the world with high quality, healthy, nutritious Australian grown and processed almonds, both in their raw form and increasingly as value-added inputs to a wide range of healthy plant-based food products. Select Harvests Annual Report 202014 A sustainable, growing business PEOPLE & DIVERSITY Select Harvests recognises the advantages of having an inclusive and diverse workforce. We aim to offer a supportive and engaging work environment that enables employees to develop their careers and be rewarded for their contributions to our success. We always expect our people to maintain high work and quality standards, whilst maintaining a relentless commitment to safety. We employ 533 employees (full time equivalent, as at 30 September 2020), including executive, permanent, contractor and seasonal (casual and agency labour hire) personnel throughout regional and metropolitan Australia. We had no incidents of bullying during the year. Select Harvests’ Inclusion & Diversity objectives are to recruit, develop and retain talent, whilst building and maintaining a flexible workplace. Our Diversity Policy is available on the company website, along with Diversity reporting, which is included in the 2020 Corporate Governance Statement. See Governance section: www.selectharvests.com.au/governance One characteristic of our diversity is the significantly different ethnicities we employ. We are proud to partner with indigenous and islander education and employment programs, in addition to employing people from Asia Pacific and European countries in our workforce. In addition to ethnic diversity, we continue to maintain a focus to increase female participation, with this year’s participation level at 31%, against a target of 33% overall. Whilst the result was on par to the previous year, there was an increase in females in managerial roles. The Workplace Flexible Arrangements Policy was reviewed and significantly, as a key policy to enabling the attraction and retention of females. COMMUNITIES Select Harvests is a significant employer and active member in its local communities in regional Victoria, South Australia, New South Wales and the Northern Metropolitan area in Melbourne. This year, it was decided to make a significant contribution to the bushfire affected communities in the regional areas where Select Harvests operates. A contribution of $100,000 will be made by the Company to relevant fire services. In addition, Select Harvests has matched all contributions submitted by employees, to various registered charities, in support of the rebuilding work following the bushfires. OH&S Focus continues towards achieving Zero Harm, with annual targets to improve year on year performance by driving a 15% reduction in the number of incidents, injuries and injury severity and a 15% increase in hazards identified and resolved, to prevent harm. The key focus for the year has predominantly been to ensure the safety and wellbeing of our employees, during the COVID-19 pandemic, whilst not diverting our attention from key risk areas in the business. The key strategic priorities for the year were: 1. COVID-19 Management & Response Plan 2. Process improvement and System Implementation 3. Building on Safety Culture and Safety Leadership 4. Targeted Employee health and wellbeing programs The key activities implemented included: • Activating and continually updating the COVID-19 Management and Response Plan • Implementing support technology compliance management and real time incident and hazard reporting. to • Actioning process improvements in incident investigation reporting and risk assessment. the strong safety culture, • Reinforcing through revised Company Values and Behaviours, visible safety leadership, including safety walks and frequent toolbox training sessions and discussions. the • Supporting employee wellbeing through a holistic wellness program (Global Challenge), mental health first aid training for leaders, increased counselling support through our Employee Assistance Program (EAP) and pulse check surveys for employees working from home. +60% LTIFR Lost Time Injury Frequency Rate -9% -35% -20% MTIFR Medically Treated Injury Frequency Rate OCT 2018 -SEP 2019 LTISR Lost Time Injury Severity Rate TRIFR Total Recordable Injury Frequency Rate OCT 2019 -SEP 2020 SOURCE: COMPANY DATA SUSTAINABILITY & ENVIRONMENT This year, Select Harvests has reviewed its sustainability strategy and as part of that process, aligned reporting with the Global Reporting Initiative Standards as well as the United Nations Sustainable Development Goals (SDGs). Both provide a global framework that helps guide our goals and objectives as a business. There is a shortage of healthy food globally and as a grower and marketer of nutrient dense food products, we are well positioned to help meet this growing demand. To capitalise on this demand, we need to set our goals and targets with a long-term lens as we operate in an industry that requires commitment and up to 25 years of foresight when expanding almond operations. Therefore, it is imperative that sustainability be embedded into everything we do, which is why we recognise it as a core value supporting the delivery of our business strategy. This sustainable approach to running our business is essential to delivering on our key strategic objectives; • Optimise the almond base • Grow our brands • Expand strategically. The Company is committed to minimising the its operations have on the environment, with several projects activated over the past two years, including reduction of our carbon footprint. Our key focus areas in 2020 were: • Ensuring the safety of our people, by preventing injuries before they occur. The aim of Select Harvests’ Zero Harm Safety and Wellbeing strategy is to improve our safety performance by 15% per annum until we operate in a zero-harm environment impact • Securing future water supply whilst being a leader in the market for water efficiency. We aim to manage our water efficiency through best practice water delivery systems, water optimisation technology such as soil water monitoring, plant based monitoring and high-resolution imagery • Reducing our impact on the environment across all aspects of the business. This is achievable through the further investment in sustainable projects (i.e. H2E co-generation facility), bee stewardship, promoting a ‘recycle first’ culture and transitioning to greener inputs used throughout the value chain. The 2019/20 Sustainability Report is available on the company website: www.selectharvests.com.au/sustainability Our Environment and Sustainability Policy and its related procedures and systems govern our wildlife management plan and licensing requirements. A copy is available on the Select Harvests website: www.selectharvests.com.au/governance Select Harvests is a signatory of the National Packaging Industry Covenant, which aims to deliver more sustainable packaging, increase recycling rates and reduce waste. The Company’s office and farm waste is recycled where possible. Select Harvests is subject to environmental regulations under laws of the Commonwealth and State Governments of Victoria, New South Wales and South Australia. The Company holds licences issued by the Environmental Protection Authority (EPA) which specify limits for discharges to the environment. These licences regulate the management of discharge to the air and stormwater runoff. For FY2020, there were no environmental breaches nor breaches of the Company’s environmental licence conditions. Select Harvests Annual Report 202015 Select Harvests Annual Report 202016 Executive Team BRAD CRUMP Chief Financial Officer and Company Secretary Brad joined Select Harvests as Chief Financial Officer on 20 November 2017 and was appointed Company Secretary on 7 August 2018. He is a Certified Practising Accountant and has over 15 years experience in senior financial management. Most recently he has been the CFO of Redflex Limited and previously gained extensive experience in agribusiness as CFO of Landmark (Australia’s largest rural services provider) and senior roles within AWB Limited. He brings extensive agribusiness, agri services and related capital management experience to the role. BEN BROWN General Manager Horticulture Ben joined Select Harvests in 2014. Ben held the position of Project and Technical Manager of the Horticultural Division, before being appointed General Manager Horticulture in April 2018. Ben is an Applied Science graduate with Honours in Soil Science and has 20 years experience across perennial irrigated horticulture with expertise in: orchard development; production horticulture; development of detailed RD&E strategies; and extension and technology transfer of best practice. Prior to joining Select Harvests, Ben was the Industry Development Manager at the Almond Board of Australia and an irrigation and soil agronomist. PETER ROSS General Manager Almond Operations Peter joined Select Harvests in 1999. He has held the positions of Plant Manager, Project Manager and General Manager for the Processing area of the Almond Division, General Manager Horticulture and was appointed General Manager Almond Operations in August 2017. Prior to joining Select Harvests, Peter ran his own maintenance and fabrication business servicing agriculture, mining and heavy industry. LAURENCE VAN DRIEL General Manager Trading and Industrial Laurence joined Select Harvests in 2000. Laurence has over 30 years experience in trading edible nuts and dried fruits. He has a comprehensive knowledge of international trade and deep insights into the trading cultures of the various countries in which these commodities are sold. He has held senior purchasing and sales management positions with internationally recognised companies. SUZANNE DOUGLAS General Manager Consumer Suzanne joined Select Harvests in April 2019. Suzanne is a highly experienced, successful and senior manager who has extensive experience in both the Australian and international Fast-Moving Consumer Goods Industry. Before joining Select Harvests, Suzanne has led HJ Heinz Australia, and held senior management roles at Devondale Murray Goulburn and McPherson’s Consumer Products. URANIA DI CECCO General Manager People, Safety & Sustainability Urania joined Select Harvests in July 2019. Urania is a highly experienced and commercial HR Leader, with a passion for helping businesses transform to achieve success and sustainable growth through a capable, diverse and engaged workforce. She has proven her adaptability to different industries, having worked in manufacturing, professional services and service and distribution. Prior to joining Select Harvests, Urania was the Director of Human Resources for Cummins South Pacific. She also held the position of Group General Manager, Human Resources at Crowe Horwarth and various senior HR roles at Amcor Australasia. Select Harvests Annual Report 2020Board of Directors 17 MICHAEL IWANIW Chair Appointed to the board on 27 June 2011 and appointed Chair 3 November 2011. He began his career as a chemist with the Australian Barley Board (ABB), became managing director in 1989 and retired 20 years later. During these years he accumulated extensive experience in all facets of the company’s operations, including leading the transition from a statutory authority and growing the business from a small base to an ASX 100 listed company. Michael was instrumental in the successful merger of ABB Grain, AusBulk Ltd and United Grower Holdings Limited to form one of Australia’s largest agri-businesses. He has a Bachelor of Science, a graduate diploma in business administration and is a member of the Australian Institute of Company Directors. Michael is the immediate past Chair of Australian Grain Technologies and has extensive non-executive director experience with several listed and private companies. He is a member of the Remuneration and Nomination Committee. PAUL THOMPSON Managing Director and Chief Executive Officer Appointed as the Managing Director and Chief Executive Officer (MD) of Select Harvests Limited on 9 July 2012. Paul has over 30 years of management experience. Formerly President of SCA Australasia, part of the SCA Group, one of the world’s largest personal care and tissue products manufacturers. He is a member of the Australian Institute of Company Directors and has formerly held positions as a Director of the Food and Grocery Council and councillor in the Australian Industry Group. MICHAEL CARROLL Non-Executive Director Joined the board on 31 March 2009. He brings to the Board diverse experience from executive and non-executive roles in food and agribusiness. Current non-executive board roles include Rural Funds Management (RE for ASX: RFF; director since April 2010), Paraway Pastoral Company, Australian Rural Leadership Foundation and Viridis Ag Pty Ltd. Previous board roles include Queensland Sugar Limited, Elders Limited (ASX: ELD, 2018-2020), Tassal (ASX: TGR, 2014-2018), Warrnambool Cheese & Butter, Rural Finance Corporation, Sunny Queen Farms and Meat and Livestock Australia. During his executive career Mike established and led the NAB’s agribusiness division with earlier senior executive roles including marketing and investment and advisory services. He is Chair of the Remuneration and Nomination Committee. FRED GRIMWADE Non-Executive Director Appointed to the board on 27 July 2010. Fred is a Principal and Director of Fawkner Capital, a specialist corporate advisory and investment firm. He is Chair of CPT Global Ltd (ASX: CGO; director since October 2002) and XRF Scientific Ltd (ASX: XRF; director since May 2012) as well as being a director of Australian United Investment Company Ltd (ASX: AUI; director since March 2014) and AgCap Pty Ltd. He was formerly Chair of Troy Resources Ltd (2013-2017), a non-executive director of AWB Ltd., and has held general management positions with Colonial Agricultural Company, Colonial Mutual Group, Colonial First State Investments Group, Western Mining Corporation and Goldman, Sachs and Co. He is a member of the Audit and Risk Committee. NICKI ANDERSON Non-Executive Director Appointed to the board on 21 January 2016. Nicki Anderson is an accomplished leader and director with broad experience in strategy, sales, marketing, licensing and innovation within branded food, beverage and consumer goods businesses both in Australia and Internationally (including Coca Cola Amatil, Cadbury Schweppes, McCain, Nestle and Kraft). Nicki has held senior positions in marketing and innovation within world class FMCG companies and was most recently Managing Director of the Blueprint Group concentrating on sales, marketing and merchandising within the retail and pharmacy sales channels. Nicki is currently a Director of Mrs Mac’s, Australia Made Campaign Limited, Prostate Cancer Foundation and ASX listed Funtastic (ASX: FUN; director since October 2018). She is Chair of the Remuneration & Nomination Committee for both Mrs Mac’s Limited and Funtastic Limited. Nicki is a Member and Former Chair of the Monash University Advisory Board for the marketing faculty. She is a member of the Remuneration and Nomination Committee. FIONA BENNETT Non-Executive Director Appointed to the board on 6 July 2017. Ms Fiona Bennett is a Chartered Accountant and an experienced non-executive director with an extensive background in business management, corporate governance, audit and risk. She is currently on the boards of BWX Limited (ASX: BWX; director since December 2018) and Hills Limited (ASX: HIL; director since May 2010) and is also Chair of the Victorian Legal Services Board. Ms Bennett has previously served on the board of Beach Energy Limited (2012-2017). She has held senior executive roles at BHP Limited and Coles Limited and has been Chief Financial Officer at several organisations in the health sector. She is Chair of the Audit and Risk Committee. GUY KINGWILL Non-Executive Director Appointed to the board on 25 November 2019. Guy joins the Board with an extensive background in horticulture, international soft commodity marketing and water investment and trading. He is currently on the Boards of Tasmanian Irrigation and ACMII Australia 1 Group and serves as the Chair of the Audit Committee at Tasmanian Irrigation. Guy has previously served as Managing Director of Tandou Limited, and as a non-executive director of Lower Murray Water Urban and Rural Water Corporation. He is a member of the Audit and Risk Committee. Select Harvests Annual Report 202018 Historical Summary Select Harvests consolidated results for years ended 30 September/June $'000 (EXCEPT WHERE INDICATED) 2009 2010 2011 2012 2013 2014* 2015 2016 2017 2018 2018† 2019 2020 YEAR/PERIOD ENDED 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 SEPT† 30 SEPT 30 SEPT 248,581 238,376 248,316 246,766 190,918 188,088 223,474 26,827 26,032 22,612 (2,495) 5,241 31,288 85,845 285,917 49,785 242,142 210,238 67,581 298,474 248,262 16,979 34,869 (1,052) 80,065 38,726 23,047 23,603 18,473 (8,743) 198 26,833 80,514 44,290 11,978 29,464 (2,089) 76,108 36,662 16,712 42.6 17,253 43.3 16.6 15.2 21 100 48.5 17,674 (4,469) 33.7 10.5 13 100 38.6 (7.9) (2.8) 8 100 (101.3) 1.87 2.17 2.19 10.70 6.70 (0.4) 39.6 1.44 43.3 1.96 41.7 1.42 12 100 28.2 1.56 7.10 51.9 0.79 2,872 5.0 1.8 12 100 239.8 2.14 1.0 49.6 1.61 21,643 56,766 37.5 12.3 20 55 53.5 2.38 6.9 54.0 4.02 82.9 19.8 50 - 62.8 3.35 15.9 38.2 3.36 33,796 46.7 9,249 12.6 20,371 (1,536) 53,022 25,001 23.2 (1.6) 55.5 11.6 3.3 127.5 12.7 46 54 99.1 3.22 9.0 23.1 1.90 10 100 79.4 2.95 3.4 52.5 1.05 12 100 51.7 0 28 N/A N/A 100 50.0 3.34 0.00 3.60 N/A 20.0 6.4 18.7 15.9 6.6 79.6‡ 4.49 3.23 2.74 2.39 26.0 6.2 13 100 50.0 3.46 18.7 Total sales Earnings before interest and tax Operating profit before tax Net profit after tax Earnings per share (Basic) (cents) Return on shareholders' equity (%) Dividend per ordinary share (cents) Dividend franking (%) Dividend payout ratio (%) Financial ratios Net tangible assets per share ($) Net interest cover (times) Net debt/equity ratio (%) Current asset ratio (times) Balance sheet data as at 30 September/June Current assets 81,075 83,993 91,228 76,936 123,303 136,639 207,782 155,521 136,610 162,118 159,721 173,667 217,397 Non-current assets 133,884 145,612 214,352 202,371 180,542 194,080 280,130 294,251 343,081 354,435 362,900 379,190 607,497 Total assets 214,959 229,605 305,580 279,307 303,845 330,719 487,912 449,772 479,691 516,553 522,621 552,858 824,894 Current liabilities 102,348 58,469 Non-current liabilities 11,735 57,515 46,454 90,311 54,369 64,608 76,800 67,540 33,988 121,325 61,893 138,632 81,783 77,088 130,371 36,104 49,412 63,457 71,701 101,809 102,570 73,398 Total liabilities 114,083 115,984 136,765 118,977 144,340 155,313 200,525 158,871 202,072 137,913 151,982 136,854 91,062 328,822 419,884 Net assets 100,876 113,621 168,815 160,330 159,505 175,406 287,387 290,901 277,619 378,640 370,639 416,003 405,010 Shareholders' equity Share capital Reserves Retained profits Total shareholders' equity 46,433 12,949 41,494 100,576 47,470 11,327 54,824 113,621 95,066 11,201 62,548 95,957 10,472 53,901 97,007 9,144 53,354 99,750 12,190 63,466 170,198 178,553 181,164 268,567 268,567 271,750 279,096 12,818 11,168 11,602 9,601 9,802 10,417 104,371 101,180 84,853 100,472 92,270 133,836 14,280 111,634 168,815 160,330 159,505 175,406 287,387 290,901 277,619 378,640 370,639 416,003 405,010 Other data as at 30 September/June Fully paid shares ('000) Number of shareholders Select Harvests' share price 39,519 39,779 56,227 56,813 57,463 57,999 71,436 72,919 73,607 95,226 95,226 95,737 96,637 3,296 3,039 3,227 3,359 3,065 3,779 4,328 8,908 11,461 11,943 11,884 10,331 11,258 - close ($) 2.16 3.46 1.84 1.30 3.27 5.14 11.00 6.74 4.90 6.90 5.32 7.69 5.57 Market capitalisation 85,361 137,635 103,458 73,857 187,904 298,115 785,796 491,474 360,674 657,059 506,602 736,218 538,268 * The 2014 result has been restated due to the early adoption of changes to Accounting Standards, AASB 116 Property, Plant and Equipment, and AASB 141 Agriculture, impacting 'bearer plants'. As a result of implementation of AASB16 Leases on 1 October 2019, the Company recognised Right-of-use assets and lease liabilities in its books † 3 month transition period ‡ Select Harvests Annual Report 2020 19 Financial Report 20 Directors' Report 28 Remuneration Report 40 Auditor’s Independence Declaration 41 Annual Financial Report 43 Statement of Comprehensive Income 44 Balance Sheet 45 Statement of Changes in Equity 46 Statement of Cash Flows 47 Notes to the Financial Statements 77 Directors' Declaration 78 Independent Auditor’s Report 85 ASX Additional Information 87 Corporate Information RIGHT: The Murray River at Euston Lock Select Harvests Annual Report 202020 Directors’ Report The directors present their report together with the financial report of Select Harvests Limited and controlled entities (referred to hereafter as the “Company”, “the Group” or “the consolidated entity”) for the year ended 30 September 2020. DIRECTORS The qualifications, experience and special responsibilities of each person who has been a director of Select Harvests Limited at any time during or since the end of the financial year is provided below, together with details of the company secretary. Directors were in office for this entire period unless otherwise stated. NAMES, QUALIFICATIONS, EXPERIENCE AND SPECIAL RESPONSIBILITIES M Iwaniw, B Sc, Graduate Diploma in Business Management, MAICD (Chair) Appointed to the board on 27 June 2011 and appointed Chair 3 November 2011. He began his career as a chemist with the Australian Barley Board (ABB), became managing director in 1989 and retired 20 years later. During these years he accumulated extensive experience in all facets of the company’s operations, including leading the transition from a statutory authority and growing the business from a small base to an ASX 100 listed company. Instrumental in the successful merger of ABB Grain, AusBulk Ltd and United Grower Holdings Limited to form one of Australia’s largest agri-businesses. He has a Bachelor of Science, a graduate diploma in business administration and is a member of the Australian Institute of Company Directors. Michael is the immediate past Chair of Australian Grain Technologies and has extensive non-executive director experience with several listed and private companies. He is a member of the Remuneration and Nomination Committee. Interest in shares: 220,545 fully paid shares. P Thompson, B Bus and MAICD (Managing Director and Chief Executive Officer) Appointed as the Managing Director and Chief Executive Officer (MD) of Select Harvests Limited on 9 July 2012. Paul has over 30 years of management experience. Formerly President of SCA Australasia, part of the SCA Group, one of the world’s largest personal care and tissue products manufacturers. He is a member of the Australian Institute of Company Directors and has formerly held positions as a Director of the Food and Grocery Council and councillor in the Australian Industry Group. Interest in Shares: 559,451 fully paid shares. M Carroll, B Ag Sc, MBA and FAICD (Non-Executive Director) Joined the board on 31 March 2009. He brings to the Board diverse experience from executive and non-executive roles in food and agribusiness. Current non-executive board roles include Rural Funds Management (RE for ASX: RFF; director since April 2010), Paraway Pastoral Company, Australian Rural Leadership Foundation and Viridis Ag Pty Ltd. Previous board roles include Queensland Sugar Limited, Elders Limited (ASX: ELD, 2018-2020), Tassal (ASX: TGR, 2014-2018), Warrnambool Cheese & Butter, Rural Finance Corporation, Sunny Queen Farms and Meat and Livestock Australia. During his executive career Mike established and led the NAB’s agribusiness division with earlier senior executive roles including marketing and investment and advisory services. He is Chair of the Remuneration and Nomination Committee. Interest in Shares: 26,023 fully paid shares. F S Grimwade, B Com, LLB (Hons), MBA, FAICD, SF Fin and FCIS (Non-Executive Director) Appointed to the board on 27 July 2010. Fred is a Principal and Director of Fawkner Capital, a specialist corporate advisory and investment firm. He is Chair of CPT Global Ltd (ASX: CGO; director since October 2002) and XRF Scientific Ltd (ASX: XRF; director since May 2012) as well as being a director of Australian United Investment Company Ltd (ASX: AUI; director since March 2014) and AgCap Pty Ltd. He was formerly Chair of Troy Resources Ltd (2013-2017), a non-executive director of AWB Ltd., and has held general management positions with Colonial Agricultural Company, Colonial Mutual Group, Colonial First State Investments Group, Western Mining Corporation and Goldman, Sachs and Co. He is a member of the Audit and Risk Committee. Interest in shares: 92,699 fully paid shares. N Anderson, B Bus, EMBA, GAICD (Non-Executive Director) Appointed to the board on 21 January 2016. Nicki Anderson is an accomplished leader and director with broad experience in strategy, sales, marketing, licensing and innovation within branded food, beverage and consumer goods businesses both in Australia and Internationally (including Coca Cola Amatil, Cadbury Schweppes, McCain, Nestle and Kraft). Nicki has held senior positions in marketing and innovation within world class FMCG companies and was most recently Managing Director of the Blueprint Group concentrating on sales, marketing and merchandising within the retail and pharmacy sales channels. Nicki is currently a Director of Mrs Mac’s, Australia Made Campaign Limited, Prostate Cancer Foundation and ASX listed Funtastic (ASX: FUN; director since October 2018). She is Chair of the Remuneration & Nomination Committee for both Mrs Mac’s Limited and Funtastic Limited. Nicki is a Member and Former Chair of the Monash University Advisory Board for the marketing faculty. She is a member of the Remuneration and Nomination Committee. Interest in shares: 8,653 fully paid shares. Select Harvests Annual Report 202021 NAMES, QUALIFICATIONS, EXPERIENCE AND SPECIAL RESPONSIBILITIES F Bennett, BA (Hons), FCA, FAICD and FIML (Non-Executive Director) Appointed to the board on 6 July 2017. Ms Fiona Bennett is a Chartered Accountant and an experienced non-executive director with an extensive background in business management, corporate governance, audit and risk. She is currently on the boards of BWX Limited (ASX: BWX; director since December 2018) and Hills Limited (ASX: HIL; director since May 2010) and is also Chair of the Victorian Legal Services Board. Ms Bennett has previously served on the board of Beach Energy Limited (2012-2017). She has held senior executive roles at BHP Limited and Coles Limited and has been Chief Financial Officer at several organisations in the health sector. She is Chair of the Audit and Risk Committee. Interest in shares: 9,175 fully paid shares. G Kingwill (Non-Executive Director) Appointed to the board on 25 November 2019. Guy joins the Board with an extensive background in horticulture, international soft commodity marketing and water investment and trading. He is currently on the Boards of Tasmanian Irrigation and ACMII Australia 1 Group and serves as the Chair of the Audit Committee at Tasmanian Irrigation. Guy has previously served as Managing Director of Tandou Limited, and as a non-executive director of Lower Murray Water Urban and Rural Water Corporation. He is a member of the Audit and Risk Committee. Interest in shares: 6,212 fully paid shares. B Crump (Chief Financial Officer and Company Secretary) Joined Select Harvests as Chief Financial Officer on 20 November 2017 and appointed Company Secretary on 7 August 2018. He is a Certified Practising Accountant and has over 15 years experience in senior financial management. Most recently he has been the CFO of Redflex Limited and previously gained extensive experience in agribusiness as CFO of Landmark (Australia’s largest rural services provider) and senior roles within AWB Limited. He brings extensive agribusiness, agri services and related capital management experience to the role. Interest in shares: 4,000 fully paid shares. CORPORATE INFORMATION Nature of operations and principal activities The principal activities during the year of entities within the Company were: • The growing, processing and sale of almonds to the food industry from company owned and leased almond orchards; and • Processing, packaging, marketing and distribution of edible nuts, dried fruits, seeds, muesli and a range of natural health foods. EMPLOYEES The Company employed 533 time equivalent employees as at 30 September 2020 (30 September 2019: 570 full time equivalent employees). full time equivalent employees Full executive, seasonal (casual and employment types. permanent, include: and labour agency hire) contractor OPERATING AND FINANCIAL REVIEW Highlights and Key developments during the year Another strong yielding performance from Select Harvests almond asset base delivered a record crop in FY2020. This performance was offset by a 12.8% reduction in the achieved almond price as a record 2020 U.S. crop and the impact of COVID-19 on global market access negatively for almond kernel and processed product. Additionally, increasingly dry conditions led to the cost of increasing temporary substantially leading to an overall increase in cost of production per kilogram by 13.3%. impacted prices licences water in Despite the the adverse movement global almond price and cost of water, Select Harvests delivered a solid profit result for FY2020. This performance reflects the prior years’ investment in greenfield developments continuing to increase their production as they mature. Additionally, consistent improved the ongoing yields investment in technology, supported by a targeted horticultural management approach, has led to an increase in the forecasted production volume. This reflects the current strategic focus on consolidating the almond asset base to maximise returns. achieved through The water market was challenging in FY2020. Ongoing drought conditions, increased horticultural developments and a greater presence of large non-irrigator financial traders in the water markets have all put increased pressure on water (cost and supply). Improved recent seasonal conditions have meant catchment levels have increased, leading to improved allocations and a significant drop in the temporary water licence market. The Food Division continued to be impacted by increasing private label competition in the consumer domestic cooking nuts category, significant growth was again however achieved with the Sunsol Brand. The lower global almond price has a material impact on margins in the B2B Industrial segment. COVID-19 and its impact on global market access has extended the length of Select Harvests’ shipping schedule. This has led to delays in the delivery of the 2020 crop and related cash receipts. As growing and processing costs for the 2020 crop have already occurred this shipment delay has led to lower operational cashflows. As a result, Select Harvests’ net bank debt position at the end of FY2020 is $57.5 million (FY2019: net cash position $7.9 million). There has been no major project expenditure or greenfield development during the year. The options for greenfield expansion, mature orchard acquisition, and non-almond related opportunities continue to be assessed for future growth. Select Harvests Annual Report 202022 Directors’ Report Continued FINANCIAL PERFORMANCE REVIEW Profitability Reported Net Profit After Tax (NPAT) is $25.0 million. Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is $57.8 million and Earnings Before Interest and Taxes (EBIT) is $38.7 million. Results Summary and Reconciliation ($‘000) Almond Division Food Division Corporate Costs Operating EBIT Interest Expense Net Profit Before Tax Tax (Expense) Net Profit After Tax Earnings Per Share (cents) Almond Division Profitability Revenue of $102.5 million was generated for FY2020. This was 33% lower than last year due to the reduction in the global almond price and a slower shipping program as a result of COVID-19 impacts on global market access. 88% of the crop had been processed by the end of the year. This was less than FY2019 due to a wet finish to the FY2020 harvest. 82% of the FY2020 crop is either shipped or committed for sale with the majority of the remaining tonnage allocated for internal use in the Food Division and Parboil value adding facility until product from the 2021 crop becomes available. An EBIT of $41.8 million was achieved in FY2020 as a result of the valuation of the 2020 crop based on a yield achieved of 23,250Mt (560Mt or 2.5% higher than the 2019 crop). Whilst mature orchard yield percentages were down slightly following a very large 2019 crop, 2020 still produced a record tonnage result as immature orchards progressed another year at above business case performance and mature industry orchards delivered yields above standard. Another good year for growing conditions, protection from frost fan investments and a well executed, comprehensive and targeted horticultural program led to this consistent high volume production. The FY2020 result was adversely impacted by a reduction in the achieved almond price to $7.50/kg (12.8% lower than the 2019 crop) and a 13.3% increase in the cost per kilogram due to the cost per kilogram of temporary water increasing by 63.4% from FY2019. Balance Sheet $’000 Trade and other receivables Inventories Biological asset Trade and other payables Net working capital Food Division Profitability FY2020 revenue generated was stable at $145.4 million delivering an EBIT of $3.3 million (33.2% lower than FY2019). While volumes processed and packed were higher than FY2019, the mix of product sold was more weighted towards lower margin private label product. The domestic consumer branded market remains challenging with both major domestic retailers aggressively pursuing their private label strategy in the cooking nuts category. Demand in the Industrial market continued to be strong however lower almond prices led to margins decreasing across domestic and international sales. Interest Expense Interest expense of $2.1 million reflects the lower interest rates applicable to current finance facilities and the ongoing close management of operating cashflows and resultant debt levels. Balance Sheet Net assets at 30 September 2020 are $405.0 million, compared to $416.0 million at 30 September 2019. An increase in trade receivables and inventory has been offset by an increase in net borrowings (as a result of delayed cashflows from a slower shipping program and lower almond price). Property, plant and equipment also declined with limited capital expenditure, no current greenfield developments and no permanent water rights acquired during the FY2020 period. Net working capital has increased by 30.8%. This increase is due to higher trade receivables and inventory due to a slower shipping schedule as a result of COVID-19 related market access delays. REPORTED RESULT (AIFRS) FY2020 41,807 3,348 (6,429) 38,726 (2,064) 36,662 (11,661) 25,001 26.0 FY2019 82,235 5,011 (7,181) 80,065 (3,957) 76,108 (23,086) 53,022 55.5 Cash flow and Net Bank Debt Total net bank debt at 30 September 2020 was $57.5 million (30 September 2019: Net cash position $7.9 million), with a gearing ratio (total net bank debt (excluding lease liabilities)/equity) of 14.2% (30 September 2019: N/A). The increase in borrowings is a result of a delayed shipping schedule due to COVID-19 related market access issues and lower global almond prices. Operating cash inflow generated for FY2020 amounted to $13.2 million. This reduced result was due to COVID-19 related delayed shipments, a lower almond price and resuming a tax payable position (a refund was received in FY2019 as a result of the change in financial periods). Investing cash outflows of $35.3 million was $1.3 million higher than FY2019 due to investments in processing capital to improve efficiencies and quality levels. Dividend payments for the year were higher due to the final dividend payment relating to the FY2019 result (paid in FY2020). Net cash outflow for FY2020 was $65.4 million which was funded through a decrease in cash on hand and an increase in bank debt. Dividends A 4 cents final dividend has been declared, resulting in a total dividend of 13 cents per share for the financial year. This compares to a total dividend of 32 cents per share declared for the financial year ended 30 September 2019. FY2020 69,154 100,549 42,432 (42,517) 169,618 FY2019 50,223 77,687 34,144 (32,345) 129,709 Select Harvests Annual Report 202023 Overall, total recordable incidents reduced by 23%. Due to the focus on managing risk of COVID-19, proactive hazard identification reduced slightly compared to FY2018/19 by 0.6%. Medical Treatment Injuries improved by a reduction of 32% and a decrease of 35% in frequency rate. There were decreases in both days lost (8%) and the Lost Time severity rate (20%), due to early intervention and effective injury management, including early return to work programs. Whilst the severity rate has improved, unfortunately there was an increase in Lost Time Injuries of 50% and the resulting increase in frequency rate of 60%, mostly incurred in our high risk agricultural operations. An in-depth analysis of Lost Time Injuries has been conducted and a plan to action further preventative activities. The key activities implemented included: • Activating and continually updating the COVID-19 Management & Response Plan • Implementing support technology compliance management and real time incident and hazard reporting to • Actioning process improvements in incident investigation reporting and risk assessment • Reinforcing the strong safety culture, through the revised Company Values and Behaviours, visible safety leadership, including safety walks and frequent toolbox training sessions and discussions • Supporting employee wellbeing through a holistic wellness program (Global Challenge), mental health first aid training for leaders and increased counselling support through our Employee Assistance Program (EAP) and pulse check surveys for employees working from home FY2019 FY2020 VARIANCE FY2019 VS FY2020 88 58.2 631 19 20.9 404 11.2 7 7.7 68 53 627 13 14 374 9 14 16 -23% -9% -0.6% -32% -35% -8% -20% +50% +60% CORPORATE SOCIAL RESPONSIBILITY Health, Safety and Wellbeing Focus continues towards achieving Zero Harm, with annual targets to improve year on year performance by driving a 15% reduction in the number of injuries and injury severity and a 15% increase in hazards identified and resolved, to prevent harm. incidents, The key focus for the year has predominantly been to ensure the safety and wellbeing of our employees, during the COVID-19 pandemic, whilst not diverting our attention from key risk areas in the business. The key strategic priorities for the year were: 1. COVID-19 Management & Response Plan 2. Process improvement and System Implementation 3. Building on the Safety Culture and Safety Leadership 4. Targeted Employee health and wellbeing activities Occupational Health and Safety (OH&S) Total Recordable Incidents Hazards Medical Treatment Injuries Lost Time Injuries Severity Lost Time Injuries # Frequency Rate # # Frequency Rate Days Lost Severity Rate # Frequency Rate Community Fair Employment Practices Select Harvests is a significant employer and proud member of the community with orchards in regional Victoria, South Australia and New South Wales and the Company has significant processing facilities at Thomastown in the Northern Metropolitan area of Melbourne and Carina West, in North West Victoria. The Company is actively involved in all our local communities. Many employees contribute to local community organisations on a regular basis. Select Harvests supports the local communities with both financial and non-financial support and through product donations. This year the company focussed on supporting regional areas impacted by bush fires. A significant donation of $100,000 is being made to fire services in the communities we support. In addition, the company matched employee donations to various agencies supporting bushfire appeals. Our policies, practices and procedures ensure that all our employees and contractors are in a fair and reasonable manner. treated We are an Equal Employment Opportunity employer, who values and respects Inclusion and Diversity in our workplace. All third-party labour providers engaged are subject to meeting our Contractor Engagement and Recruitment Policies that warrant compliance with Australian labour laws and legislative obligations. We undertake regular reviews to ensure compliance with focus on the payment of wages and eligibility to work in Australia. Select Harvests has an Ethical Sourcing Policy in place, with the objectives of upholding human rights, protecting the environment and operating in a sustainable manner, whilst being a respected leader in the industry and communicating the same expectations of our suppliers and their supply chains. The Company is committed to managing the economic, environmental and social challenges across our supply chain and this will be achieved by committing to: • Employing innovative approaches to conserve resources and reduce impacts to help preserve, improve and protect the environment • Promoting responsible agricultural and food manufacturing practices • Safeguarding the quality and integrity of the food we produce, market and manufacture • Respecting people and human rights by treating our employees, suppliers, and contractors with dignity and respect and providing safe, secure and healthy work environments, and expecting the same from our suppliers The Ethical Sourcing Policy is available on the Select Harvests website: www.selectharvests.com.au/governance Select Harvests Annual Report 202024 Directors’ Report Continued Sustainability This year, Select Harvests has reviewed its sustainability strategy and as part of that process aligned reporting with the Global Reporting Initiative Standards as well as the United Nations Sustainable Development Goals (SDGs). Both provide a global framework that helps guide our goals and objectives as a business. There is a shortage of healthy food globally and as a grower and marketer of nutrient dense food products, we are well positioned to help meet this growing demand. To capitalise on this demand, we need to set our goals and targets with a long-term lens as we operate in an industry that requires commitment and up to 25 years of foresight when expanding almond operations. Therefore, it is imperative that into sustainability be embedded everything we do, which is why we recognise it as a core value supporting the delivery of our business strategy. This sustainable approach to running our business is essential to delivering on our key strategic objectives; • Optimise the almond base • Grow our brands • Expand strategically. We are motivated to meet increasing expectations by doing our fair share to address complex global social and environmental challenges, such as managing our resources efficiently, creating a safe working environment that ensures inclusiveness and diversity and compliance to laws within our operations and supply chain, whilst reducing our impact on the environment. To achieve this, we need to execute on the business fundamentals, along with receiving the social and environmental mandate from the communities within which we operate. The Company is committed to minimising the impact its operations have on the environment, with several projects activated over the past two years, including reduction of our carbon footprint. Our key focus areas in 2020 were: • Ensuring the safety of our people, by preventing injuries before they occur. The aim of Select Harvests’ Zero Harm Safety and Wellbeing strategy is to improve our safety performance by 15% per annum until we operate in a zero-harm environment • Securing future water supply whilst being a leader in the market for water efficiency. We aim to manage our water efficiency through best practice water delivery systems, water optimisation technology such as soil water monitoring, plant based monitoring and high-resolution imagery • Reducing our impact on the environment across all aspects of the business. This is achievable through the further investment in sustainable projects (i.e. H2E co-generation facility), bee stewardship, promoting a ‘recycle first’ culture and transitioning to greener inputs used throughout the value chain. In looking ahead, we will continue to improve the monitoring and reporting systems we have in place as a business, to ensure that we are pinpointing the right sustainability measures that address the key focus areas of our stakeholders. We are cognisant of the potential impact we have on our environment and the impact that climate change has on our business. We seek to mitigate the risks and capitalise on the opportunities that occur across the business through sensible and responsible management. To achieve this, we are exploring the following: • Further steps to address our climate change related risks and opportunities • Participating and supporting the Murray Darling Basin Plan to bring the Basin back to a healthier and sustainable level. • In January 2019, Australia’s Modern Slavery Act came into effect. We look forward to releasing our first report in FY2021, which will outline how we plan to address this important global issue. rates and The 2019/20 Sustainability Report is available on the company website : www.selectharvests.com.au/sustainability Our Environment and Sustainability Policy and its related procedures and systems govern our wildlife management plan and licensing requirements. A copy is available on the Select Harvests website: www.selectharvests.com.au/governance Select Harvests is a signatory of the National Packaging Industry Covenant, which aims to deliver more sustainable packaging, increase recycling reduce waste. The Company’s office and farm waste is recycled where possible. Environmental Regulation & Performance Select Harvests is subject to environmental regulations under laws of the Commonwealth and State Governments of Victoria, New South Wales and South Australia. The Company holds licences issued by the Environmental Protection Authority (EPA) which specify limits for discharges to the environment. These licences regulate the management of discharge to the air and stormwater runoff. For FY2020, there were no environmental breaches nor breaches of the Company’s environmental licence conditions. Water Water is a limited resource and a key input to Select Harvests’ almond orchards. A significant amount of capital and management time is invested in improving the efficiency of water utilisation. Initiatives include installing state of the art irrigation technology and systems to deliver water efficiently, dedicated resources on each farm to optimise water use which includes reviewing and agreeing the irrigation and fertigation application on a weekly basis. Several innovative technology solutions have also been deployed to improve orchard management, including soil moisture monitoring probes, plant-based water stress monitoring sensors and vegetative index imagery collected by drones that identifies differing tree health. These sources of real time information are connected by telemetry enabling us to build a database that over time will lead to more informed decisions. In some orchards we are recycling water from the drainage system, resulting in cost savings and minimising the impact on the water table. In addition, trials are being run on higher yielding almond varieties that use less water per tonne of almonds produced. Almond orchards are a long-term investment that require a secure supply of water. To mitigate the risk of inadequate supply of water at an economic price, Select Harvests has developed a strategy that addresses our exposure to immediate and future weather patterns, market trends and projected prices. The company operates in several irrigation regions, has a mix of owned permanent water entitlements, medium term water leases and allocation water purchased in the spot market, and uses a mix of ground and river water. The strategy is reviewed by the Board annually and monitored through monthly reports. Energy Our H2E co-generation facility was commissioned in June 2018 and it uses biomass such as hulls, shells and orchard prunings to generate electricity. Enough electricity can be generated to power the Carina West Processing Facility (CWPF) and nearby orchard pumps and supply renewable electricity into the local grid. Project H2E is delivering approximately 27% reduction in the carbon footprint of the facility or the equivalent of taking 8,210 cars off the road. Further work to optimise the facility was completed at the end of 2019, with further increases in energy generation from the installation of the bag filter. Increased purchases through the Virtual Generation Agreements (VGA) have occurred over the last 12 months, resulting in increase last year from 39% to 51% of net from electricity consumption from renewables (excluding grid mix renewables) through self-generation and targeted Wind Power Purchase Agreements (PPA). A breakdown is provided in the following table: Total Power Consumed Total Grid Power Consumed Total Power Generated Total Power Exported Power Purchased through VGA (MWH) 55,523.46 40,587.78 20,882.88 5,947.20 3,201.42 This highlights the company’s commitment to sourcing sustainable energy and Select Harvests continues to be on track for increasing use of renewable power. We continue to pursue projects to reduce our energy footprint and efficiency. Projects include site energy efficient consumption reviews and portfolio reviews to understand potential contracting options moving forward. Recycling The composting of the cogeneration facility’s ash with organic matter, soil ameliorants and essential plant nutrients resulted in approximately 30,000 tonnes of compost being produced and applied to the orchards in readiness for the 2020/21 season. The composting process takes all the waste skins from the Carina West value adding facility, which used to be directed to landfill. More recently the waste almond skins from the Thomastown facility have also been diverted to composting, averting them being sent to landfill. The compost will increase soil carbon levels, provide a valuable slow release biological nutrient source, increase water and fertiliser efficiency, and ultimately improve soil health. The compost will reach peak production over the next 12 months with approximately 30,000 tonnes being produced annually, enough to treat approximately 85% of our orchards. Office waste, containers and packaging are recycled or reused wherever possible. All food waste is sold into the stockfeed industry. Select Harvests Annual Report 202025 On 1 October 2020 Select Harvests announced it had entered into an Implementation Deed and Sale Agreements to acquire the 1,566ha Piangil Almond Orchard, along with a $120m capital raising to assist in funding the acquisition. Anticipated to complete by the 3rd week of December 2020, this exciting development will add significant scale to our orchard portfolio. The Food Division is undergoing a detailed strategic review to determine the best option for the division to deliver maximum returns. Options being considered are: • Development of a new highly efficient processing facility to build on the current Thomastown plant’s (lease expires in June 2022) capabilities through a targeted growth program • Optimise the use of the capability of the • Grow Carina West processing facility the consumer retail branded presence through marketing support and targeted new product development • Develop strong strategic partnerships with key domestic customers delivering a variety of products and services • Access new sales channels in the China and South East Asian markets for both the Sunsol and Lucky brands • Further progress value added almond sales in the business to business Industrial market, particularly China. As our production levels naturally grow there will continue to be a volume uplift in this area. Improvements in our Parboil value adding facility will deliver additional opportunities in domestic and export markets. • Divest activities that generate below hurdle rate returns. Additionally, the company continues to carefully assess (through internally set hurdle rates and strategic benefits) its growth opportunities. These comprise: • Continued expansion in almond orchards, both greenfield and mature • Diversification into other nuts • Continue to grow our Food Division both organically (through new product development, brand strengthening and improved operational efficiencies) and inorganically The macro for the almond industry and ‘better for you’ plant-based foods remains very strong both domestically and internationally. Select Harvests has high quality assets, a sustained increasingly efficient and consistent production profile supported by world class technology. We remain well placed to deliver on the opportunities that will arise from continued demand growth globally for plant based foods. almonds. particularly This ongoing demand continues to be driven by increasing middleclass wealth and a higher number of consumers adopting including and consuming healthier diets, the increased consumption of plant-based products, Select Harvests continues to successfully deliver in both the Almond and Food Divisions to leverage this macro increase in global demand. The horticultural program for the 2021 crop is well underway. Conditions to date have been favourable with the trees receiving sufficient chill hours through the dormancy period and the pollination process has completed without issue. There have been a limited number of frost events and the previous investment in frost fans implemented in key areas has mitigated any negative impact. Based on industry standard yields and the age profile of the orchards, and assuming normal growing conditions for the season, the Select Harvests 2021 theoretical crop would be approximately 23,500Mt (excluding Piangil Orchard). Increased rainfall to date this season has led to a significant drop in the price of temporary water. Select Harvests will not see the full cost benefit of this flow through into FY2021 due to the level of acquired FY2020 water carried over. Our policy of owning water entitlements, long and medium term leasing entitlements and acquiring annual allocations on the spot market means we are not fully exposed to annual fluctuations in water prices. USD almond pricing decreased to 10 year lows in mid-2020 due to the confirmation of an estimated 3.0 Billion pound 2020 U.S. crop, the high levels of carry-over stock from the U.S. 2019 crop and the increasing spread and impacts of COVID-19. While levels of demand have increased in response to the price drop, current pricing levels remain subdued and are not expected to materially rise for the next twelve months. After a slow start, 2020 almond exports (kernel and processed product) have increased and are expected to remain strong, particularly into the India and China market. The Almond Division continues to pursue opportunities to further maximise returns from its core almond asset base. This occurs through (yields), increased production improved quality and greater efficiency. This is achieved through the following: • Increasing the use of technology to provide a more targeted horticultural management approach delivering improvements to yield, quality and lower water usage • Further investment in advanced equipment in our Carina West processing facility to deliver additional scale, quality and productivity improvements • Additional capabilities and operating efficiency from our Parboil value adding facility through targeted investment and new product manufacturing processes • Consistent maximum power generation from our H2E bio-mass facility using hull and horticultural waste and producing high quality pot ash to be composted and applied to current orchard assets In addition to the above, domestic greenfield developments and mature orchard acquisitions continue to be assessed. Pollination Management Select Harvests’ almond orchards are dependent on bee pollination. The key challenges and risks in bee stewardship centre on optimum bee health, pollination activity and almond yield. The Company sources pollination services through several brokers and direct relationships with apiarists. This generates productive relationships and an optimum pollination outcome. Recognising the importance of bees, Select Harvests actively engages and supports the bee and pollination industries. This includes the sponsorship and support for apiary associations, participation and presentation at conferences, and collaboration in all-of- horticulture and almond specific R&D projects and steering committees. We continue innovative solutions to generate improved colony health include and pollination outcomes. These trialling self-pollinating varieties, improved bee husbandry practices, colony imagery and artificial pollen application. Our on-farm bee stewardship practices include fostering alternative forage sources for bees, provision of water at pollination sites to aid bee hydration, avoiding the use of products bees are sensitive to when colonies are present. If a spray is required we work with the apiarist and conduct it at night outside of foraging periods. Audited spray diaries are available and ongoing inspections monitor for colony strength and health. Other critical components maximum yield pollination through varietal selection. to ensuring include successful cross- investigate to Risk Management Select Harvests has a risk management process in place to identify, analyse, assess, manage and monitor risks throughout all parts of the business. The Company maintains and refreshes its detailed risk register annually. The register provides a framework and benchmark against which risks are reported on at different levels in the business, with a biannual report presented to the Board. Each month major risks are reviewed by Senior Management and the Board. They include • Safety Risks (including employee safety, fire prevention and plant operation); • Horticultural Risks (including climatic, disease, water management, pollination and quality) • Food Safety Risks (including product quality, utilities supply, major equipment failure); and • Financial Risks (including currency, customer concentration, market pricing) The Audit and Risk Committee Charter is available on the Select Harvests website: www.selectharvests.com.au/governance Outlook The global macro for almonds continues to remain positive moving forward. While COVID-19 has no doubt logistically impacted the global supply of almonds the export shipping data in recent months from the U.S. has shown record breaking levels of shipments. Select Harvests Annual Report 202026 Directors’ Report Continued SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There have been no significant changes in the state of affairs of the Company. SIGNIFICANT EVENTS AFTER THE BALANCE DATE On 1st October 2020, the Company announced to the ASX its proposed acquisition of the Piangil Almond Orchard for a consideration of $129 million in cash plus a reimbursement of 2020/2021 growing costs. In addition, the company undertook an equity raising of $120 million at an offer price of $5.20 per share to both institutional and retail investors. The combined share raising was successfully completed by 27 October with a total of 23.08 million shares issued. The expected date for completion of the Piangil Orchard acquisition will be in the 3rd week of December 2020. For further details, please refer to the relevant announcements made to the ASX. On 30 November 2020, the Directors of the Company declared a final fully franked dividend of 4 cents per share payable on 5 February 2021 to shareholders on the register on 11 December 2020. DIRECTORS’ MEETINGS NON IFRS FINANCIAL INFORMATION DIVIDENDS The non IFRS financial information included within this Directors’ Report has not been audited or reviewed in accordance with Australian Auditing Standards. information IFRS financial Non includes underlying EBIT, underlying result, underlying NPAT, underlying earnings per share, net interest expense, net bank debt, net debt, net working capital and adjustments to reconcile from reported results to underlying results. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS During the year the Company entered into an insurance contract to indemnify Directors and Officers against liabilities that may arise from their position as directors and officers of the Company and its controlled entities. The terms of the contract do not permit disclosure of the premium paid. Officers indemnified include the company secretary, all directors, and executive officers participating in the management of the Company and its controlled entities. CENTS 4 2020 ($’000) 4,794 Final fully franked dividend declared for 30 September 2020* * On ordinary shares COMMITTEE MEMBERSHIP During or since the end of the financial year, the Company had an Audit and Risk Committee and a Remuneration and Nomination Committee comprising members of the Board of Directors. Members acting on the Committees of the Board during or since the end of the financial year were: Audit and Risk F Bennett (Chair) F Grimwade G Kingwill (appointed 16 December 2019) N Anderson (resigned 16 December 2019) Remuneration and Nomination M Carroll (Chair) M Iwaniw N Anderson The number of meetings of directors (including meetings of committees of directors) held during the financial year and the number of meetings attended by each director was as follows: DIRECTORS’ MEETINGS MEETINGS OF COMMITTEES Audit and Risk Remuneration and Nomination Number Eligible to Attend 13 13 13 13 13 13 12 Number Attended 13 13 13 13 13 13 12 Number Eligible to Attend - 6 - 6 6 1 5 Number Attended - 6 - 6 6 1 5 Number Eligible to Attend 5 5 5 - - 5 - Number Attended 5 5 4 - - 5 - M Iwaniw P Thompson M Carroll F Bennett F Grimwade N Anderson G Kingwill* * Appointed 25 November 2019 Select Harvests Annual Report 202027 DIRECTORS’ INTERESTS IN CONTRACTS Directors’ interests in contracts are disclosed in Note 27(e) to the financial statements. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 40. NON-AUDIT SERVICES Non-audit services provided by the external auditor are approved by resolution of the Audit and Risk Committee and approval is provided in writing to the board of directors. The directors are satisfied that no non-audit services were provided during the period, as detailed in Note 26. ROUNDING The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191. The Company is an entity to which the Class Order applies. PROCEEDINGS ON BEHALF OF THE COMPANY There are no material legal proceedings in place on behalf of the Company as at the date of this report. CORPORATE GOVERNANCE In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Select Harvests Limited support and have adhered to the ASX principles of corporate governance. The Company has previously adopted Listing Rule 4.10.3 which allows companies to publish their corporate governance statement on their website rather than in their annual report. A copy of the statement along with any related disclosures is available at: www.selectharvests.com.au/governance This report is made in accordance with a resolution of the Directors. M Iwaniw Chair Melbourne, 30 November 2020 Select Harvests Annual Report 2020 28 Directors’ Report Continued REMUNERATION REPORT Introduction from the Chair of the Remuneration and Nomination Committee Dear Shareholder, On behalf of the Board, I'm pleased to present our 30 September 2020 remuneration report. The objective of Select Harvests remuneration strategy is to attract, retain and motivate the people we require to sustainably manage and grow the business. Executive remuneration packages include a balance of fixed remuneration, short term cash incentives and long term equity incentives. The framework endeavours reward with market to align executive conditions and shareholders’ interests. Fixed remuneration is aligned to the market mid- point for similar roles in comparable companies. The health and well-being of our people for the remains the paramount priority business, with the short term incentive payments conditional on the foundations being in place for a safe work environment, demonstration of a strong safety culture and our values. The board assessed the safety environment to be sound. The short term incentive program is based on annual performance and assessed against key financial and operational performance indicators (KPIs). The performance targets are based on the annual business plan and set at a level that results in a 50% payout on achievement of a stretching but realistically achievable level of performance. Maximum payout only occurs where there is a clearly outstanding level of performance across all KPIs. In addition to KPIs for their business unit and areas of direct responsibility all Key Management Personnel (KMP) share a company NPAT KPI to encourage a strong executive team dynamic and cross business unit collaboration. Setting KPIs for a business such as ours has the challenge of a number of factors such as climatic conditions, commodity prices and exchange rates having a significant effect on results. While management can to some degree mitigate these “agricultural risks” and should be encouraged to do so, they are largely out of our control. The Board retains some discretion in evaluating overall performance and taking into account operating conditions. KMP STI vesting levels ranged from 27% to 39% of the maximum opportunity. The higher vesting levels were primarily driven by strong orchard yields, innovation, improved culture in the orchards, and strong cost control processing, manufacturing and head office. The long term incentive plan is based on 3 year compound annual growth in earnings per share and relative total shareholder return against ASX listed industry peers and absolute Earnings Per Share (EPS) growth. The EPS band is broad with vesting starting at 5% and full vesting occurring at 20%. The choice of a broad band reflects our desire for the start point to have a reasonable probability of occurring and for full vesting to only occur when there is a strong outcome for shareholders. TSR over the three year performance period was 24.5% which came out at the 61.5th percentile of the peer group and resulted in 73% vesting. EPS growth was 25%, admittedly off a low base three years prior and therefore fully vested. No adjustments were made to the reported statutory EPS in determining this outcome. The Company was not a recipient of the government JobKeeper scheme. Overall LTI vesting was at 86.5%. The remuneration outcomes resulting from the FY2020 performance are set out in this Remuneration Report. Mike Carroll Chair – Remuneration & Nomination Committee The report has been prepared and audited against the disclosure requirements of the Corporations Act 2001 (Cth). 1. KEY QUESTIONS What are our remuneration objectives and guiding principles? OBJECTIVE To deliver sustainable returns as a leader in “better for you” plant based foods. Align management and shareholder interests. PRINCIPLES Deliver competitive advantage in attracting, motivating and retaining talent. Encourage a diverse workforce. Simple, easily understood, rewarding performance and creating a culture that delivers shareholder value. Reflect our values of: • Trust & Respect • Integrity & Diversity • Sustainability • Performance & Innovation Select Harvests Annual Report 202029 How is our remuneration structured? The table below provides an overview of the different remuneration components within the framework. PURPOSE DELIVERY FY20 APPROACH OBJECTIVE Attract and retain the best talent REMUNERATION COMPONENT Total Fixed Remuneration (TFR) Reward current year performance Short Term Incentive (STI) TFR is set in relation to the external market and takes into account: • Size and complexity of the role • Individual responsibilities STI ensures appropriate differentiation of pay for performance and is based on business and individual performance outcomes Base salary, superannuation and salary sacrifice components based on total cost to the company Target TFR positioning is Median of Comparator Group Comparators: Listed Food and Agribusiness Companies Annual cash payment STI Performance Measures1 Reward long term sustainable performance Long Term Incentive (LTI) LTI ensures alignment to long-term overall company performance and is consistent with: Performance rights (vesting after three years, subject to performance) • Profitable growth • Long-term shareholder return • NPAT (40%) • Capital management (20%) • Culture/ Executive Development (10%) • Personal & Operational performance (10%) • Board discretion (20%) With a tollgate for safety and values LTI Performance Measures • Relative TSR (50%) • EPS growth (50%) With a positive TSR gate • Holding Lock The participant’s holding is equal to their fixed annual remuneration • Clawback conditions For fraud or dishonest conduct breach of obligations to the Company 1 This summarises the MD’s Performance Measures. Other KMP’s measures are tailored to their responsibilities When remuneration is earned and received? The remuneration components are structured to reward executives progressively across different timeframes. The diagram below shows the period over which FY20 remuneration is delivered and when the awards vest. TFR STI LTI AGM Monthly FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Date Paid Date Granted Vesting Date Performance Period Select Harvests Annual Report 202030 Directors’ Report Continued REMUNERATION REPORT (CONTINUED) 1. KEY QUESTIONS (CONTINUED) What is the remuneration mix for Key Management Personnel? The remuneration mix for KMP is balanced between fixed and variable remuneration. • MD: 50% of remuneration is performance-based pay and 25% of remuneration is delivered as performance rights to shares. • Other KMP: 50% of their remuneration is performance-based pay and 25% of their remuneration is delivered as performance rights to shares. MD Other KMP 50% 50% 7% (Max 25%) 6.0-9.9% (Target 20-25%) 22% (Max 25%) 22% (Max 25-30%) Total Fixed Remuneration Peformance Dependent STI Peformance Dependent LTI STI payments are based on 50% of the fixed remuneration, with maximum payment on achievement of a stretching but achievable target, with regard to past and otherwise expected achievements. LTI grants are at face value, where face value represents the share pricing at 30 September 2020. Executive KMP have minimum shareholding requirements. How much did you pay your executive for the financial year? The table below presents the remuneration paid to, or vested for, Executive KMP for the financial year ended 30 September 2020. $ Paul Thompson - MD Brad Crump – CFO & Company Secretary Peter Ross – GM Almond Operations Laurence Van Driel – GM Trading & Industrial Sales Ben Brown – GM Horticulture Suzanne Douglas – GM Consumer Urania Di Cecco – GM People, Safety & Sustainability TOTAL FIXED REMUNERATION 641,073 404,616 345,953 355,523 338,781 325,381 281,365 STI ACHIEVED1 87,807 59,660 56,417 47,532 65,560 56,632 42,189 VESTED PERFORMANCE RIGHTS2 361,354 86,725 72,271 72,271 72,271 - - TOTAL 1,090,234 551,001 474,641 475,326 476,612 382,013 323,554 1 Cash STI will be paid after the 30 September 2020 financial statements have been finalized. 2 The vested performance rights value in this table has been determined using the closing share price on the last trading day of FY20. Vesting occurs after the finalisation of the 30 September 2020 financial statements and hurdle testing is completed by an independent expert. Sale of shares emanating from vested performance rights under the current plan are subject to a holding lock which requires Executive KMP to accumulate and hold a value equivalent to their annual TFR. Select Harvests Annual Report 2020 31 What equity was granted for year ended 30 September 2020? Equity was granted to KMP in 2020, as detailed in the table below. The methodology used for the allocation was determined using the face value of full vesting based on the Volume Weighted Average Price (VWAP) over the 10 days preceding the date of 21 February 2020 Annual General Meeting. NUMBER OF PERFORMANCE RIGHTS GRANTED FACE VALUE Based on VWAP price ($9.03) over 10 days preceding AGM (21 February 2020) COMMENCEMENT OF PERFORMANCE PERIOD FACE VALUE Based on share price ($7.69) on 1 October 2019 Paul Thompson - MD Brad Crump – CFO & Company Secretary Peter Ross – GM Almond Operations Laurence Van Driel – GM Trading & Industrial Sales Ben Brown – GM Horticulture Suzanne Douglas – GM Consumer Urania Di Cecco – GM People, Safety & Sustainability 46,845 11,243 9,369 9,369 9,369 9,369 7,729 $423,010 $101,524 $84,602 $84,602 $84,602 $84,602 $69,793 $360,238 $86,459 $72,048 $72,048 $72,048 $72,048 $59,436 Is there alignment between management and shareholder interests? The following chart shows the alignment between shareholder’s interests as measured by reported profit and earnings per share and management’s interests as measured by the proportion of STI that pays out and the number of performance rights vesting. EPS growth was 25% off a low base three years prior and therefore fully vested. No adjustments were made to the reported statutory EPS in determining this outcome. The Board believes these outcomes show “at risk” remuneration has varied appropriately. 100 80 60 40 20 0 FY16 FY17 FY18 FY19 FY20 STI Vesting % of maximum dollars (%) LTIP vesting % of maximum rights (%) Basic Earnings per Share (cents) Reported NPAT ($’m) Note: This report excludes the FY18 transition period (3 months period ending 30 September 2018) as no STI or LTIP were vested. Select Harvests Annual Report 202032 Directors’ Report Continued REMUNERATION REPORT (CONTINUED) 2. EXECUTIVE KMP REMUNERATION 2.1 How STI outcomes are linked to performance At the commencement of each annual operating cycle the Board sets KPIs for the MD and the MD sets KPIs for the KMP with target levels of performance based on the Board approved annual operating plan. At the end of the operating cycle the Board assesses performance against these KPIs and how these rate against the scales set out in the following table. This determines the STI reward. PERFORMANCE LEVEL PERFORMANCE DESCRIPTION Unsatisfactory Threshold Unacceptable level of performance The minimum acceptable level of performance that needs to be achieved before any reward would be available. Target Represents the planned level of performance. Financial and other quantitative KPIs are set at the budgeted level assuming plans are challenging but achievable Outstanding A clearly outstanding level of performance and evident to all as an exceptional level of achievement QUANTITATIVE KPI TARGETS (% PLANNED PERFORMANCE) < 95% SUBJECTIVE TARGETS (BASED ON A 1 TO 5 SCALE) Score 1 or < 2 STI REWARD (% MAXIMUM) STI REWARD (% TFR) No payment No payment 95% Score 2 1% 0.5% 96% - 99.9% Score > 2 & < 3 100% Score of 3 Pro-rata from 1% to 49.9% 50% Pro-rata from 12.5% to 24% 25% 100.1% - 119.9% Score > 3 & < 5 120% + Score of 5 Pro-rata from 50.1% to 99.9% 100% (double on target reward) Pro-rata from 26% to 49% 50% For FY2020 the KMP score cards range from 27% to 39% as a percentage of the potential maximum score and resulted in STI rewards as a percentage of TFR of 15%. This level of performance is reflective of the delivery of a solid result through a challenging year. 2.2 Overview of FY20 remuneration framework FIXED REMUNERATION Base salary Short Term Incentive (STI) Opportunity Purpose Term Instrument Performance measures Why these were chosen Consists of cash salary, superannuation and salary sacrifice arrangements based on total cost to the company. Reviewed annually with reference to the market median for comparable companies, the individual’s performance and potential and the company’s future plans. There is no guaranteed base pay increase in any executives’ contracts. % of Fixed Remuneration MD Unsatisfactory – 0% Threshold – up to 12.5% Target – up to 25% Maximum - up to 50% Other KMP Unsatisfactory – 0% Threshold – up to 7.5-12.5% Target – up to 15-25% Maximum – up to 40-50% To provide incentive to exceed the annual business objectives. 1 year Cash KPI Score Card Company NPAT Culture/Executive Development Capital management Personal & Operational performance / Project delivery Board discretion With a safety and values tollgate To provide a balance between outperforming the annual operating plan, individual business unit plans, focus on the efficient use of capital and strengthening the balance sheet, on time and budget delivery of strategic projects and sustained orchard productivity. The Board retains some discretion to adjust the outcomes based on whether they were influenced by uncontrollable “headwinds” or “tailwinds” and the degree to which behaviours reflect our values. The health and well-being of our people remains paramount and no incentive is paid if the foundations for a safe work environment were not maintained. Other KMP 30-40% 0-15% 0-20% 20-40% 20% MD 40% 10% 20% 10% 20% Select Harvests Annual Report 202033 FIXED REMUNERATION Long Term Incentive (LTI) Opportunity Purpose Term Instrument Performance conditions* Why these were chosen % of Fixed Remuneration MD Face Value – up to 82% Other KMP Face Value – up to 35% Reward achievement of long term business objectives and sustainable value creation for shareholders. 3 years, vesting at the end of the period. Performance rights 1. Continuing service 2. Positive absolute shareholder return 3. 50% Compound Annual Growth in underlying earnings per share† over three years. The performance targets and vesting proportions are as follows: • Below 5% CAGR • 5% CAGR • 5.1% - 19.9% CAGR • 20% or higher CAGR 4. 50% Total Shareholder Return relative to a peer group of ASX listed companies over three years. The performance targets and vesting proportions are as follows: Nil • Below the 50th percentile 25% • 50th percentile Pro rata vesting • 51st – 74th percentile • At or above 75th percentile 50% Underlying EPS represents a strong measure of overall business performance. TSR provides a shareholder perspective of the Company’s relative performance against comparable companies. Nil 25% Pro rata vesting 50% * The Remuneration and Nomination Committee is responsible for assessing whether the targets are met and in doing so obtains the advice of an independent expert. † EPS adjustments are made consistent with the guidance issued by the Australian Institute of Company Directors and Financial Services Institute of Australasia in March 2009 and ASIC Regulator Guide RG230 ‘Disclosing Non-IFRS financial information’. OTHER Hedging policy Clawback Minimum shareholding requirements Individuals cannot hedge Select Harvests equity that is unvested or subject to restrictions. The Board may determine that any unvested share rights will lapse or be forfeited in certain circumstances such as in the case of fraud, wilful misconduct or dishonesty. Vested performance rights are to be held until the accumulated value is equal to 100% base salary. The safety tollgate, which requires maintenance of a safe work environment, was passed. The individual KMP actual STI payments and potential maximum payments are set out in the following table in section 2.3. Select Harvests Annual Report 202034 Directors’ Report Continued REMUNERATION REPORT (CONTINUED) 2. EXECUTIVE KMP REMUNERATION (CONTINUED) 2.3 What we paid executive KMP in FY2020 – Further detail The following pages compare the maximum potential and actual remuneration for the period ended 30 September 2020 and for the period ended 30 September 2019 for current KMP. The statutory remuneration shows benefits before they are actually received by the KMP. Amounts include: • Total fixed remuneration • STI achieved as a result of business and individual performance (versus the maximum potential cash STI) • Share performance rights that vested during the year at face value (versus the maximum initial award face value) for the performance testing period concluding in that year. This information differs from the statutory remuneration disclosures presented in Section 5.1 (which are presented in accordance with the accounting standards) as the performance rights value is based on the closing share price on the day the tranche of performance rights were approved. The directors believe that the remuneration received is more relevant to users for the following reasons: • The statutory remuneration expensed is based on historic costs and does not reflect the value of the equity instruments when they are actually received by the KMP. • The statutory remuneration shows benefits before they are actually received by the KMP. $’000 P Thompson Managing Director & CEO B Crump Chief Financial Officer & Company Secretary P Ross General Manager Almond Operations L Van Driel General Manager Trading B Brown General Manager Horticulture S Douglas‡ General Manager Consumer U Di Cecco� General Manager People, Safety & Sustainability Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential Actual Remuneration Maximum Potential TOTAL FIXED REMUNERATION 641 641 629 629 405 405 394 394 346 346 341 341 356 356 349 349 339 339 314 314 325 325 140 140 281 281 59 59 2020 2020 2019 2019 2020 2020 2019 2019 2020 2020 2019 2019 2020 2020 2019 2019 2020 2020 2019 2019 2020 2020 2019 2019 2020 2020 2019 2019 SHORT TERM INCENTIVE* 88 321 329 393 60 202 222 246 56 173 176 213 48 178 175 218 66 167 186 196 57 163 31 70 42 141 8 24 PERFORMANCE RIGHTS† 421 487 178 487 101 117 - - 84 97 36 97 84 97 36 97 84 97 18 49 - - - - - - - - * Short term incentives have been calculated based on a 15 month period for 2018/19 financial year, as part of the transition to the new financial year period. † 2020 Performance Rights valued at $6.49, the closing share price on the day of the 2014 AGM at which they were approved (21/11/2014) ‡ Commenced 15 July 2019 � Commenced 29 April 2019 TOTAL 1,150 1,449 1,136 1,509 566 724 616 640 486 616 553 651 488 631 560 664 489 603 518 559 382 488 171 210 323 422 67 83 Select Harvests Annual Report 202035 2.4 FY2021 Outlook The Committee and Board continue to review and finesse our remuneration strategy: • Our LTIP performance rights are allocated annually, ensuring closer alignment to current strategic plans. • The 2021 STIP KPIs continue to evolve, maintaining the focus on financial metrics, whilst continuing the focus on culture and controllable costs. • We will be evaluating changes to the LTIP measures to align with our strategy, including capital return performance measures. 2.5 Long Term Performance Perspective The following table provides the performance outcomes over a five year period which align to the STI and LTI outcomes for Executive KMP. Net profit / (loss) after tax ($'000) Basic EPS (cents) Basic EPS Growth Dividend per share (cents) Opening share price 1 Oct / 1 July ($) Change in share price ($) Closing share price 30 September / 30 June ($) TSR % p.a.* 2020 YEAR ENDED 30 SEPT 25,001 26.0 (53%) 13.0 7.69 (2.12) 5.57 (26%) 2019 YEAR ENDED 30 SEPT 53,022 55.5 3,552% 32.0 5.32 2018 3 MONTH PERIOD ENDED 30 SEPT (1,536) (1.6) (107%) Nil 6.90 2.37 7.69 51% (1.58) 5.32 (23%) 2018 YEAR ENDED 30 JUNE 20,371 23.2 84% 12.0 4.90 2.00 6.90 (26%) 2017 YEAR ENDED 30 JUNE 9,249 12.6 (73%) 10.0 6.74 (1.84) 4.90 (35%) 2016 YEAR ENDED 30 JUNE 33,796 46.7 (44%) 46.0 11.00 (4.26) 6.74 124% * TSR is calculated as the change in share price for the year plus dividends announced for the year, divided by opening share price Vesting of performance rights is based on performance against the hurdles over the three years prior to vesting. The following illustrates the Company’s performance against the criteria in the LTI plan. EPS GROWTH Basic EPS (cents) Underlying EPS (cents) 3 Year EPS CAGR 3 Year EPS CAGR target 5% - 20% Percentage vested RELATIVE TSR PERFORMANCE† SHV 3 Year TSR % SHV 3 Year TSR Ranking Peer group 3 Year Median TSR SHV Rank against peer group Percentage vested 2020 YEAR ENDED 30 SEPT 26.0 26.0 24.9% 2019 YEAR ENDED 30 SEPT 55.5 55.5 11.9% 2018 3 MONTH PERIOD ENDED 30 SEPT (1.6) (1.6) N/A 2018 YEAR ENDED 30 JUNE 23.2 23.2 (36%) 2017 YEAR ENDED 30 JUNE 12.6 12.6 (37%) 100% 73% N/A 0% 0% 2020 YEAR ENDED 30 SEPT 24.5% 62nd percentile 20% 6th out of 14 73% 2019 YEAR ENDED 30 SEPT 22.8% 29th percentile 50% 11th out of 15 0% 2018 3 MONTH PERIOD ENDED 30 SEPT N/A N/A N/A N/A N/A 2018 YEAR ENDED 30 JUNE (22.5%) 0th percentile 27% 15th out of 15 0% 2017 YEAR ENDED 30 JUNE 1% 13th percentile 18% 14th out of 16 0% † TSR ranking relative to ASX Consumer Staples also included in the All Ordinaries index. Select Harvests Annual Report 202036 Directors’ Report Continued REMUNERATION REPORT (CONTINUED) 2. EXECUTIVE KMP REMUNERATION (CONTINUED) 2.6 Terms of KMP Service Agreements Remuneration and other terms of employment for the KMP are formalised in service agreements. These service agreements set out the base salary arrangements and future review. Each of these agreements provide for participation in a Short Term Incentive Plan and a Long Term Incentive Plan. Other significant provisions of the agreements are that the term is on-going with a 6 month notice period for the MD and 3 month notice period for all other KMP. Other than the notice periods, there are no specific termination benefits applicable to the service agreements. 3. NON-EXECUTIVE DIRECTORS’ ARRANGEMENTS On appointment to the Board, all Non-Executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation, relevant to the office of Director. Non-Executive Directors receive fees (including statutory superannuation) but do not receive any performance related remuneration nor are they issued options or performance rights on securities. This reflects the responsibilities and the Group’s demands of directors. Non-Executive Directors’ fees are periodically reviewed by the Board to ensure that they are appropriate and in line with market expectations. Non-Executive Directors’ professional development is supported and funded through the company’s training budget. There is no equity ownership requirement for Non-Executive Directors. Directors are encouraged to acquire and hold shares equivalent in value to their annual fees. The current aggregate fee limit of $950,000 was approved by shareholders at the 21 February 2020 Annual General Meeting. For the reporting year the total amount paid to Non-Executive Directors was $767,106. The remuneration is a base fee with the Chair of each of the Committee receiving additional fees commensurate with their responsibilities. The current directors’ fees are as follows: Base Fees (including superannuation) Chair Other Non-Executive Directors Additional Fees (including superannuation) Chair of the Audit and Risk Committee Chair of the Remuneration and Nominations Committee 4. GOVERNANCE 4.1 Role of the Remuneration and Nomination Committee $223,788 $106,132 $14,153 $14,153 The Remuneration and Nomination Committee operates under its own Charter and reports to the Board. The Charter, which the Board reviews annually, was last updated in July 2018. A copy of the Charter is available on the Company’s website: www.selectharvests.com.au 4.2 Use of Remuneration Advisors No remuneration advisors were used during the financial year ended 30 September 2020. 4.3 Share Trading Policy The Share Trading Policy was last reviewed by the Board in April 2019. A copy is available on the Company’s website: www.selectharvests.com.au Under the policy senior executives may not hedge Select Harvests equity that is unvested or subject to restrictions. Select Harvests Annual Report 202037 5. KMP STATUTORY DISCLOSURES 5.1 Details of 2020 and 2019 Remuneration Remuneration of the directors and other key management personnel of Select Harvests Limited and the consolidated entity. $ ANNUAL REMUNERATION LONG TERM Base Fee Short Term Incentives� Non Cash Benefits Superannuation Contributions Long Service Leave Accrued & Paid Performance Rights Granted Total Non Executive Directors M Iwaniw 2020 2019 M Carroll F Grimwade N Anderson F Bennett 2 2 3,788 218,362 109,849 100,866 96,924 88,998 96,924 88,998 1 1 2 , 4 5 8 100,866 82,634 2020 2019 2020 2019 2020 2019 2020 2019 2020 G Kingwill* Executive Director P Thompson P Ross L Van Driel 2020 2019 574,553 564,051 Other key management personnel 383,614 B Crump 375,872 321,063 314,938 334,521 326,081 312,782 293,222 304,378 129,204 260,362 55,002 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 U Di Cecco‡ S Douglas† B Brown - - - - - - - - - - - 87,807 328,718 59,660 221,847 56,417 175,590 47,532 175,093 65,560 185,869 56,632 31,041 42,189 7,730 - - - - - - - - - - - 45,517 44,425 - - 3,888 4,951 - - 4,997 - - - - - - - 10,436 9,582 9,208 8,455 9, 2 0 8 8,455 7,827 9,582 7,850 21,003 20,649 21,003 18,522 21,003 20,649 21,003 22,797 21,003 20,813 21,003 10,305 21,003 4,460 - - - - - - - - - - - 11,993 12,544 - - 5,986 6,594 6,465 10,730 53,751 - - - - - - - - - - - - - - - - 2 2 3,788 218,362 120,285 110,448 106,132 97,453 106,132 97,453 120,285 110,448 90,484 250,893 358,833 991,766 1,329,220 77,354 42,595 51,411 60,446 51,411 60,446 51,411 51,668 4,417 - 3,644 - 541,631 658,836 459,768 583,168 460,932 595,147 509,504 551,572 386,430 170,550 327,198 67,192 * Commenced 25 November 2019 � † Commenced 29 April 2019 ‡ Commenced 15 July 2019 Short term incentives have been calculated based on a 15 month period for 2018/19 financial year, as part of the transition to the new financial year. Notes: It should be noted that performance rights granted, referred to in the remuneration details set out in this report, comprise a proportion of rights which have not yet vested and are reflective of rights that may or may not vest in future years. The elements of remuneration have been determined based on the cost to the consolidated entity. Performance rights granted have been independently valued using the Monte Carlo simulation option pricing model, which takes account of factors such as the exercise price of the rights, the current level and volatility of the underlying share price and the time to maturity of the rights. The amount shown here is an accounting expense and reflects the value as determined using this model. The value is expensed over the vesting period of the rights. Select Harvests Annual Report 2020 38 Directors’ Report Continued REMUNERATION REPORT (CONTINUED) 5. KMP STATUTORY DISCLOSURES (CONTINUED) 5.2 Details of LTI Performance Rights Granted, Vested and Exercised Performance rights granted to the Managing Director and KMP during the year. Opening balance 1 Oct 2019 Granted during the year NUMBER Vested during the year Forfeited during the year Closing balance 30 Sept 2020 Executive Director P Thompson Other key management personnel B Crump P Ross L Van Driel B Brown S Douglas U Di Cecco 157,815 40,095 31,571 31,571 31,571 - - 46,845 11,243 9,369 9,369 9,369 9,369 7,729 64,875 15,570 12,975 12,975 12,975 - - 10,125 2,430 2,025 2,025 2,025 - - 129,660 33,338 25,940 25,940 25,940 9,369 7,729 All vested rights are exercisable at the end of the year, subject to a holding lock that requires KMP to hold shares with a value equivalent to their base salary. 5.3 Active Plan Performance Rights Granted Performance rights granted to executives under the LTI Plans that are relevant to FY2020 and beyond. GRANT DATE 2017 VESTING CONDITIONS • EPS Compound Annual Growth • Relative TSR performance to peer group • Continuous service • Holding Lock PERFORMANCE PERIOD 30 June 2018 30 September 2019 30 September 2020 20 Nov 2017 29 April 2019 27 March 2020 • EPS Compound Annual 30 September 2020 B Crump Growth • Relative TSR performance to peer group • Continuous service • Holding Lock • EPS Compound Annual Growth • Relative TSR performance to peer group • Continuous service • Holding Lock • EPS Compound Annual Growth • Relative TSR performance to peer group • Continuous service • Holding Lock 30 September 2021 30 September 2020 P Thompson B Crump P Ross L Van Driel B Brown P Thompson B Crump P Ross L Van Driel B Brown S Douglas U Di Cecco PARTICIPATING EXECUTIVES P Thompson‡ P Ross� L Van Driel� B Brown¶ PERFORMANCE ACHIEVED VESTED % 30 June 2018 rights achieved 0% of EPS condition rights and 0% of TSR condition rights 0% of 30 June 2018 rights 30 September 2019 rights achieved 73% of EPS condition rights and 0% of TSR condition rights 37% of 30 September 2019 rights 30 September 2020 rights achieved 100% of EPS condition rights and 73% of TSR condition rights 30 September 2020 rights achieved 100% of EPS condition rights and 73% of TSR condition rights 87% of 30 September 2020 rights 87% of 30 September 2020 rights 2021 period to be determined. N/A 2022 period to be determined. N/A ‡ Granted 20 October 2014 � Granted 29 September 2016 ¶ Granted 2 December 2016 The LTI Plan provides for the offer of a parcel of performance rights with a three year performance period to participating employees. The rights vest at the end of the period on achievement of the performance hurdles. Performance rights are granted under the plan for no consideration. The plan rules contain a restriction on removing the ‘at risk’ aspect of the instruments granted to executives. Plan participants may not enter into any transaction designed to remove the ‘at risk’ aspect of an instrument before it vests. Select Harvests Annual Report 2020 5.4 Grants of Performance Rights The table details the grants of performance rights to the Managing Director and Executive team. Name P Thompson B Crump P Ross L Van Driel B Brown S Douglas U Di Cecco Year Granted 2017 2019 2020 2018 2019 2020 2017 2019 2020 2017 2019 2020 2017 2019 2020 2020 2020 Number Granted 75,000 82,815 46,845 18,000 22,095 11,243 15,000 16,571 9,369 15,000 16,571 9,369 15,000 16,571 9,369 9,369 7,729 Value per right* $4.07 $5.18 $2.83 $3.65 $5.18 $2.83 $3.38 $5.18 $2.83 $3.38 $5.18 $2.83 $3.38 $5.18 $2.83 $2.83 $2.83 Vested % RIGHTS TO DEFERRED SHARES Vested Number 64,875 - - 15,570 - - 12,975 - - 12,975 - - 12,975 - - - - Forfeited Number 10,125 - - 2,430 - - 2,025 - - 2,025 - - 2,025 - - - - 87% - - 87% - - 87% - - 87% - - 87% - - - - 39 Financial years in which rights may vest 30-Sep-20 30-Sep-21 30-Sep-22 30-Sep-20 30-Sep-21 30-Sep-22 30-Sep-20 30-Sep-21 30-Sep-22 30-Sep-20 30-Sep-21 30-Sep-22 30-Sep-20 30-Sep-21 30-Sep-22 30-Sep-22 30-Sep-22 Max. value yet to vest* - $428,982 $132,571 - $114,452 $31,812 - $85,838 $26,514 - $85,838 $26,514 - $85,838 $26,514 $26,514 $21,873 * This represents the value of the performance rights as at their grant date as valued using the option pricing model. The minimum possible total value of the rights is nil if the applicable vesting conditions are not met. 5.5 Number of shares held by directors and other key management personnel The movement during the financial year in the number of ordinary shares of the company held, directly or indirectly, by each director and other key management personnel, including their personally related entities, is as follows: HELD AT 1 OCTOBER 2019 RECEIVED ON EXERCISE OF PERFORMANCE RIGHTS OTHER –DRP, SALES AND PURCHASES HELD AT 30 SEPTEMBER 2020 Non-executive directors M Iwaniw M Carroll F Grimwade N Anderson F Bennett G Kingwill Executive director P Thompson Other key management personnel B Crump P Ross L Van Driel B Brown S Douglas U Di Cecco 205,681 21,634 80,000 7,193 7,630 5,361 483,800 - 130,392 - 580 - - - - - - - - 27,375 - 5,475 5,475 2,738 - - 175 823 - 274 289 - 250 - - - 127 - - 205,856 22,457 80,000 7,467 7,919 5,361 511,425 - 135,867 5,475 3,445 - - Select Harvests Annual Report 2020 40 Auditor’s Independence Declaration Auditor’s Independence Declaration As lead auditor for the audit of Select Harvests Limited for the year ended 30 September 2020, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Select Harvests Limited and the entities it controlled during the period. Andrew Cronin Partner PricewaterhouseCoopers Melbourne 30 November 2020 PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Select Harvests Annual Report 2020Annual Financial Report 41 ABOVE: Daniel Wilson, H2E Operations Manager, overseeing installation of the H2E bag filter Select Harvests Annual Report 202042 Annual Financial Report This financial report covers the Group consisting of Select Harvests Limited and its subsidiaries. The financial report is presented in Australian currency. Select Harvests Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Select Harvests Limited 360 Settlement Road Thomastown VIC 3074 A description of the nature of the Company’s operations and its principal activities is included in the review of operations and activities and in the directors’ report, both of which are not part of this financial report. The financial report was authorised for issue by the directors on 30 November 2020. The Company has the power to amend and reissue the financial report. Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally at minimum cost to the Company. All financial reports and other information are available on our website: www.selectharvests.com.au Select Harvests Annual Report 2020Statement of Comprehensive Income 43 FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2020 CONSOLIDATED ($'000) NOTE 2020 2019 Revenue Sales of goods and services Other revenue Total revenue Other income Fair value adjustment of biological assets Gain on sale of assets Total other income Expenses Cost of sales Distribution expenses Marketing expenses Occupancy expenses Administrative expenses Finance costs Others PROFIT / (LOSS) BEFORE INCOME TAX Income tax (expense) PROFIT / (LOSS) ATTRIBUTABLE TO MEMBERS OF SELECT HARVESTS LIMITED Other comprehensive income Items that may be reclassified to profit or loss Changes in fair value of cash flow hedges, net of tax Other comprehensive income for the year TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO MEMBERS OF SELECT HARVESTS LIMITED 5 5 6 6 6 6 7 247,876 386 248,262 13,988 291 14,279 (199,951) (4,684) (4,940) (1,003) (14,844) (2,068) 1,611 36,662 (11,661) 25,001 4,383 4,383 29,384 Earnings per share for profit attributable to the ordinary equity holders of the company: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 25 25 26.0 25.9 The above statement should be read in conjunction with the accompanying Notes. 298,204 270 298,474 9,212 519 9,731 (201,636) (4,344) (6,652) (1,232) (14,827) (3,957) 551 76,108 (23,086) 53,022 23 23 53,045 55.5 55.3 Select Harvests Annual Report 202044 Balance Sheet AS AT 30 SEPTEMBER 2020 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Biological assets Derivative financial instruments TOTAL CURRENT ASSETS NON-CURRENT ASSETS Other receivables Property, plant and equipment Right-of-use assets Intangible assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Borrowings Lease liabilities Derivative financial instruments Current tax liabilities Deferred gain on sale Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Other payables Borrowings Lease liabilities Deferred tax liabilities Deferred gain on sale Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained profits TOTAL EQUITY The above balance sheet should be read in conjunction with the accompanying Notes. CONSOLIDATED ($'000) NOTE 9 10 11 12 13 14 15 16 17 18 12 19 20 16 17 18 7(c) 19 20 21 2020 1,451 69,154 100,549 42,432 3,811 217,397 1,891 298,715 236,444 70,447 607,497 824,894 42,517 6,235 31,264 - 5,398 175 5,473 91,062 3,525 52,750 233,513 36,312 2,452 270 328,822 419,884 405,010 279,096 14,280 111,634 405,010 2019 11,588 50,223 77,687 34,144 24 173,666 - 307,923 - 71,267 379,190 552,856 32,345 8,111 - 965 16,989 175 4,870 63,455 - 30,903 - 39,629 2,627 239 73,398 136,853 416,003 271,750 10,417 133,836 416,003 Select Harvests Annual Report 2020Statement of Changes in Equity FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2020 Balance at 30 September 2018 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of transaction costs and deferred tax Dividends paid or provided Employee performance rights Balance at 30 September 2019 Adjustment on adoption of AASB 16- net of tax Balance at 1 October 2019 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of transaction costs and deferred tax Deferred tax credit on transaction costs Dividends paid or provided Employee performance rights Balance at 30 September 2020 * Nature and purpose of reserves CONSOLIDATED ($'000) NOTE CONTRIBUTED EQUITY 268,567 RESERVES* 9,802 RETAINED EARNINGS 92,270 12 21 8 28 1 12 21 21 8 28 - - - - 23 23 53,022 - 53,022 3,183 - - 271,750 - 271,750 - - - 6,289 1,057 - - 279,096 - - 592 10,417 - 10,417 - 3,326 3,326 - - - 537 14,280 - (11,456) - 133,836 (19,391) 114,445 25,001 - 25,001 - - (27,812) - 111,634 45 TOTAL 370,639 53,022 23 53,045 3,183 (11,456) 592 416,003 (19,391) 396,612 25,001 3,326 28,327 6,289 1,057 (27,812) 537 405,010 (i) Asset revaluation reserve The asset revaluation reserve was previously used to record increments and decrements in the value of non-current assets. This revaluation reserve is no longer in use given assets are now recorded at cost. A balance of $7.6 million (2019: $7.6 million) remains in the account. (ii) Options reserve The options reserve amounting to $4.2 million (2019: $3.7 million) is used to recognise the fair value of performance rights granted and expensed but not exercised. (iii) Cash flow hedge reserve The cash flow hedge reserve is used to record gains or losses on the fair value movements in the interest rate swap and foreign currency contracts in a cash flow hedge that are recognised directly in equity. Balance at 30 September 2020 amounted to $2.4 million (2019: $0.9 million). The above statement of changes in equity should be read in conjunction with the accompanying Notes. Select Harvests Annual Report 2020 46 Statement of Cash Flows FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2020 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest received Interest and finance costs paid Income tax received / (paid) Net cash inflow from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Government grants related to assets Proceeds from sale of property, plant and equipment Payment for water rights Payment for property, plant and equipment Tree development costs Net cash outflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings Repayments of borrowings Proceeds from leases Principal elements of lease payments Dividends on ordinary shares, net of Dividend Reinvestment Plan Net cash inflow / (outflow) from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Reconciliation to cash at the end of the year: Cash and cash equivalents Bank overdrafts CONSOLIDATED ($'000) NOTE 2020 2019 22 236,617 (189,755) 46,862 5 (15,440) (18,274) 13,153 - 1,058 - (26,103) (10,216) (35,261) 246,519 (193,769) - (21,848) (21,523) 9,379 (12,729) 7,945 (4,784) 1,451 (6,235) (4,784) 310,929 (229,779) 81,150 13 (3,959) 3,133 80,337 2,275 1,307 (1,185) (20,361) (15,940) (33,904) 282,667 (313,067) 5,837 (5,596) (14,939) (45,098) 1,335 6,610 7,945 11,588 (3,643) 7,945 Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, money market investments readily convertible to cash within two working days, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. The above cash flow statement should be read in conjunction with the accompanying Notes. Select Harvests Annual Report 2020Notes to the Financial Statements 47 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the Company consisting of Select Harvests Limited and its subsidiaries. Where appropriate, comparatives have been reclassified to enhance comparability with current year disclosures. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. Select Harvests Limited is a for profit entity for the purpose of preparing the financial statements. Compliance with IFRS The consolidated financial statements of the Select Harvests Limited group comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through the income statement and biological assets. Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher level of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2. New standards adopted during the financial year The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting year as follows: • AASB 16 Leases • AASB 2018-1 Amendments to Australian Accounting Standards – Annual Improvements 2015 – 2017 (effective 1 January 2019) • AASB 2018-2 Amendments to Australian Accounting Standards – Plan Amendment, Curtailment or Settlement (effective 1 January 2019) • IFRIC 23 Uncertainty over Income Tax Treatments (effective 1 January 2019) The following Accounting Standard, AASB 16 Leases is most relevant to the consolidated entity. AASB 16 Leases The Group has adopted AASB 16 from 1 October 2019 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings on that date. Accordingly, the group has not restated comparatives for the 2019 reporting period, as permitted under the specific transition provisions in the standard. The standard replaces AASB 117 ‘Leases’. Lessee accounting AASB 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time in exchange for a consideration. This is in contrast to the concept of ‘risks and rewards’ in AASB 117. On adoption of AASB 16, the group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 October 2019. The Group recognised right-of-use assets to represent its right to use the underlying assets which will be depreciated over the estimated lease term. Where the Group acts as lessee, judgement has been applied to determine the lease term for some lease contracts that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and right of use assets recognised. Short term leases (lease term of 12 months or less) and leases of low-value items are recognised as lease expense on a straight-line basis as permitted by the standard. For leases previously classified as finance leases applying AASB 117, the Group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right of use asset and the lease liability at the date of initial application. The measurement principles of AASB 16 are only applied after that date. Lessor accounting The Group did not need to make any adjustments to the accounting for assets held as lessor under operating leases as a result of the adoption of AASB 16. Select Harvests Annual Report 202048 Notes to the Financial Statements Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Basis of preparation (continued) New standards adopted during the financial year (continued) Impact on transition On transition to AASB 16, the Group recognised right-of-use assets and lease liabilities. The impact upon transition is summarised below. Recognition of right of use asset Recognition of lease liabilities Decrease to retained earnings (pre-tax) Increase to deferred tax asset 1 OCTOBER 2019 ($'000) 210,081 237,77 19, 391 8,300 When measuring lease liabilities for leases that were classified as operating leases, the Group discounted the present value of the remaining lease payments using the Group’s incremental borrowing rate at 1 October 2019. The incremental borrowing rate applied depended on the type of lease and remaining lease term. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 October 2019 was 4.99%. In applying AASB 16 for the first time, the Group has used the following practical expedients permitted by the standard: • The use of a single discount rate to a portfolio of leases with reasonably similar characteristics; • The exclusion of initial direct costs for the measurement of the right-to-use asset at the date of initial application; • Relying on previous assessments as to whether a lease is onerous; • The use of hindsight in determining the lease term where the contract contains renewal options; • Not separating the non-lease components from lease components thereby treating the lease as a single lease component. Reconciliation of operating lease commitments to lease liability Operating lease commitments disclosed as at 30 September 2019 Less: Leases of intangible assets out of AASB 16* scope Discounted using the group’s incremental borrowing rate Lease liability impact on transition Add: Finance lease liabilities recognised as at 30 September 2019 Lease liability recognised as at 1 October 2019 Of which are: Current lease liabilities Non-current lease liabilities 1 OCTOBER 2019 ($'000) 339,551 (7,989) (93,790) 237,772 35,371 273,143 31,460 241,683 273,143 * This relates to leases on water rights. Water rights are classified as intangibles and therefore excluded from AASB 16 scope. Impact for the financial year on segment disclosures and earnings per share EBITDA, segment assets and segment liabilities for 30 September 2020 all increased as a result of the change in accounting policy. The following segments were affected by the change in policy: ($'000) Almond division Food division Corporate ADJUSTED EBITDA 1,223 1,678 23 2,924 SEGMENT ASSETS 234,440 1,985 19 236,444 SEGMENT LIABILITIES (261,527) (3,230) (20) (264,777) As a result of the adoption of AASB 16, net profit after tax increased by $0.33 million while earnings per share increased by 0.03 cents per share for the financial year ended 30 September 2020. Please refer to note 14 and 18 for further information. Select Harvests Annual Report 202049 New standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for the 30 September 2020 reporting periods and have not been early adopted by the Company. The group’s assessment of these new standards and interpretations concluded that it will not have a material impact on the financial statements of the Group in future periods. The new standards and interpretations are as follows: • AASB 2018-6 Amendments to Australian Accounting Standards definition of a business- AASB 3 Business Combinations (effective 1 January 2020) • AASB 2018-7 Amendments to Australian Accounting Standards definition of material- AASB 101and AASB 108 (effective 1 January 2020) • AASB 2019-1 Revised conceptual framework for financial reporting (effective date 1 January 2020) • AASB 2019-3 Interest rate benchmark reform on hedge accounting- AASB 7, AASB 9 and AASB 139 (effective 1 January 2020) • AASB 2019-5 Disclosure of the effect of new IFRS standards not yet issued in Australia (effective 1 January 2020) (b) Principles of consolidation (i) Subsidiaries Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. (c) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each entity comprising the Company are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is the functional and presentation currency of Select Harvests Limited. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. (d) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (e) Rounding The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191. The Company is an entity to which the Class Order applies. (f) Parent entity financial information The financial information for the parent entity, Select Harvests Limited, disclosed in Note 30 has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries and associates Investments in subsidiaries and associates are accounted for at cost in the financial statements of Select Harvests Limited. Select Harvests Annual Report 202050 Notes to the Financial Statements Continued 2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continually evaluated and are based on historical experience and other factors. Critical accounting estimates and assumptions The Company makes estimates and assumptions concerning the future. The resulting accounting estimates may not by definition, equal the related actual results. The estimates and assumptions that have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Inventory - Current Year Almond Crop The 2020 almond crop is classified as inventory once the crop is harvested in accordance with AASB 102 Inventories. The Company’s estimated average almond selling price at the point of harvest was $8.20. This was based on various assumptions including future almond price, long term yield and foreign exchange rates. Due to movements in almond prices between harvest and balance dates, the estimated average almond selling price at 30 September 2020 was $7.50, determined with reference to the Company’s committed sales contracts and current market values for uncommitted inventory. An adjustment was made to inventory to reflect the net realisable value of the FY20 almond crop following the reduction in almond prices (see Note 10). At balance date, the company had completed hulling and shelling of all its almonds with a yield of 23,250MT and 82% of this crop had been sold or committed to be sold. Carrying value of intangible assets The Group tests annually whether intangible assets have suffered any impairment, in accordance with the accounting policy stated in Note 15. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. Key assumptions and sensitivities are disclosed in Note 15. 3. FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and commodity price risk), credit risk and liquidity risk. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate risk, foreign exchange and other price risks, and ageing analysis for credit risk. Risk management is carried out by management pursuant to policies approved by the Board of Directors. (a) Market risk (i) Foreign exchange risk Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company’s functional currency. The Group sells both almonds harvested from owned orchards through the almond pool and processed products internationally in United States dollars, and purchases raw materials and other inputs to the manufacturing and almond growing process from overseas suppliers predominantly in United States dollars. The Group also acquires capital related items internationally in both United States dollars and European euros. Management and the Board review the foreign exchange position of the Group and, where appropriate, enter into a variety of derivative financial instruments, transacted with the Group’s bankers to manage its foreign exchange risk, including forward foreign currency contracts, options and formulating various strategies. The exposure to foreign currency risk at the reporting date was as follows: GROUP Trade receivables net of payables Overdraft Foreign Exchange Contracts (FEC) • • Sell foreign currency option contracts* buy foreign currency (cash flow hedges) sell foreign currency (cash flow hedges) 2020 (USD $'000) 13,347 (4,432) 2020 (EUR €'000) (10) - 2019 (USD $'000) 6,396 (2,458) 2019 (EUR €'000) 23 - 1,954 41,195 14,500 - - - 1,120 27,085 7,000 192 - - * Foreign currency option contracts have a number of possible outcomes depending on the spot rate at maturity. These contracts are shown at face value. Depending on spot rate at maturity, the value of the contract can be USD$14.5 million (2019: USD$7 million) or USD$29 million (2019: USD$14 million). Group sensitivity analysis Based on financial instruments held at 30 September 2020, had the Australian dollar strengthened/weakened by 5% against the U.S. dollar and the EUR, with all other variables held constant, the Group’s results for the period would have been $2,520,000 lower/$2,785,000 higher (2019: $1,618,000 lower/$1,788,000 higher), mainly as a result of the U.S. dollar denominated financial instruments as detailed in the above table. Equity would have been $2,938,000 lower/ $3,247,000 higher (2019: $1,812,000 lower/ $2,003,000 higher), arising mainly from forward foreign currency contracts designated as cash flow hedges. Select Harvests Annual Report 202051 (ii) Cash flow interest rate risk The Group’s interest rate risk arises from borrowings issued at variable rates, which exposes the Group to cash flow interest rate risk. The Group’s borrowings at variable interest rate are denominated in AUD. At the reporting date the Group had the following variable rate borrowings: Debt facilities (AUD) Overdraft (USD) An analysis of maturities is provided in (c) below. 2020 2019 INTEREST RATE (%) BALANCE ($'000) INTEREST RATE (%) BALANCE ($'000) 0.94% 1.68% 52,750 4,432 Nil 1.93% Nil 2,458 The Group analyses interest rate exposure on an ongoing basis in conjunction with the debt facility, cash flow and capital management. With the current low interest rate environment and the future expectation that interest rates will be at low levels, management had not entered into any interest rate swap agreement during the year. Group sensitivity At 30 September 2020, if interest rates had changed by +/- 25 basis points from the weighted average interest rate with all other variables held constant, the result for the period would have been $100,000 lower/higher (30 September 2019: $4,000 lower/higher). Interest rate risk The Company’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities both recognised and unrecognised at the balance date, are as follows: FINANCIAL INSTRUMENTS Floating Interest Rate Non-interest bearing Total carrying amount as per the balance sheet $('000) (i) Financial assets Cash Trade and other receivables Forward foreign currency contracts Interest Rate Swap Total financial assets (ii) Financial liabilities Bank overdraft – USD @ AUD Commercial Bills Lease liabilities Trade creditors Other creditors Forward foreign currency contracts Total financial liabilities Financial Assets 2020 2019 2020 2019 - - - - - 6,235 52,750 264,777 - - - - - - - - 3,643 - 35,371 - - - 1,451 69,154 3,811 11,588 30,163 24 - 74,416 - 41,775 - - - 23,290 19,227 - - - - 18,621 13,724 965 2020 1,451 69,154 3,811 - 74,416 6,235 52,750 264,777 23,290 19,227 - 2019 11,588 30,163 24 - 41,775 3,643 - 35,371 18,621 13,724 965 323,762 39,014 42,517 33,310 366,279 72,324 Weighted average effective interest rate 2020 (%) 2019 (%) - - - - 1.80 1.25 4.99 - - - 1.00 - - - 1.93 - - - - - Collectability of trade receivables is reviewed on an ongoing basis. Trade receivables are carried at full amounts due less expected credit losses which uses a lifetime expected loss allowance for all trade receivables. Amounts receivable from other debtors are carried at full amounts due. Other debtors are normally settled on 30 days from month end unless there is a specific contract which specifies an alternative date. Amounts receivable from related parties are carried at full amounts due. Financial Liabilities The bank overdraft disclosed within interest bearing liabilities is carried at the principal amount and is part of the Net Cash balance in the Statement of Cash Flows. Interest is charged as an expense as it accrues. Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the Company. Select Harvests Annual Report 202052 Notes to the Financial Statements Continued 3. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk Credit risk arises from cash and cash equivalents, favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale, retail and farm investor customers, including outstanding receivables and committed transactions. The Group has no significant concentrations of credit risk. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high credit quality financial institutions. The credit quality of financial assets that are neither past due or impaired can be assessed by reference to external credit ratings (if available) and to historical information. The majority of the Group’s sales are derived from large, established customers with no history of default. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount of those assets, net of any provisions for doubtful debts of those assets, as disclosed in the balance sheet and Notes to the financial statements. The Group applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of sales over a period of 24 months and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Group’s banking partners have long-term credit ratings of AA- and A+ (Standard and Poor’s). (c) Liquidity risk The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements The following debt facilities are held with National Australia Bank (NAB) and Rabobank (Rabo). DEBT FACILITIES 1. Term 2. Seasonal* HELD WITH RABO NAB RABO 3. Overdraft† NAB EXPIRY DATE 30/09/2023 28/02/2023 30/06/2021 28/02/2021 * The facility is reviewed annually and available for the period 1 March to 30 June each year † Held with NAB only and reviewed annually. FACILITY LIMIT $30,000,000 $50,000,000 $20,000,000 $100,000,000 USD $5,000,000 AMOUNT DRAWN 30 SEPT 2020 $4,000,000 $48,750,000 Nil AUD $52,750,000 USD $4,431,618 The interest rate paid on these facilities is determined by an incremental margin on the BBSY or LIBOR rate. The Group had access to the following undrawn borrowing facilities at the reporting date: FLOATING RATE Term / Seasonal‡ Bank Overdraft Facility USD ‡ Subject to seasonal restrictions as mentioned above 2020 ($'000) AUD $47,250 USD $568 2019 ($'000) AUD $100,000 USD $2,542 The bank overdraft facility may be drawn at any time and may be terminated by the bank without notice. The debt facilities (term and seasonal) may be drawn at any time over the term subject to restrictions noted above on the seasonal facility. Select Harvests Annual Report 202053 Maturities of financial liabilities The table below analyses the Group’s financial liabilities, net and gross settled derivative instruments into relevant maturity groupings based on the remaining period at the reporting date of the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. ($'000) LESS THAN 6 MONTHS 6-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL CONTRACTUAL CASH FLOWS CARRYING AMOUNT (ASSETS) / LIABILITIES Group at 30 September 2020 Non-derivatives Variable Rate Derivatives Derivatives Group at 30 September 2019 Non-derivatives Variable Rate Debt facilities Trade and other payables Lease liabilities Bank Overdraft FEC USD buy – outflow FEC USD sell – (inflow) USD Sell option Net USD Debt facilities Trade and other payables Lease liabilities Bank Overdraft FEC EUR buy – outflow FEC USD buy – outflow FEC USD sell – (inflow) USD Sell option Net USD 173,209 25,666 - 42,517 17,633 6,278 1,954 (20,195) (7,500) (25,741) - 32,345 3,795 3,643 192 1,120 (15,626) - (14,506) - - 17,065 - - (21,000) (7,000) (28,000) - - 3,548 - - - (11,459) (7,000) (18,459) 53,609 - 123,217 - - - - - - - 17,334 - - - - - - 53,609 42,517 331,124 6,278 1,954 (41,195) (14,500) (53,741) - 32,345 50,343 3,643 192 1,120 (27,085) (7,000) (32,965) 52,750 42,517 264,777 6,235 (42) (3,905) 136 (3,811) - 32,345 35,371 3,643 (1) (23) 786 179 941 (d) Fair Value Measurement The fair value of certain financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments, such as interest rate swaps, foreign currency forwards and foreign currency options, are valued using specific valuation techniques as follows: • for interest rate swaps - the present value of the estimated future cash flows based on observable yield curves • for foreign currency forwards - the present value of future cash flows based on the forward exchange rates at the balance sheet date • for foreign currency options - option pricing models The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Company for similar instruments. Disclosures are required of fair value measurements by level of the following fair value measurement hierarchy: (a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level one); (b) Inputs other than quoted prices included within level one that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level two); and (c) Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level three). At 30 September 2020 the group’s assets and liabilities measured and recognised at fair value comprised the forward foreign currency contracts and foreign currency options. These are level 2 measurements under the hierarchy. Select Harvests Annual Report 202054 Notes to the Financial Statements Continued 4. SEGMENT INFORMATION Segment products and locations The segment reporting reflects the way information is reported internally to the Chief Executive Officer. The Company has the following business segments: • •  Almond Division - grows, processes and sale of almonds to the food industry from company owned and leased almond orchards; and  Food Division - processes, markets, and distributes edible nuts, dried fruits, seeds, and a range of natural health foods. The Company operates predominantly within the geographical area of Australia. The segment information provided to the Chief Executive Officer is referenced in the following table: ($'000) ALMOND DIVISION FOOD DIVISION 2020 2019 2020 2019 ELIMINATIONS AND CORPORATE 2020 2019 CONSOLIDATED ENTITY 2020 2019 Revenue Total revenue from external customers Intersegment revenue Total segment revenue Other revenue Total revenue EBIT Interest received Finance costs expensed Profit / (Loss) before income tax Segment assets (excluding intercompany debts) Segment liabilities (excluding intercompany debts) Acquisition of non-current segment assets Depreciation and amortisation of segment assets 102,483 73,607 176,090 375 176,465 41,807 - (848) 40,959 744,786 153,866 51,771 205,637 255 205,892 82,235 - (2,177) 80,058 469,491 145,393 2,957 148,350 6 148,356 3,348 - (14) 3,334 73,584 144,338 3,775 148,113 15 148,128 5,011 - - 5,011 73,197 - (76,564) (76,564) 5 (76,559) (6,429) 5 (1,207) (7,631) 6,524 - (55,546) (55,546) - (55,546) (7,181) 55 (1,835) (8,961) 10,170 247,876 - 247,876 386 248,262 38,726 5 (2,069) 36,662 824,894 298,204 - 298,204 270 298,474 80,065 55 (4,012) 76,108 552,858 (336,772) (101,992) (11,638) (8,190) (71,474) (26,671) (419,884) (136,853) 57,072 34,375 2,634 16,792 13,939 1,325 675 320 432 940 1,520 60,138 36,570 847 19,057 15,106 Sales to major customers include Coles 19% and Woolworths 17% of total sales of the Food Division. Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. 5. REVENUE CONSOLIDATED ($'000) Revenue from continuing operations Sale of goods Management services Government grant and other revenue Total revenue Revenue Recognition NOTE 2020 2019 241,899 5,977 386 248,262 293,811 4,393 270 298,474 Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, and amounts collected on behalf of third parties. Revenue is recognised when performance obligations are satisfied and control of the goods or services have passed or provided to the buyer. The following specific recognition criteria must also be met before revenue is recognised: Sale of Goods and Services Control for the goods and services has been transferred to the buyer when the goods have been shipped to the customer or when services have been provided. Select Harvests Annual Report 202055 Management services Management services revenue relates to services provided for the management and development of farms as well as acting sales agent for external growers by selling almonds on their behalf. Sales for external growers are not included in the Group’s revenue. However, the Group receives a marketing fee for providing this service. Revenue from providing services is recognised in the accounting period in which the services are rendered, on the basis of quantity of almonds sold by Select Harvest on behalf of the external grower. The above services are recognised as revenue when services are provided. All revenue is stated net of the amount of Goods and Services Tax (GST). As at 30 September 2020 the group held almond inventory on behalf of external growers which was not recorded as inventory to the Group. Government grants Government grants are assistance by the government in the form of transfers of resources to the Group in return for past or future compliance with certain conditions relating to the operating activities of the consolidated entity. Government grants relating to income are recognised as income over the periods necessary to match them with the related costs. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised as income of the period in which they become receivable. Government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are deducted from the carrying amount of the asset on the Balance sheet. The Grant is recognised in profit or loss over the life of the depreciable asset as a reduced depreciation expense. 6. OTHER INCOME AND EXPENSES CONSOLIDATED ($'000) Profit before tax includes the following specific expenses: Fair value adjustment at harvest of 2020/2019 almond crop Release of margin on sales - 2020 and 2019 crop (2019: 2019 and 2018 crop) Inventory write off Depreciation of non-current assets: • Buildings • Plantation land and irrigation systems • Plant and equipment • Bearer plants Total depreciation of non-current assets Depreciation charge of right-of-use assets: • Property • Plant and equipment • Orchard Interest on leases Amortisation of software Employee benefits Short term and low-value lease rental payments Net (gain) / loss on disposal of property, plant and equipment NOTE 2020 2019 (a) (b) (c) (d) (e) (f) (g) (64,611) 50,623 16,275 537 2,185 10,293 - 13,015 803 3,762 657 5,222 1,237 820 48,057 527 (291) (88,620) 79,408 - 411 2,107 11,155 657 14,330 - - - - 2,177 798 42,483 - (519) (a) Fair value adjustment relates to the recognition of 2020 and 2019 crop profits at the time of harvest. (b) Fair value adjustment relates to the unwinding of 2020 and 2019 crop profits at the point of sale. (c) Included in Cost of Sales are write down of inventories to net realisable value for 2020 almond crop (due to the market almond price reducing from $8.20/kg to $7.50/kg) amounting to $16.28 million (2019: Nil). (d) Depreciation on almond trees relating to Property, Plant and Equipment amounting to $5.98 million (2019: $5.23 million) was capitalised as part of growing crop which will then unwind as part of cost of sales when the almonds are sold. (e) Depreciation relating to Right-of-Use assets amounting to $11.89 million and $5.64 million was capitalised as part of growing crop and capital work in progress respectively. This amount relates to orchard leases. (f) Lease interest amounting to $7.63 million and $4.50 million was capitalised as part of growing crop and leasehold improvement respectively. This amount relates to orchard leases. (g) The expense represents lease rentals that are short-term leases (terms of 12 months or less) and leases of low-value assets charged directly to the Statement of Comprehensive Income. Select Harvests Annual Report 202056 Notes to the Financial Statements Continued 7. INCOME TAX CONSOLIDATED ($'000) (a) Income tax expense Current tax Deferred tax Over provided in prior years Income tax expense is attributable to: (Profit) from continuing operations Aggregate income tax (expense) NOTE 2020 2019 (7,222) (4,162) (277) (20,717) (2,265) (104) (11,661) (23,086) Deferred income tax benefit included in income tax expense comprises: Increase / (Decrease) in deferred tax assets (Increase) / Decrease in deferred tax liabilities 7(c) 7(c) (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30% (2019 – 30%) Tax effect of amounts that are not deductible/ (taxable) in calculating taxable income Other non-deductible items (Under) / Over provided in prior years Income tax (expense) (c) Deferred tax liabilities (Non-current) The balance comprises temporary differences attributable to: Amounts recognised in profit and loss Receivables Inventory Biological assets Property, plant and equipment (includes bearer plants) Right-of-use assets Intangibles Accruals and provisions Lease liabilities Amounts recognised directly in other comprehensive income Cash flow hedges Amounts recognised directly in equity Equity raising costs Net deferred tax liabilities Movements: Opening balance 1 Oct Prior period under provision Charged / (Credited) to income statement Debited / (Credited) to other comprehensive income Debited / (Credited) to equity Closing balance at 30 September (11,661) (11,661) 1,219 (5,381) (4,162) 36,662 (10,999) (386) (276) (23,086) (23,086) 1,899 (4,164) (2,265) 76,108 (22,832) (150) (104) (11,661) (23,086) 11 5,974 9,194 33,626 67,883 749 (3,704) (78,141) 35,592 28 5,810 10,243 35,881 - 871 (4,923) (7,990) 39,920 1,143 (282) (423) 36,312 39,629 30 4,162 1,425 (8,934) 36,312 (9) 39,629 37,197 203 2,239 (10) - 39,629 Select Harvests Annual Report 202057 The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (i) Investment allowances and similar tax incentives Companies within the group may be entitled to claim special tax deductions for investments in qualifying assets or in relation to qualifying expenditure (e.g. the Research and Development Tax Incentive regime in Australia or other investment allowances). The group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits that are carried forward. (ii) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: • Where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the cash flow statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. 8. DIVIDENDS PAID OR PROPOSED FOR ON ORDINARY SHARES CONSOLIDATED ($'000) NOTE 2020 2019 (a) Dividends paid during the year (i) Interim – paid 3 August 2020 Fully franked dividend 9c per share (30 September 2019: 12c paid on 5 July 2019) (ii) Final – paid 6 January 2020 Fully franked dividend 20c per share (30 June 2018: 7c paid on 5 October 2018) 8,656 11,456 19,156 27,812 6,666 18,122 (b) Dividends proposed and not recognised as a liability. A final fully franked dividend of 4 cents per share has been declared by the directors ($4,793,810) (2019: 20 cents). (c) Franking credit balance Franking credits available for subsequent reporting periods based on a tax rate of 30% (2019: 30%) 23,901 34,531 The above amounts represent the balance of the franking account (presented as the gross dividend value) as at the end of the period, adjusted for: (i) Franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date (ii) Franking debits that will arise from the payment of dividends recognised as a liability at the reporting date. Select Harvests Annual Report 202058 Notes to the Financial Statements Continued 9. TRADE AND OTHER RECEIVABLES CONSOLIDATED ($'000) Trade receivables Loss allowance Other receivables Prepayments Trade Receivables NOTE 2020 39,941 - 39,941 5,666 23,547 69,154 2019 29,350 (15) 29,335 828 20,060 50,223 Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. They are recognised initially at the amount of consideration that is unconditional and subsequently measured at amortised cost using the effective interest method. Details about the Company’s impairment policies and the calculation of the loss allowance are explained below. (a) Impairment of trade receivables The group applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of sales over a period of 24 months before 30 September 2020 and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The ageing analysis for the financial year ended 2020 was determined as follows: GROSS CARRYING AMOUNT ($'000) Current Up to 3 months past due More than 3 months past due NOTE 30 SEPT 2020 37,908 2,033 - 39,941 30 SEPT 2019 28,037 1,206 107 29,350 Note: Expected credit loss on aged receivables is immaterial and not disclosed above. The closing loss allowances for trade receivables as at 30 September 2020 reconcile to the opening loss allowances as follows: CONSOLIDATED ($'000) NOTE Opening loss allowances Increase in loan loss allowance recognised in profit or loss during the year Unused amount reversed Receivables written off during the year At 30 September (b) Effective interest rates and credit risk All receivables are non-interest bearing. 2020 15 - - (15) - 2019 158 11 (154) - 15 The Company minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a large number of customers from across the range of business segments in which the Company operates. Refer to Note 3 for more information on the risk management policy of the Company as well as the effective interest rate and credit risk of current receivables. (c) Fair value Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value. Select Harvests Annual Report 202010. INVENTORIES CONSOLIDATED ($'000) Raw materials Finished goods and work in progress Other inventories 59 NOTE 2020 75,001 20,175 5,373 100,549 2019* 35,231 39,943 2,513 77,687 * 2019 Inventory amounting to $34.1million has been reclassed to biological assets in accordance with AASB141 Agriculture. Inventories are valued at the lower of cost and net realisable value. Write-downs of inventories to net realisable value for 2020 almond crop (due to the market almond price reducing from $8.20/kg to $7.50/kg) amounted to $16.28 million (2019- Nil). These were recognised as an expense during the year and included in ‘Cost of Sales’ in the Statement of Comprehensive Income. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • Raw materials and consumables: purchase cost on a first in first out basis; • Biological assets reclassified as inventory (included within raw materials in the table above): the initial cost assigned to agricultural produce is the fair value less costs to sell at the point of harvesting in accordance with AASB 141 Agriculture; • Finished goods and work in progress: cost of direct material and labour and a proportion of manufacturing overheads based on normal operating capacity; and • Other inventories comprise consumable stocks of chemicals, fertilisers and packaging materials recorded at cost on a first in first out basis. 11. BIOLOGICAL ASSETS CONSOLIDATED ($'000) Growing almond crop Reconciliation of changes in carrying amount of biological assets Opening balance Increases due to purchases / growing costs Decreases due to harvest Gain arising from changes in fair value Closing balance NOTE 2020 42,432 34,144 134,327 2019 34,144 31,432 106,957 (i) (ii) (190,650) (192,865) 64,611 42,432 88,620 34,144 (i) Includes biological assets reclassified as inventory at the point of harvest (ii) Includes physical changes as a result of biological transformation such as growth. Net increments in the fair value of the growing assets are recognised as income in the statement of Comprehensive Income. Recognition and Measurement Almond trees are bearer plants and are therefore presented and accounted for as property, plant and equipment (see note 13). However, almonds growing on the trees are accounted for as biological assets until the point of harvest. Almonds are transferred to inventory at fair value less costs to sell when harvested (see note 10). Biological assets relate to the almond crop and are measured at fair value less costs to sell in accordance with AASB141 Agriculture. Where fair value cannot be reliably measured or little or no biological transformation has taken place, biological assets are measured at cost. At 30 September 2020, the biological asset balance relates to 2021 almond crop, which is recorded at cost and has little or no biological transformation. The 2020 almond crop has been transferred to inventory when fully harvested. The change in estimated fair value of the biological assets are recognised in the Statement of Comprehensive Income. Fair value measurements have been categorised as Level 3 fair values based on the inputs to the valuation techniques used, which are not based on observable market data. It is measured taking into account the following: • Estimated future selling prices and estimated cash inflows based on forecasted sales; • Estimated yields; and • Estimated remaining growing, harvests, processing and selling costs. Select Harvests Annual Report 202060 Notes to the Financial Statements Continued 12. DERIVATIVE FINANCIAL INSTRUMENTS CONSOLIDATED ($'000) Current Assets Forward exchange and option contracts – cash flow hedges Total current derivative financial instrument assets Current Liabilities Forward exchange and option contracts – cash flow hedges Total current derivative financial instrument liabilities (a) Derivatives NOTE 2020 3,811 3,811 - - 2019 24 24 965 965 Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates derivatives as either; (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (2) hedges of highly probable forecast transactions (cash flow hedges). (i) Hedge ineffectiveness Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. The Company documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. For hedges of foreign currency purchases and sales, the Company enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item. The Company therefore performs a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the Company uses the hypothetical derivative method to assess effectiveness. Ineffectiveness may arise if the timing of the forecast transaction changes from what was originally estimated or if there are changes in the credit risk. In hedges of foreign currency purchases and sales, ineffectiveness may arise if the timing of the forecast transaction changes from what was originally estimated, or if there are changes in the credit risk of Australia or the derivative counterparty. (ii) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (iii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognised immediately in Other Expenses in the Statement of Comprehensive Income. When option contracts are used to hedge forecast transactions, the Company designates intrinsic value options as the hedging instrument. Gains and losses relating to the effective portion of the change in value of the options are recognised in the cash flow hedge reserve within equity. When forward contracts are used to hedge forecast transactions, the Company designates the full change in fair value of the forward contract as the hedging instrument. The gains or losses relating to the effective portion of the change in fair value of the entire forward contract are recognised in the cash flow hedge reserve within equity. Amounts accumulated in equity are reclassified in Cost of Sales in the Statement of Comprehensive Income in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to Other Expenses in the Statement of Comprehensive Income. The Company entered into forward foreign currency contracts to buy and sell specified amounts of foreign currency in the future at stipulated exchange rates. The objective of entering the forward foreign currency contracts is to protect the Company against unfavourable exchange rate movements for highly probable contracted and forecasted sales and purchases undertaken in foreign currencies. Select Harvests Annual Report 2020At balance date, the details of outstanding foreign currency contracts are: LESS THAN 6 MONTHS FEC Buy USD Settlement FEC Buy Euro Settlement LESS THAN 6 MONTHS FEC Sell USD Settlement Option Sell USD Settlement MORE THAN 6 MONTHS FEC Sell USD Settlement Option Sell USD Settlement (iv) Credit risk exposures SELL AUSTRALIAN DOLLARS ($'000) 2019 USD1,120 EUR192 2020 USD1,954 - BUY AUSTRALIAN DOLLARS ($'000) 2019 USD15,626 - 2020 USD20,195 USD7,500 BUY AUSTRALIAN DOLLARS ($'000) 2019 USD11,459 USD7,000 2020 USD21,000 USD7,000 AVERAGE EXCHANGE RATE ($) 2020 0.73 - AVERAGE EXCHANGE RATE ($) 2020 0.65 0.68 AVERAGE EXCHANGE RATE ($) 2020 0.69 0.65 61 2019 0.69 0.62 2019 0.68 - 2019 0.69 0.67 Credit risk for derivative financial instruments arises from the potential failure by counterparties to the contract to meet their obligations at maturity. The credit risk exposure to forward exchange contracts and the interest rate swap are the net fair values of these instruments. The net amount of the foreign currency the Company will be required to pay or purchase when settling the brought forward foreign currency contracts should the counterparty not pay the currency it is committed to deliver to the Company at balance date was USD $53,740,749 (2019: USD $32,966,036 and EUR $191,872). The Company does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the Company. (v) Hedging reserves The Company’s hedging reserves as presented in Statement of Changes in Equity relate to the following hedging instruments: CONSOLIDATED ($'000) Closing balance 30 September 2018 Add: Change in fair value of hedging instrument recognised in OCI Less: Reclassified from OCI to profit or loss Less: Deferred tax Closing balance 30 September 2019 Add: Change in fair value of hedging instrument recognised in OCI Less: Reclassified from OCI to profit or loss Less: Deferred tax Closing balance 30 September 2020 INTRINSIC VALUE OF OPTIONS (206) (178) 206 (8) (186) (137) 178 (13) (158) SPOT COMPONENT OF CURRENCY FORWARDS (721) (762) 721 44 (718) 3,948 762 (1,413) 2,579 TOTAL HEDGE RESERVES (927) (940) 927 36 (904) 3,811 940 (1,426) 2,421 Select Harvests Annual Report 202062 Notes to the Financial Statements Continued 12. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) (vi) Market risk The effects of the foreign currency related hedging instruments on the Company’s financial position and performance are as follows: CONSOLIDATED ($'000) Foreign currency forwards Carrying amount asset Notional amount Maturity date Hedge ratio Change in discounted spot value of outstanding hedging instruments since 1 October Change in value of hedged item used to determine hedge effectiveness Weighted average hedged rate for the year (including forward points) CONSOLIDATED ($'000) Foreign currency forwards Carrying amount asset / (liability) Notional amount Maturity date Hedge ratio Change in discounted spot value of outstanding hedging instruments since 1 October Change in value of hedged item used to determine hedge effectiveness Weighted average hedged rate for the year (including forward points) Foreign currency options Carrying amount asset / (liability) Notional amount Maturity date Hedge ratio Change in intrinsic value of outstanding hedging instruments since 1 October Change in value of hedged item used to determine hedge effectiveness Weighted average strike rate for the year 2020 BUY USD 2019 BUY USD 2019 BUY EUR 42 1,954 23 1,120 Oct - Nov 2020 Oct - Nov 2019 1:1 23 (23) 0.6874 1:1 42 (42) 0.7269 1 192 Nov 2019 1:1 1 (1) 0.6209 2020 SELL USD 2019 SELL USD 3,905 41,195 Oct 2020 - Sep 2021 1:1 3,905 (3,905) USD$0.6678: AUD$1 (136) 14,500 Nov 2020-Aug 2021 1:1 (136) 136 USD$0.6627: AUD$1 (786) 27,085 Oct 2019 -July 2020 1:1 (786) 786 USD$0.6876: AUD$1 (179) 7,000 May-Aug 2020 1:1 (179) 179 USD$0.6745: AUD$1 Select Harvests Annual Report 202013. PROPERTY, PLANT AND EQUIPMENT (a) Reconciliations Reconciliations of the carrying amounts of property, plant and equipment for the current financial year. BUILDINGS PLANTATION LAND AND IRRIGATION SYSTEMS PLANT AND EQUIPMENT BEARER PLANTS CAPITAL WORK IN PROGRESS 63 TOTAL 425,482 (131,798) 293,684 293,684 34,587 (788) (19,560) - 307,923 459,281 (151,358) 307,923 307,923 (36,085) 111,971 (35,227) 76,744 105,614 (64,388) 41,226 147,051 (29,030) 118,021 76,744 - (694) (2,107) 2,218 76,161 113,495 (37,334) 76,161 41,226 - - (11,155) 37,354 67,425 142,968 (75,543) 67,425 118,021 8,925 - (5,887) 237 121,296 156,213 (34,917) 121,296 76,161 - 67,425 (13,309) 121,296 (22,776) 39,380 - 39,380 39,380 25,662 (94) - (39,932) 25,016 25,016 - 25,016 25,016 - 76,161 54,116 98,520 25,016 271,838 - - (2,186) 2,075 76,050 115,570 (39,520) 76,050 7,049 (782) (10,294) 20,968 71,057 146,245 (75,188) 71,057 10,216 - (5,980) 1,392 104,148 139,146 (34,998) 104,148 29,391 - - (24,738) 29,669 29,669 - 29,669 46,656 (782) (18,997) - 298,715 452,521 (153,806) 298,715 ($'000) At 30 September 2018 Cost Accumulated depreciation Net book amount Year ended 30 September 2019 Opening net book amount Additions Disposals Depreciation expense Transfers between classes Closing net book amount At 30 September 2019 Cost Accumulated depreciation Net book amount Year ended 30 September 2020 Opening net book amount Finance lease assets reclassified to right-of-use assets, see (b) below and note 14 Restated opening net book amount Additions Disposals Depreciation expense Transfers between classes Closing net book amount At 30 September 2020 Cost Accumulated depreciation Net book amount Cost and valuation 21,466 (3,153) 18,313 18,313 - - (411) 123 18,025 21,589 (3,564) 18,025 18,025 - 18,025 - - (537) 303 17,791 21,892 (4,101) 17,791 All classes of property, plant and equipment are measured at historical cost less accumulated depreciation. The carrying amount of property, plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from those assets. The recoverable amount is assessed on the basis of the expected net cash flows which will be received from the assets’ employment and subsequent disposal. The expected net cash flows have been discounted to present values in determining recoverable amounts. An independent valuation was performed in September 2019 for specific assets of our Almond Division (owned orchards and Carina West Processing Facility). The book value of the assets at 30 September 2020 was $169.8 million against the September 2019 market valuation of $249.7 million. Select Harvests Annual Report 202064 Notes to the Financial Statements Continued 13. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) (a) Reconciliations (continued) An independent valuation was performed by CBRE in September 2019 for specific assets of our Almond Division (seven owned orchards and the Carina West Processing Facility). The orchards were valued using a direct comparison summation and a discounted cashflow to determine their market value. This was performed on the basis of ‘highest and best use’ being the most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and results in the highest value of the property being valued. The valuation approach used for the processing facility was capitalisation of EBITDA and a productive unit basis to determine its market value. The book value of the assets at 30 September 2020 was $169.8 million against the September 2019 market valuation of $249.7 million. As the inputs to determine the fair value are unobservable, the valuation is considered Level 3 in the fair value hierarchy. Depreciation The depreciable amount of all fixed assets including buildings, but excluding freehold land are depreciated on a straight line basis over their estimated useful lives to the entity commencing from the time the asset is held ready for use. Bearer plants are assumed ready for use when a commercial crop is produced from the seventh year post planting. The depreciation on the almond trees amounting to $5.98 million (30 September 2019: $5.23 million) was capitalised into the inventory cost base. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The useful lives for each class of assets are: Buildings: 25 to 40 years Plant and equipment: 5 to 20 years Bearer plants: Irrigation systems: 10 to 30 years 10 to 40 years Capital works in progress Capital works in progress are valued at cost and relate to costs incurred for owned orchards and other assets under development. (b) Reclassification of Leased assets - 2019 As at 30 September 2019, plant and equipment and bearer plants included the following amounts where the group was a lessee under finance leases. CONSOLIDATED ($'000) Leasehold plant and equipment and bearer plants At cost Accumulated depreciation and impairment Adjustment to 2019 finance lease recorded at 30 September 2019 Net book amount transferred to right-of-use assets on 1 October NOTE 2019 RESTATED 47,643 (13,652) 33,991 2,094 36,085 14. RIGHT-OF-USE ASSETS ($'000) At 1 October 2019 Transition from operating lease* Finance leases reclassified to right-of-use assets† At 1 October 2019* Additions to right-of-use assets Depreciation charge for the year At 30 September 2020 NOTE PROPERTY PLANT AND EQUIPMENT ORCHARD (a) TOTAL 2,071 - 2,071 87 (803) 1,355 (b) 1,299 13,309 14,608 1,920 (3,995) 12,533 206,711 22,776 229,487 11,475 (18,406) 222,556 210,081 36,085 246,166 13,482 (23,204) 236,444 * Please refer to note 1 on adoption of new accounting standard. † In the previous year, the group only recognised lease assets and lease liabilities in relation to leases that were classified as ‘finance leases’ under AASB 117 Leases. The assets were presented in property, plant and equipment and the liabilities as part of the group’s borrowings. These have now been transferred to Right-of-use assets and lease liabilities respectively. For adjustments recognised on adoption of AASB 16 on 1 October 2019, please refer to note 1. A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is shorter. Where the consolidated entity expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is expensed over its estimated useful life. Right-of-use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to the income statement as incurred. Select Harvests Annual Report 2020 65 (a) Orchard The orchards comprise leases with Arrow Funds Management, Rural Funds Management and Aware Super (formerly known as First State Super). A total of 11,729 acres of land are leased over a 20 year term (with extension options) in which the Company has the right to harvest almonds and citrus from the trees for the term of the agreement. The Company also has first right of refusal to purchase the properties in the event that the lessor wishes to sell. (b) Orchard depreciation Depreciation relating to the orchards have either been capitalised as part of growing crop and leasehold improvements or expensed directly to the Statement of Comprehensive Income. 15. INTANGIBLES CONSOLIDATED ($'000) At 30 September 2018 Cost Accumulated amortisation Net book amount Year ended 30 September 2019 Opening net book amount Acquisition Amortisation of software Closing net book amount At 30 September 2019 Cost Accumulated amortisation Net book amount Year ended 30 September 2020 Opening net book amount Acquisition Amortisation of software Closing net book amount At 30 September 2020 Cost Accumulated amortisation Net book amount GOODWILL BRAND NAMES* PERMANENT WATER RIGHTS SOFTWARE TOTAL 25,995 - 25,995 25,995 - - 25,995 25,995 - 25,995 25,995 - - 25,995 25,995 - 25,995 2,905 - 2,905 2,905 - - 2,905 2,905 - 2,905 2,905 - - 2,905 2,905 - 2,905 37,540 - 37,540 37,540 319 - 37,859 37,859 - 37,859 37,859 - - 37,859 37,859 - 37,859 3,922 (280) 3,642 70,362 (280) 70,082 3,642 1,664 (798) 4,508 70,082 1,983 (798) 71,267 5,586 (1,078) 4,508 72,345 (1,078) 71,267 4,508 - (820) 3,688 71,267 - (820) 70,447 5,586 (1,898) 3,688 72,345 (1,898) 70,447 * Brand name assets principally relate to the “Lucky” brand, which has been assessed as having an indefinite useful life. This assessment is based on the Lucky brand having been sold in the market place for over 50 years, being a market leader in the cooking nuts category and remaining a heritage brand. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquired subsidiary/business at the date of acquisition. Goodwill is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less any accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Brand names Brand names are measured at cost. Directors are of the view that brand names have an indefinite life. Brand names are therefore not amortised. Instead, brand names are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired, and are carried at cost less any accumulated impairment losses. Permanent water rights Permanent water rights are recorded at historical cost. Such rights have an indefinite life, and are not amortised. As an integral component of the land and irrigation infrastructure required to grow almonds, the carrying value is tested annually for impairment. If events or changes in circumstances indicate impairment, the carrying value is adjusted to take account of any impairment losses. The Company’s portfolio of water rights is currently recorded at a historical cost value of $37.9 million (2019: $37.9 million). A market value assessment was performed at the end of the financial year. This was completed by accessing the State Water Registers and determining the median price for the applicable class of water rights. This value is then applied on a like basis to the company’s water portfolio. As water prices fluctuate due to seasonal factors current market rates has been valued internally at $97.7 million (2019: $85.8 million). As the inputs to determine the fair value are observable, the valuation is considered Level 2 in the fair value hierarchy. Select Harvests Annual Report 2020 66 Notes to the Financial Statements Continued 15. INTANGIBLES (CONTINUED) Software Costs associated with maintaining software programmes are recognised as an expense when incurred. Development costs that are directly attributable to the design and testing of identifiable software products controlled by the group are recognised as intangible assets when the following criteria are met: • It is technically feasible to complete the software so that it will be available for use • Management intends to complete the software to use it • There is an ability to use the software • It can be demonstrated how the software will generate probable future economic benefits • Adequate technical, financial and other resources to complete the development of the software • The expenditure attributable to the software during its development can be reliably measured Directly attributable costs that are capitalised as part of the software include employee costs, consultant costs and an appropriate portion of relevant overheads. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use. Software costs are amortised on a straight line basis over the period of their expected benefit, being 7 years. Impairment of assets Goodwill, brand names and permanent water rights that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). (a) Impairment tests for goodwill and brand names Goodwill is allocated to the Company’s cash-generating units (CGU) identified according to operating segment. The total value of goodwill and brand names relates to the Food Division CGU. The recoverable amount of a CGU is determined based on value-in-use calculations which require the use of assumptions. These calculations use cash flow forecasts based on financial projections by management covering a five-year period based on growth rates taking into account past performance and its expectations for the future. Assumptions made include current domestic and export contracts for branded products are maintained at current rates with a 2% volume growth rate applied from FY22-FY25 (FY21 growth rate used was 27%). Industrial grade sales and crop marketing fees grow in line with the company’s forecasted almond production growth rate and operating costs remain flat. Working capital movements are considered to fluctuate in line with sales forecasts. Cash flow projections beyond the five-year period are not extrapolated, but a terminal value with a nil growth rate is included in the calculations. A real pre-tax weighted average cost of capital of 10.0% (2019: 11.1%) was used to discount the cash flow projections. No material changes in key assumptions arose during the period. (b) Impact of possible changes to key assumptions The recoverable amount of the goodwill and brand names in the Food Division Cash Generating Unit (CGU) exceeds its carrying amount based on impairment testing performed at 30 September 2020. A decrease of 10% in the projected annual cash flows, or an increase of 1% in the pre-tax discount rate of 10% does not result in an impairment of the goodwill and brand names. These changes would be considered reasonably possible changes to the key assumptions. (c) Permanent water rights The value of permanent water rights relates to the Almond Division CGU and is an integral part of land and irrigation infrastructures required to grow almond orchards. The fair value of permanent water rights is supported by the tradeable market value, which at current market prices is in excess of book value. 16. TRADE AND OTHER PAYABLES CONSOLIDATED ($'000) Current Trade creditors Other creditors and accruals Non-Current Other creditors and accruals NOTE 2020 2019 22,997 19,520 42,517 18,621 13,724 32,345 3,525 - These amounts represent liabilities for goods and services provided to the Group prior to the end of the year which are unpaid. These amounts are unsecured and are usually paid within 30 days of recognition. Select Harvests Annual Report 202017. BORROWINGS CONSOLIDATED ($'000) Current - Secured Bank overdraft Finance lease* Non-current - Secured Debt facilities Finance lease* 67 2019 3,643 4,468 8,111 - 30,903 30,903 NOTE 2020 6,235 - 6,235 52,750 - 52,750 * Finance lease liabilities were included in borrowings until 30 September 2019, but were reclassified to lease liabilities on 1 October 2019 in the process of adopting the new leasing standard. Please refer to note 18 Leases for more information. Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs, inclusive of all facility fees, bank charges, and interest, are expensed as incurred. (a) Interest rate risk exposures Details of the Company’s exposure to interest rate changes on borrowings are set out in Note 3. (b) Assets pledged as security The bank overdraft and debt facilities of the parent entity and subsidiaries are secured by the following: (i) A registered mortgage debenture is held as security over all the assets and undertakings of Select Harvests Limited and the entities of the wholly owned group. (ii) A deed of cross guarantee exists between the entities of the wholly owned group. The carrying amounts of assets pledged as security for current and non-current borrowings are: CONSOLIDATED ($'000) Current Floating charge Cash and cash equivalents Receivables Inventories Biological assets Derivative financial instruments Total current assets pledged as security Non-current Floating charge Other receivables Property, plant and equipment Permanent water rights Total non-current assets pledged as security Total assets pledged as security NOTE 2020 2019 1,451 69,154 100,549 42,432 3,811 217,397 1,891 298,715 37,859 338,465 555,862 11,588 50,223 77,687 34,144 24 173,666 - 273,932 37,859 311,791 485,457 Select Harvests Annual Report 2020 68 Notes to the Financial Statements Continued 17. BORROWINGS (CONTINUED) Financing arrangements The Company has a debt facility available to the extent of $100,000,000 as at 30 September 2020 (30 September 2019: $100,000,000). The Company has bank overdraft facilities available to the extent of USD$5,000,000 (2019: USD$5,000,000). The current interest rates at balance date are 1.44% (2019: 2.30%) on the debt facility, and 1.675% (2019: 1.925%) on the United States dollar bank overdraft facility. As part of the planned acquisition announced to the ASX on 1st October 2020, the company had received Commitment Letters from NAB and Rabobank, subject to certain terms and conditions. This will increase the current facilities from $100 million to $160 million over a 3 year term plus a short term facility of $53 million for working capital purposes of the new farm. 18. LEASE LIABILITIES CONSOLIDATED ($'000) Current Non-current NOTE The following table sets out the maturity analysis of lease payments, showing the undiscounted lease payments after the reporting date. CONSOLIDATED ($'000) Within one year Later than one year but not later than 5 years Later than 5 years NOTE 2020 31,264 233,513 264,777 2020 34,698 123,217 173,209 331,124 A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the consolidated entity’s incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of-use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. Leases are secured with the orchards, property and plant and equipment. 19. DEFERRED GAIN ON SALE CONSOLIDATED ($'000) Current Sale and leaseback Non-Current Sale and leaseback NOTE 2020 175 2019 175 2,452 2,627 The deferred gain on sale relates to the sale and leaseback of bearer plants for three orchards that were sold to First State Super on 22 September 2015 and 1 January 2016. The lease is for a 20 year term. 20. PROVISIONS CONSOLIDATED ($'000) Current Employee benefits Others Non-Current Employee benefits Provisions NOTE 2020 5,218 255 5,473 2019 4,670 200 4,870 270 239 Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Select Harvests Annual Report 202069 Employee benefits This covers the leave obligations for long service leave and annual leave which are classified as either short-term benefits or other long-term benefits explained below. The current portion of this liability includes all of the accrued annual leave, the unconditional entitlements to long service leave where employees have completed the required period of service and also for those employees who are entitled to pro-rata payments in certain circumstances. The entire amount of the provision is presented as current, since the group does not have an unconditional right to defer settlement for any of these obligations. Contributions are made by the Company to an employee superannuation fund and are charged as expenses when incurred. (i) Short-term obligations Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees' services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. (ii) Other long-term benefit obligations The liability for long service leave and annual leave which is not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 21. CONTRIBUTED EQUITY CONSOLIDATED ($'000) (a) Issued and paid up capital Ordinary shares fully paid Contributed equity Ordinary shares are classified as equity. The value of new shares or options issued is shown in equity. (b) Movements in shares on issue NOTE 2020 2019 279,096 271,750 2020 2019 NUMBER OF SHARES 95,736,628 $'000 271,750 NUMBER OF SHARES 95,226,349 856,584 43,801 - 96,637,013 6,289 - 1,057 279,096 510,279 - - 95,736,628 $'000 268,567 3,183 - - 271,750 Beginning of the year Issued during the year • Dividend reinvestment plan • Long term incentive plan – tranche vested • Deferred tax credit on transaction costs End of the year (c) Performance Rights Long Term Incentive Plan The Company offers employee participation in long term incentive schemes as part of the remuneration packages for the employees. In determining the quantum of rights offered the board considers a number of factors including: the corporate strategy; the appropriate mix of fixed and at risk remuneration; the fair value and face value of the rights; and the market relativity of employees with equivalent responsibilities. The long term scheme involves the issue of performance rights to the employee, under the Long Term Incentive Plan. The market value of ordinary Select Harvests Limited shares closed at $5.57 on 30 September 2020 ($7.69 on 30 September 2019). (d) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. (e) Capital risk management The group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Select Harvests Annual Report 202070 Notes to the Financial Statements Continued 22. RECONCILIATON OF THE NET PROFIT AFTER INCOME TAX TO THE NET CASH FLOWS FROM OPERATING ACTIVITIES CONSOLIDATED ($'000) Net profit / (loss) after tax Non-cash items Depreciation and amortisation Depreciation right-of-use assets Inventory fair value adjustment Net (gain) / loss on sale of assets Options expense Deferred gain on sale Lease interest Changes in assets and liabilities (Increase) / Decrease in trade and other receivables (Increase) / Decrease in inventory (Increase) / Decrease in biological assets Increase / (Decrease) in trade payables (Decrease) / Increase in income tax payable (Decrease) / Increase in deferred tax liability Increase in employee entitlements Net cash flow from operating activities Non cash financing activities NOTE 2020 25,001 19,817 23,026 (13,988) (291) 537 (175) 4,500 (20,822) (6,587) (8,288) 13,697 (11,591) (3,317) 634 13,153 2019 53,022 20,358 - (9,212) (519) 592 (175) - (4,067) 4,732 (2,711) (7,840) 23,393 2,432 332 80,337 During the current financial year ended 30 September 2020, the company issued 856,584 of new equity (30 September 2019: 510,279) as part of the Dividend Reinvestment Plan. (a) Net debt reconciliation Net debt movement during the year/period as follows: CONSOLIDATED ($'000) Cash and cash equivalents Borrowings- repayable after one year Lease liabilities- repayable within one year Lease liabilities- repayable after one year Net debt NOTE (b) 2020 (4,784) (52,750) (31,264) (233,513) (322,311) 2019 7,945 - (4,468) (30,903) (27,426) ($'000) CASH/ BANK OVERDRAFT LIABILITIES FROM FINANCING ACTIVITIES TOTAL LEASES DUE WITHIN 1 YEAR LEASES DUE AFTER 1 YEAR BORROWINGS DUE WITHIN 1 YEAR BORROWINGS DUE AFTER 1 YEAR Net debt as at 30 September 2018 Cash flows - Principle Cash flows - Interest Acquisitions finance leases Foreign exchange adjustments Other non-cash movements Net debt as at 30 September 2019 Adjustment on adoption of AASB16 Cash flows - Principle Cash flows - Interest Additions to leases Foreign exchange adjustments Other non-cash movements Net debt as at 30 September 2020 6,610 4,605 - - (3,270) - 7,945 - (15,820) - - 3,091 - (4,784) (4,572) 7,845 (2,249) (5,837) - 345 (4,468) (26,992) 35,215 (13,367) (13,482) - (8,170) (31,264) (30,558) - - - - (345) (30,903) (210,780) - - - - 8,170 (233,513) - - - - - - - - - - - - - - (30,400) 30,400 - - - - - - (52,750) - - - - (52,750) (58,920) 42,850 (2,249) (5,837) (3,270) - (27,426) (237,772) (33,355) (13,367) (13,482) 3,091 - (322,311) Select Harvests Annual Report 202071 23. EXPENDITURE COMMITMENTS Upon adoption of AASB 16 on 1st October 2019, the operating and finance lease commitments have been disclosed as lease liabilities, except for leases on water rights which are classified as intangibles and therefore excluded from AASB16 scope. (a) Operating lease commitments Commitments payable in relation to leases contracted for at the reporting date but not recognised as liabilities: CONSOLIDATED ($'000) Minimum lease payments • Within one year • Later than one year and not later than five years • Later than five years Aggregate lease expenditure contracted for at reporting date NOTE 2020 2019 11,022 10,831 - 21,853 30,260 112,180 197,111 339,551 Operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight line basis over the term of the lease. CONSOLIDATED ($'000) (i) Property and equipment leases (non-cancellable): Minimum lease payments • Within one year • Later than one year and not later than five years • Later than five years Aggregate lease expenditure contracted for at reporting date Property and equipment lease payments are for rental of premises, farming and factory equipment. CONSOLIDATED ($'000) (ii) Almond orchard leases: Minimum lease payments • Within one year • Later than one year and not later than five years • Later than five years Aggregate lease expenditure contracted for at reporting date NOTE 2020 2019 - - - - 5,078 8,683 - 13,761 NOTE 2020 2019 - - - - 25,182 103,497 197,111 325,790 The almond orchard leases comprises: (i) A 20 year lease of a 512 acre (207 hectares) almond orchard and a 1,002 acre (405 hectares) lease from Arrow Funds Management in which the Company has the right to harvest the almonds from the trees owned by the lessor for the term of the agreement. The Company also has first right of refusal to purchase the properties in the event that the lessor wished to sell. Other leases within the consolidated entity have renewal and first right of refusal clauses. (ii) A 20 year lease of 3,017 acres (1,221 hectares) at Hillston with Rural Funds Management. (iii) A 20 year lease of 5,877 acres (2,382 hectares) of almond and 722 acres (292 hectares) citrus orchards and approximately 599 acres (242 hectares) for future development of almonds with Aware Super (formerly known as First State Super). The Company has the right to harvest the almonds from the trees owned by the lessor for the term of the agreement. The Company also has first right of refusal to purchase the properties in the event that the lessor wished to sell. (b) Finance lease commitments Commitments payable in relation to leases contracted for at the reporting date and recognised as liabilities: CONSOLIDATED ($'000) Within one year Later than one year but not later than five years Later than five years Minimum lease payments Future finance charges Total lease liabilities The present value of finance lease liabilities is as follows: Within one year Later than one year but not later than five years Later than 5 years Minimum lease payments NOTE 2020 - - - - - - - - - - 2019 7,240 14,765 28,233 50,238 (14,867) 35,371 5,258 8,717 21,396 35,371 Finance lease payments are for rental of farming equipment and bearer plants with a net carrying amount at 30 September 2019 of $11,338,106 and $22,652,930 respectively. Select Harvests Annual Report 202072 Notes to the Financial Statements Continued 23. EXPENDITURE COMMITMENTS (CONTINUED) (c) Capital commitments Significant capital expenditure contracted for at the end of the reporting year but not recognised as liabilities is as follows: CONSOLIDATED ($'000) Property, plant and equipment NOTE 2020 4,366 2019 9,667 24. EVENTS OCCURRING AFTER BALANCE DATE On 1st October 2020, the Company announced to the ASX its proposed acquisition of the Piangil Almond Orchard for a consideration of $129 million in cash plus a reimbursement of 2020/2021 growing costs. In addition, the company undertook an equity raising of $120 million at an offer price of $5.20 per share to both institutional and retail investors. The combined share raising was successfully completed by 27 October with a total of 23.08 million shares issued. The expected date for completion of the Piangil Orchard acquisition will be in the 3rd week of December 2020. For further details, please refer to the relevant announcements made to the ASX. On 30 November 2020, the Directors declared a final fully franked dividend of 4 cents per share in relation to the financial year ended 30 September 2020 to be paid on 5 February 2021. 25. EARNINGS PER SHARE CENTS Basic earnings per share attributable to equity holders of the company Diluted earnings per share attributable to equity holders of the company NOTE 2020 26.0 25.9 The following reflects the income and share data used in the calculations of basic and diluted earnings per share: CONSOLIDATED ($'000) Basic earnings per share: Profit attributable to equity holders of the company used in calculating basic earnings per share Diluted earnings per share: Profit attributable to equity holders of the company used in calculating diluted earnings per share NOTE 2020 25,001 25,001 2019 55.5 55.3 2019 53,022 53,022 NUMBER OF SHARES Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilutive securities: Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share NOTE 2020 96,137,435 2019 95,530,334 96,517,979 95,873,271 Basic Earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive ordinary shares, and after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares. 26. REMUNERATION OF AUDITORS CONSOLIDATED ($) Audit and other assurance services Audit and review of financial statements Other services Total remuneration of PricewaterhouseCoopers NOTE 2020 2019 337,600 - 337,600 273,000 - 273,000 Select Harvests Annual Report 202073 27. RELATED PARTY DISCLOSURES (a) Parent entity The parent entity within the consolidated entity is Select Harvests Limited. (b) Subsidiaries Parent Entity: Select Harvests Limited (i) Subsidiaries of Select Harvests Limited: Kyndalyn Park Pty Ltd (i) Select Harvests Food Products Pty Ltd (i) Meriram Pty Ltd (i) Kibley Pty Ltd (i) Select Harvests Nominee Pty Ltd (i) Select Harvests Orchards Nominee Pty Ltd (i) Select Harvests Water Rights Unit Trust (i) Select Harvests Water Rights Trust (i) Select Harvests Land Unit Trust (i) Select Harvests South Australian Orchards Trust (i) Select Harvests Victorian Orchards Trust (i) Select Harvests NSW Orchards Trust (i) Jubilee Almonds Irrigation Trust Inc (i) Members of extended closed group (c) Key management personnel compensation CONSOLIDATED ($) Short term employment benefits Post-employment benefits Long service leave Share based payments COUNTRY OF INCORPORATION PERCENTAGE OWNED (%) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 2020 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2019 100 100 100 100 100 100 100 100 100 100 100 100 100 100 NOTE 2020 3,684,049 191,550 78,195 490,541 4,444,335 2019 4,070,611 174,611 29,868 554,994 4,830,084 Other disclosures relating to key management personnel are set out in the Remuneration Report. (d) Director related entity transactions There were no director related entity transactions during the year. (e) Directors’ interests in contracts Michael Carroll is a director of Rural Funds Management, the responsible entity for Rural Funds Group, which leases orchards to Select Harvests. Additionally, he was a director of Elders Limited until 2 July 2020, which supplies crop inputs, other farm related products and water brokering services to Select Harvests. These transactions are on normal commercial terms and procedures are in place to manage any potential conflicts of interest. Select Harvests Annual Report 202074 28. SHARE BASED PAYMENTS Long Term Incentive Plan The Group offers executive directors and senior executives the opportunity to participate in the long term incentive plan (LTI Plan) involving the issue of performance rights to the employee under the LTI Plan. The LTI Plan provides for the offer of a parcel of performance rights with a three year performance period to participating employees on an annual basis. Rights vest each year, with half of the rights vesting upon achievement of underlying earnings per share (EPS) and the other half vesting upon achievement of total shareholder return (TSR) targets. The underlying EPS growth targets are based on the Cumulative Annual Growth Rate (CAGR) of the company’s underlying EPS over the three years prior to vesting. The TSR targets are measured based on the company’s average TSR compared to the TSR of a peer group of ASX listed companies over the three years prior to vesting. The performance targets and vesting proportions are as follows: MEASURE Current Issues Underlying EPS Below 5% CAGR 5% CAGR 5.1% - 19.9% CAGR 20% or higher CAGR TSR Below the 50th percentile* 50th percentile* 51st – 74th percentile* At or above 75th percentile* RIGHTS TO VEST Nil 25% Pro rata vesting 50% Nil 25% Pro rata vesting 50% * Of the peer group of ASX listed companies as outlined in the directors’ report. Summary of performance rights over unissued ordinary shares Details of performance rights over unissued ordinary shares at the beginning & ending of the reporting date and movements during the year are set out below: 30 September 2020 GRANT DATE VESTING DATE EXERCISE PRICE BALANCE AT START OF THE YEAR (NUMBER) GRANTED DURING THE YEAR (NUMBER) FORFEITED DURING THE YEAR (NUMBER) VESTED DURING THE YEAR (NUMBER) BALANCE AT END OF THE YEAR ON ISSUE VESTED PROCEEDS RECEIVED ($) SHARES ISSUED (NUMBER) FAIR VALUE PER SHARE ($) FAIR VALUE AGGREGATE ($) 20/10/2014 29/09/2016 02/12/2016 20/11/2017 29/04/2019 27/03/2020 30/09/2020 30/09/2020 30/09/2020 30/09/2020 30/09/2021 30/09/2022 30 September 2019 - - - - - - 75,000 30,000 22,500 18,000 169,557 - - - - - - 122,578 (10,125) (4,050) (3,037) (2,430) - - (64,875) (25,950) (19,463) (15,570) - - - - - - 169,557 122,578 - - - - - - - - - - - - - - - - - - 4.21 3.23 3.23 3.65 5.18 2.83 - - - - 878,305 346,896 GRANT DATE VESTING DATE EXERCISE PRICE BALANCE AT START OF THE YEAR (NUMBER) GRANTED DURING THE YEAR (NUMBER) FORFEITED DURING THE YEAR (NUMBER) VESTED DURING THE YEAR (NUMBER) BALANCE AT END OF THE YEAR ON ISSUE VESTED PROCEEDS RECEIVED ($) SHARES ISSUED (NUMBER) FAIR VALUE PER SHARE ($) FAIR VALUE AGGREGATE ($) 20/10/2014 29/09/2016 02/12/2016 20/11/2017 30/09/2020 30/09/2020 30/09/2020 30/09/2020 29/04/2019 30/09/2021 - - - - - 150,000 100,000 30,000 18,000 - - - 7,500 - 169,557 (47,625) (59,050) (9,524) - - (27,375) (10,950) (5,476) - - 75,000 30,000 22,500 18,000 169,557 - - - - - - - - - - - - - - - 4.21 3.23 3.23 3.65 5.18 315,750 96,900 72,675 65,700 878,305 Select Harvests Annual Report 202075 Fair value of performance rights granted The assessed fair value at grant date is determined using a Monte Carlo option pricing model that takes into account the term of the rights, the impact of dilution, the share price at offer date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the right. The model inputs for rights granted in the tables opposite included: PERFORMANCE RIGHTS ISSUE Share price at grant date Expected volatility* Expected dividends Risk free interest rate 27 MARCH 2020 $7.05 40% 4.95% 0.35% 29 APRIL 2019 $6.49 40% 1.83% 1.33% 20 NOVEMBER 2017 $4.64 45% 2.13% 1.85% 2 DECEMBER 2016 $6.23 45% 7.87% 1.58% 29 SEPTEMBER 2016 $5.62 45% 7.87% 1.58% 20 OCTOBER 2014 $5.95 45% 3.31% 2.84% * Expected share price volatility was calculated with reference to the annualised standard deviation of daily share price returns on the underlying security over a specified period. Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: CONSOLIDATED ($) Performance rights granted under employee long term incentive plan NOTE 2020 536,897 2019 592,102 Share-based payments Share-based compensation benefits are provided to employees via the Select Harvests Limited Long Term Incentive Plan (LTIP). The fair value of performance rights granted under the Select Harvests Limited LTIP is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the performance rights. The fair value at grant date is independently determined using a Monte Carlo option pricing model that takes into account the term of the right, the vesting and performance criteria, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the right. The fair value of the performance rights granted is adjusted to reflect market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non market vesting conditions are included in assumptions about the number of rights that are expected to vest. At each balance sheet date, the entity revises its estimate of the number of rights that are expected to vest. The employee benefit expense recognised each period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the income statement with a corresponding adjustment to equity. 29. CONTINGENT LIABILITIES (i) Guarantees Cross guarantees are given by the entities comprising the Group. Group entities are set out in Note 27(b). (ii) Bank Guarantees As at 30 September 2020, the company had provided $6.16 million (2019: $6.16 million) of bank guarantees as security for the almond orchard lease. 30. PARENT ENTITY FINANCIAL INFORMATION (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance Sheet ($'000) Current Assets Total Assets Current Liabilities Total Liabilities Shareholders’ Equity Issued capital Reserves • Cash flow hedge reserve • Options reserve Retained profits Total Shareholders’ Equity Profit / (loss) for the year Total comprehensive income / (expense) 2020 7,318 360,704 14,429 72,211 2019 12,407 302,523 2,869 7,283 278,039 271,750 3,479 4,216 2,759 288,493 32,707 37,090 (940) 3,679 20,751 295,240 30,840 30,863 Select Harvests Annual Report 202076 30. PARENT ENTITY FINANCIAL INFORMATION (CONTINUED) (b) Tax consolidation legislation Select Harvests Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as of 1 July 2003. The head entity, Select Harvests Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, Select Harvests Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Select Harvests Limited for any current tax payable assumed and are compensated by Select Harvests Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Select Harvests Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities' financial statements. The amounts receivable/payable under the tax funding agreement is due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities (c) Guarantees entered into by parent entity Each entity within the consolidated group has entered into a cross deed of financial guarantee in respect of bank overdrafts and loans of the group. Loans are made by Select Harvests Limited to controlled entities under normal terms and conditions. Select Harvests Annual Report 2020Directors' Declaration 77 In the directors’ opinion: (a) the financial statements and Notes set out on pages 41 to 76 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the consolidated entity’s financial position as at 30 September 2020 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in Note 27 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in Note 30. (b) (c) Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Managing Director and Chief Financial Officer required under section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. M Iwaniw Chair Melbourne, 30 November 2020 Select Harvests Annual Report 2020 78 Independent Auditor’s Report Independent auditor’s report To the members of Select Harvests Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Select Harvests Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 September 2020 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: ● ● ● ● ● ● the balance sheet as at 30 September 2020 the statement of comprehensive income for the year then ended the statement of changes in equity for the year then ended the statement of cash flows for the year then ended the notes to the financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Select Harvests Annual Report 202079 Select Harvests Annual Report 2020individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality ●For the purpose of our audit we used overall Group materiality of $2.30 million. This representsapproximately 5% of the Group’s three year average of profit before tax, excluding the three month transitionperiod ended 30 September 2018.●We applied this threshold, together with qualitative considerations, to determine the scope of our audit andthe nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on thefinancial report as a whole.●We chose Group profit before tax because, in our view, it is the benchmark against which the performance ofthe Group is most commonly measured. We chose a three year average to address volatility in the profitbefore tax calculation caused by fluctuations in the almond price and yield between years.●We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonlyacceptable thresholds.Audit Scope ●Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events.80 Independent Auditor’s Report Continued Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit and Risk Committee. Key audit matter How our audit addressed the key audit matter Inventory valuation – current year almond crop (Refer to notes 2, 10 and 11) The FY20 almond crop is classified by the Group as inventory, given it has been fully harvested at the year end. Australian Accounting Standards require agriculture produce (such as almonds) from an entity’s biological assets to be measured at fair value less costs to sell at the point of harvest. To measure the fair value at the point of harvest of this agriculture produce, the Group applies various assumptions including estimated yield, estimated future selling price and estimated remaining growing, harvest, processing and selling costs. As outlined in Notes 2 and 11, the assumptions applied include the estimated average almond selling price at the point of harvest of $8.20 per kg, the crop estimate for the Group’s orchards of 23,250MT based on estimated harvest yield, and the estimated remaining processing and selling costs. Australian Accounting Standards require inventory to be recognised at the lower of cost and net realisable value. As outlined in Note 10, an adjustment of $16.3m has been recognised in the period to write down inventory to net realisable value. We consider this to be a key audit matter because of the financial significance of the almond crop to the Group’s assets and profit for the year ended 30 September 2020 and the judgement involved in the assumptions. Our audit procedures included, amongst others: • • • • • • • Developing an understanding of the Group’s processes and controls over determining the field weights of almonds produced and testing the operating effectiveness of a sample of related controls. Comparing the actual yield for each orchard in the current year to prior year levels, forecast yields and discussing significant variances with management. Attending the Group’s stocktakes in September 2020, where we observed the Group’s count procedures and tested a sample of inventory on hand to verify its existence. Obtaining external confirmations for a sample of third party inventory storage locations and agreeing quantities per the confirmations to the Group’s inventory listing. Reconciling opening inventory to closing inventory and testing a sample of inflows of almonds from harvest, almonds processed and sales outflows during the year. Evaluating the Group’s ability to make estimates of the fair value of the almond crop and its net realisable value by comparing prior estimates to actual selling prices achieved since harvest, agreeing a sample of committed sales to contracts and considering external spot price information and the quality and ageing of inventory on hand. Assessing sources of estimation uncertainty in uncommitted sales relating to global almond price movements by comparing to external industry information and market data. Select Harvests Annual Report 202081 Select Harvests Annual Report 2020•Agreeing a sample of costs of harvesting andprocessing the almond crop during the periodto supporting documentation and agreeing theallocation of these costs to inventory at 30September 2020.•Testing the mathematical accuracy of theGroup’s almond crop valuation.•Evaluating the adequacy of the disclosuresmade in note 2, 10 and 11 in light of therequirements of Australian AccountingStandards.Carrying value of goodwill and brand names in the Food Division CGU (Refer to notes 2 and 15) Under Australian Accounting Standards, the Group is required to assess goodwill and indefinite life intangibles for impairment at least annually. An impairment is recognised where the estimated recoverable amount for each division is less than the carrying amount of the division’s intangible assets. The Food Division has goodwill and brand names of $28.9m at 30 September 2020. The Group performed an impairment assessment for the Food Division cash generating unit (CGU), calculating the value-in-use using a discounted cash flow model (the model). The model is based on the FY21 Board approved budget. Assumptions applicable to the model are described in note 15. We consider this to be a key audit matter due to the financial significance of the goodwill and brand names in the Food Division and the significant judgements and assumptions applied in estimating future cash flows and the discount rate. Our audit procedures included, amongst others: •Assessing whether the Group’s determinationof CGUs was consistent with our knowledge ofthe Group’s operations and its internalreporting, as required by AustralianAccounting Standards.•Testing the mathematical accuracy of thecalculations in the model.•Evaluating the Group’s cash flow forecasts forthe Food Division in the model and theprocess by which they were developed withreference to current year results, externalindustry information and market data.•Assessing that the forecast earnings wereconsistent with the Board approved budget,and that forecast growth rates are reasonablewith reference to our understanding of the keydrivers, including forecast harvest volumesand the almond price.•Comparing the previous three years’ forecastto actual results to assess the accuracy andreliability of the Group’s forecasting.•With the assistance of PwC valuation experts,assessing whether the discount rate applied inthe model is reasonable by comparing it tomarket data and comparable companies.•Considering the sensitivity of the model byvarying key assumptions such as volumegrowth rates and discount rates and assessingunder which assumptions an impairment82 Independent Auditor’s Report Continued would occur and whether this was reasonably possible. • Evaluating the adequacy of the disclosures in notes 2 and 15 in light of the requirements of Australian Accounting Standards. Financing arrangements (Refer to note 17) Our audit procedures included, amongst others: At 30 September 2020, the Group has borrowings of $59.0m outstanding. During the year, the Group entered into an Implementation Deed and Sale Agreement to acquire the Piangil orchard, which will be partially funded by new debt facilities and for which the lenders have provided conditional commitments to extend existing facilities. We consider this to be a key audit matter given the financial significance of the Group’s borrowings, commitments received from its lenders for new facilities to partly fund the Piangil orchard acquisition, and the importance of the capital structure for the Group’s growth. • Obtaining confirmations from the Group’s lenders to confirm borrowings outstanding at the balance date. • Reading the signed agreements and other correspondence between the Group and its lenders to develop an understanding of the terms associated with its facilities, the amounts available for drawdown, and the terms of the conditional commitments offered in connection with the Piangil acquisition. • Where debt was classified as non-current, evaluating the Group’s assessment that it had an unconditional right to defer payment such that there were no repayments required within 12 months from the balance date. • • Evaluating the debt maturity profile and funding plan in light of our understanding of the debt agreements in place. Evaluating the adequacy of disclosures made in note 17 in light of the requirements of Australian Accounting Standards. Accounting for bearer plants (Refer to note 13) Our audit procedures included, amongst others: The Group accounts for its almond trees as property, plant and equipment recorded at cost less accumulated depreciation. Under Australian Accounting Standards, the Group capitalises growing and leasing costs proportionate to maturity up to 7 years, when trees are deemed to reach a mature commercial state. Depreciation of the tree begins at this point on a units of production method, reflecting the commencement of revenue generation by the trees. Depreciation is charged over 10 to 30 years depending on the maturity of the bearer plant. • • Testing the amount and nature of a sample of growing costs capitalised during the period to supporting documentation for trees with a maturity of up to 7 years old. Evaluating the Group’s useful life assessment, maturity of trees and yield profile assumptions applied in the units of production method for depreciation against historical experience. Select Harvests Annual Report 202083 Select Harvests Annual Report 2020At 30 September 2020 the Group had bearer plants with a carrying value of $104.1m, against which depreciation of $6.0m was charged during the year. This was a key audit matter due to the significance of: •the net book value of bearer plants to theGroup’s balance sheet.•estimates and judgements regardingcapitalisation of growing costs and the usefullife and depreciation profile of trees.•Evaluating the adequacy of disclosures madein note 13 in light of the requirements ofAustralian Accounting Standards.Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 September 2020, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that 84 Independent Auditor’s Report Continued includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 28 to 39 of the directors’ report for the year ended 30 September 2020. In our opinion, the remuneration report of Select Harvests Limited for the year ended 30 September 2020 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Andrew Cronin Partner Melbourne 30 November 2020 Select Harvests Annual Report 2020ASX Additional Information 85 Additional information required by the Australian Stock Exchange Limited and not shown elsewhere in this report is as follows. (a) Distribution of equity securities The following information is current as at 30 October 2020. The number of shareholders, by size of holding, in each class of share is: NUMBER OF ORDINARY SHARES 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over The number of shareholders holding less than a marketable parcel of shares is: NUMBER OF ORDINARY SHARES 14,024 (b) Twenty largest shareholders NUMBER OF SHAREHOLDERS 5,150 4,381 1,013 719 41 NUMBER OF SHAREHOLDERS 623 The following information is current as at 30 October 2020. The names of the twenty largest registered holders of quoted shares are: 1. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 2. J P MORGAN NOMINEES AUSTRALIA LIMITED 3. CITICORP NOMINEES PTY LIMITED 4. NATIONAL NOMINEES LIMITED 5. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 6. UBS NOMINEES PTY LTD 7. BNP PARIBAS NOMS PTY LTD 8. BNP PARIBAS NOMS PTY LTD 9. SMARTEQUITY EIS PTY LTD 10. MR JOHN PATERSON 11. RATHVALE PTY LIMITED 12. MIRRABOOKA INVESTMENTS LIMITED 13. ETIAM PTY LIMITED 14. INVIA CUSTODIAN PTY LIMITED 15. REZANN PTY LTD 16. COSTA ASSET MANAGEMENT PTY LTD 17. INVIA CUSTODIAN PTY LIMITED 18. PAKA NOMINEES PTY LTD 19. BRAZIL FARMING PTY LTD 20. BRANKA NOMINEES PTY LTD Total securities of Top 20 holdings Remaining holders balance Total NUMBER OF SHARES 22,097,801 21,222,958 15,267,570 5,803,557 5,194,065 4,527,864 2,195,994 1,042,076 620,342 557,142 400,315 374,531 364,967 350,000 312,777 238,029 215,000 210,165 209,842 202,516 81,407,511 38,311,885 119,719,396 PERCENTAGE OF SHARES 18.46% 17.73% 12.75% 4.85% 4.34% 3.78% 1.83% 0.87% 0.52% 0.47% 0.33% 0.31% 0.30% 0.29% 0.26% 0.20% 0.18% 0.18% 0.18% 0.17% 68.00% 32.00% 100% (c) Substantial shareholders The substantial shareholders as disclosed by notices received by the Company as at 30 October 2020 are: Paradice Investment Management Pty Ltd Perpetual Limited Yarra Funds Management Limited (d) Voting rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. The Company is listed on the Australian Stock Exchange. The home exchange is Melbourne. NUMBER OF SHARES 9,041,243 6,648,533 6,460285 % HOLDING 9.40% 6.91% 6.69% Select Harvests Annual Report 2020 86 NOTES Select Harvests Annual Report 2020Corporate Information ABN 87 000 721 380 DIRECTORS M Iwaniw (Chair) P Thompson (Managing Director) M Carroll (Non-Executive Director) F S Grimwade (Non-Executive Director) N Anderson (Non-Executive Director) F Bennett (Non-Executive Director) G Kingwill (Non-Executive Director) COMPANY SECRETARY B Crump REGISTERED OFFICE - SELECT HARVESTS LIMITED 360 Settlement Road Thomastown VIC 3074 Postal address PO Box 5 Thomastown VIC 3074 Telephone (03) 9474 3544 Email info@selectharvests.com.au SOLICITORS Minter Ellison Lawyers BANKERS National Australia Bank Limited Rabobank Australia AUDITOR PricewaterhouseCoopers SHARE REGISTER Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford VIC 3067 Telephone (03) 9415 4000 WEBSITE www.selectharvests.com.au TM Supplies bulk product to major bakeries, manufacturers and wholesalers who depend on quality and service. Product range muesli, cereal and oats Distribution major supermarkets (muesli) and export markets including Hong Kong, Singapore, Malaysia, Indonesia and the Paciﬁc Rim Product range muesli, dried fruit, wholefoods, nuts and snacks Distribution Health aisle of major supermarkets and export markets including Hong Kong, Singapore, Malaysia, Indonesia and the Paciﬁc Rim Product range almonds and other nuts, dried fruit, seeds, nut pastes, pralines and muesli Bulk and convenient packs Products sold to local and overseas food manufacturers, wholesalers, distributors and re-packers Market leader in the cooking nut category Cooking Nut product range almonds, walnuts, cashews, brazil nuts, pine nuts, pistachios, macadamias, hazelnuts, peanuts, sunﬂower seeds and pepitas Snacking product range portion control packs and Lucky Smart Snax Distribution major supermarkets and export markets including the Middle East, Indonesia, Papua New Guinea and China Select Harvests Limited ABN 87 000 721 380 PO Box 5 Thomastown VIC 3074 360 Settlement Road Thomastown VIC 3074 T (03) 9474 3544 F (03) 9474 3588 E info@selectharvests.com.au ASX ticker code: SHV Company Websites www.luckynuts.com.au www.sunsol.com.au www.nuvitality.com.au Company Instagram Sites www.instagram.com/select_harvests/ www.instagram.com/lucky.nuts/ www.instagram.com/sunsol_muesli/ www.instagram.com/nuvitalityau/ Select Harvests Limited www.selectharvests.com.au

Continue reading text version or see original annual report in PDF format above