Global premium berry growth lifts Costa Group earnings

Global premium berry growth lifts Costa Group earnings

Arana blueberries in the field. Photo: Driscoll's

Australia's largest vertically integrated fresh produce company Costa Group (ASX: CGC) has reported a 16 per cent rise in underlying profit in 2021, buoyed by blueberry projects abroad with its proprietary varieties delivering price premiums in international markets. 

Costa's chief financial officer Wayne Johnston told an investor call this morning the majority of the $60 million in additional revenue for the year came from the international segment with more than a quarter of sales now generated by customers outside Australia.

Revenue grew almost by half in China as Costa's joint venture berry project with Driscoll's notched a 40 per cent uptick in volume, with the jumbo-sized Arana variety receiving a 30 per cent price premium in China, compared to a 20 per cent premium in Australia.

More Chinese blueberry growth looks likely as CEO Sean Hallahan noted planting was completed in October for a 50-hectare development in Baoshan, Yunnan, followed by the completion of the 100-hectare Baoshan Agripark project recently in mid-February.

"Over the past year total planted China hectares increased by 150 hectares to a total of 396 hectares," Hallahan said.

"Costa has consistently shown our ability to plan and execute our growth objectives on time and on budget in the Chinese market, creating an outstanding platform for future growth."

Costa's Moroccan joint venture African Blue has also performed strongly with 24.1 per cent revenue growth, but the company's revenue from that business accounted for 59 per cent of Costa Group's $177.7 million in international segment sales.

Expansion is happening in Morocco as well with a 14-hectare project in Massa south of Agadir due for completion by the end of this month, alongside plans for further land acquisition in the region with planned capital expenditure in North Africa of $34 million this year.

"In Morocco we are progressing our northern farms replanting with Costa VIP purpose-bred superior genetic blueberry varieties. This includes substituting soil for substrate plantings," Hallahan said.

"In Morocco production volumes were up 21 per cent year on year, supported by steady demand and pricing. There was also improved pricing in the key margin windows for the North and South farms."

The international segment also includes genetics licensing which was down 12.7 per cent in revenue, with Hallahan highlighting emerging regions were impacted by delayed crop timing in the US, although there was "solid progress with third party growers building out our European 52 week supply offering".

The company noted India, Namibia, Laos and New Zealand as potential emerging blueberry growing and licensing regions for the future, although Hallahan said Australian travel restrictions had hindered progress in prospective new overseas ventures.

"We've got some of the most highly regarded blueberry horticulturalists or agronomists in the world, and they've been stuck in Australia and plainly unable to travel," Hallahan said.

"We can't make any decisions about what we may or may not do in India until we get boots on the ground.

"Literally as of this week we've got a couple of people over in Morocco for the first time in in a couple of years, which is fantastic and then we'll very quickly start spreading out into other areas of the world that we're interested in."

Australia represents a tiny fraction of the global blueberry market but is in many ways a testing ground for some of the world's leading blueberry breeders, including Costa, OzBlu and Mountain Blue Farms, which have all been successful in developing attractive varieties from the 'southern highbush' family that require fewer or no chill hours, meaning they can be grown in warmer climates.

This has seen Australian blueberry genetics make a significant international impact in some of the fastest-growing regions, including Morocco and China but also Peru, Mexico, South Africa and other areas.

To date, Arana has been Costa's star variety but in today's announcement Hallahan hinted at what might be to come. 

"Our [domestic] berry category saw sales and earnings improve significantly over the prior year. Arana continued to deliver a plus-20 per cent price premium," Hallahan said.

"The first commercial planting of our purpose-bred tropical ‘Delight' blueberry variety in Far North Queensland (FNQ) was completed in late 2021, with the initial crop to be harvested in CY22.

While Arana continues to perform well, it tends to be a later season variety, so Costa is keen to deliver more premium varieties in periods of relative scarcity.

"So we've always looked particularly out of FNQ to try and close that early season timing, and what I’m talking there is primarily March, April, May - certainly April, May would be the sweet spot.

"The timing window particularly in the second commercial year - is firmly within that April-May period, and we’re certainly hoping that more of it will be in that period this year."

He added the expected volume this year of 200 tonnes for Delight was immaterial, but its emergence was "very material in terms of the future path for that whole berry segment".

"I think that over time you will see us progressively change that FNQ footprint towards varieties like Delight and of course Arana that will always be important," he said.

"What we'd like consumers to see is that there is normal, everyday blueberries, but then there is this premium segment which they’re obviously prepared to pay more for. We’re certainly hoping that’s where Delight will end up."

Potential rebound for avocados, table grapes

The Costa CEO also highlighted expectations for a rebound for 2022 in table grapes in Colignan following a weather event in the first half of 2021, as well as benefits of full-year contributions from the acquired 2PH citrus farms and a new 10-hectare tomato glasshouse.

"The business is committed to maximising these outcomes and builds on our ability to continue to manage any COVID-19 related challenges, including sourcing necessary labor to harvest crops, and maintaining consistency of supply to customers." Hallahan said.

"Our international segment undertakes the bulk of its harvest and sales activity over the first half of the year.  Early China season performance has been above the expectation in both yields and demand setting us up for good performance. In Morocco the harvest has been steadily building against a strong demand backdrop."

He said Costa had positive momentum for its domestic fresh produce portfolio in 2021, although this was overshadowed by a "disappointing avocado year" - a circumstance that may be turning around in 2022.

"Industry avocado production is forecast to be below CY21, while foodservice markets are returning strongly which should contribute to more favourable pricing outcomes."

Of Costa's 4.1 million marketed trays of avocados in 2021, 114,000 were exported to key markets such as Singapore, Hong Kong, Malaysia and Indonesia, while in the second half of the year the fruit was successfully exported from Western Australia to Japan.

Hallahan noted research on fruit fly protocols for the export of East Coast grown avocados to Japan has been completed, with the industry urging the Federal Government to conclude market access negotiations with the East Asian country.

In the meantime, the group is busy exploring new production methods to improve yields per hectare. 

"Our commercialisation programs to plant 40 hectares of protected trellised high density substrate avocado trees is also 75 per cent complete, and on track to harvest a first crop from CY23-24."

The executive emphasised the importance of sustainable farming to the business, including being "at the forefront of agricultural innovation, having the agility to manage and mitigate risks associated with climate change, embracing opportunities to improve our productivity and efficiency, reducing all forms of waste in our supply chain and deploying leading agronomic knowledge through our skilled and passionate workforce".

On a statutory basis the company's net profit for the year was down by around $13 million, but the CFO explained this was mostly due to asset valuations of biological assets from the 2PH acquisition, clarifying the company was "required for statutory purposes only to recognise the acquired fruit produce at market value regardless of whether it had been harvested or not".

On an underlying basis, NPAT was up 16.2 per cent at $64 million, and revenue surpassed $1.2 billion.

Investors responded positively to today's news with CGC shares up 8 per cent at the time of writing at $3.24 each, although this is still well below their sharp drop in May last year after Hallahan revealed challenging labour and price pressure issues.

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