CHIEF EXECUTIVE’S REPORT

OVERVIEW

2018 saw the continuing development of Camellia whilst staying true to our roots of building a long-term sustainable business. We were fortunate in that we experienced broadly benign weather conditions across most of our agricultural operations, and it is pleasing to be able to demonstrate that our continued investment in agriculture is delivering financial returns. One-off weather events resulting from climate change remain a risk and therefore it continues to be a priority to invest in climate mitigators such as dams and irrigation and to increase the diversification of our production geographies.

Overall, I believe that whilst international trade may become more difficult in the short-term, demand for our agricultural produce from an increasingly affluent, urbanising, health conscious consumer will continue to rise. The potential addition of blueberries to our speciality crop portfolio (as described below) reflects our strategy to benefit from these trends.

Whilst the weather has played a key role in the exceptional tea crop, the investments that we have been making in our estates and our factories have enabled us to capitalise on that crop. Likewise, after consecutive drought years, macadamia volumes were up by 45%, but we have the infrastructure in place to handle these volumes. 2018 also saw a change in the market for tea, whereby almost all the UK major tea brands are now disclosing the names of the estates from which they buy. This is a welcome
development and I am pleased to confirm that our estates are on those lists.

During the year we continued to build on our strengths by investing and diversifying our agricultural base both by geography and crop. In the other divisions we are investing in areas where we can add value to our products and divesting where we do not believe that the business is core to our future.

Acquisitions and Investments

• During the year we signed contracts to purchase two farms in Tanzania for development into avocado and macadamia orchards. This will be the Group’s first investment into Tanzania and reflects our desire to expand our core crop production volumes and diversify our geographic footprint. Development of these farms, which are currently green field sites with approximately 1,200Ha of development potential, will take some years.
• After the year-end, we purchased two tea estates in Assam; Bargang and Harchurah. These are both well-known and respected marks and will help to balance our portfolio of teas from India.
  
  
• We are investing in two important trials. We planted 23Ha of avocado near Kitale in Kenya which, if successful, could lead to a development of 600Ha. We have also planted a trial of 10Ha of blueberries at Kakuzi in Kenya. This is the first time we have trialled blueberries and, if successful, we have the opportunity to expand the trial substantially.
  
  
• Outside of the Agriculture division we made two acquisitions. We purchased a majority stake in Jing Tea and the whole of Black Gold Oil Tools. Jing Tea is a UK based branded speciality tea business which will help us to distribute our high-end teas more profitably and bring us closer to our consumers. Black Gold Oil Tools is an oilfield services company based in Aberdeen which brings an additional line of business to A JT Engineering.

The projects highlighted above, particularly in the Agriculture division where we already have significant development commitments, will require substantial further investment. I am therefore pleased that our balance sheet remains strong and that we have the resources available to complete these projects.

Divestments

During the year we completed the sales of GU Cutting and Grinding, BMT (Great Yarmouth) and XiMo, all of which were referenced in the annual report and accounts for 2017.

We also disposed of our interests in Affish and Wylax, the Dutch fish trading businesses which no longer fitted with our strategy.

Financial Performance

The underlying profit before tax from continuing operations (i.e. before taking account of the two provision releases described below) amounts to £38.1 million, up 38% on the comparable result for 2017. Whilst we will not always be fortunate enough to experience the benign weather that we had in 2018, it clearly demonstrates that as we grow and diversify our agricultural operations and focus our non-agricultural businesses, we are able to enhance our profitability and therefore our dividend.

We also recorded the following significant provision releases:

• A one-off gain of £9.0 million arising from the release of post-employment benefit provisions which are no longer required. This reflects a change to the labour laws in Bangladesh. We continue to provide for and pay pensions and gratuities in Bangladesh in accordance with local requirements.
  
  
• Progress on wage negotiations for prior years across our agricultural operations has resulted in a
  £5.4 million gain arising from the release of provisions no longer required.

BUSINESS STRATEGY

The overall Group strategy, which is set out on page 19, remains unchanged with each division expected to perform against an agreed divisional strategy with goals and targets for the short, medium and long-term. These are summarised below.

Agriculture

Core crops. To focus on our core crops of tea, macadamia and avocado where we have scale and geographic diversity. Where appropriate opportunities arise, to add to our production capability in these three crops, as well as to make aligned acquisitions and investments to enable us to capture more of the value chain.

Speciality crops. To maintain our portfolio of speciality crops in order to retain the diversity of location and crop which has historically proven so valuable in diversifying the Group’s political and commodity price risk.

Engineering

AJT Engineering. To take advantage of the recovering oil sector whilst diversifying into adjacent sectors in order to create a sustainably profitable engineering business focused on the energy sector.

Abbey Metal Finishing and Atfin. To continue to grow both businesses as quality suppliers to the aerospace industry.

Food Service

ACS&T. To continue to operate as a niche high quality business in the storage and distribution of frozen foods, aiming to achieve critical mass by profitable growth and if appropriate, acquisition.

Jing Tea. To grow the existing respected small brand into a larger, more profitable distributor and retailer of speciality teas internationally.

Investments

Investment Portfolio. The Group has a portfolio, principally of listed investments, the strategy for which remains to invest in high quality companies where we believe that there is long-term value. This portfolio also enables us to balance our geographic risk exposure.

Investment Property. The strategy is to continue to invest in quality assets where an appropriate yield may be realised. The process of developing some of our existing properties to enhance yield will continue.

Collections. The Group has collections of art, philately and manuscripts which are regularly reviewed and are added to or sold as appropriate.

Associates

The Group has three associate companies in the financial services sector of which BF&M, the listed Bermudian insurance business is the most significant. With all our associates, we continually monitor our investment and may increase or decrease our holding in the future.

PERFORMANCE

Agriculture

Tea Production

2018 saw the Group’s highest ever production levels through our own and managed factories. Total made tea produced was 103mkg (2017: 95mkg) which was a record for the Group.

*Estate volumes only, in addition 24.2mkg of Bought Leaf tea was produced (2017: 19.3mkg) and a further 4.5mkg was produced for managed clients (2017: 4.0mkg)

Tea pricing and operations

India

Overall, India produced record volumes of tea in 2018 as a result of higher Bought Leaf volumes purchased by Jogopur factory which was expanded last year. Our own estate production was up 3% on 5 year average volumes and Bought Leaf volumes were at record levels, up 48% on 2017 at 8.4mkg.

Average tea prices were generally up on last year across all regions and our average selling price was 7% up on the prior year. However, this increase was not sufficient to offset multiple mid-year interim wage increases totalling 33% in West Bengal and 22% in Assam.

It is encouraging that the Darjeeling region has recovered well from the extended strike in 2017 with good quality teas and strong prices being achieved throughout the year. As part of our investment in Darjeeling and our commitment to reducing our carbon footprint, two factories have been converted from coal to Liquid Natural Gas as a heat source for drying and a hydro-electric generation system has been commissioned at Castleton.

The packet tea operation saw consolidation of the Tea City acquisition made in 2017, a brand development strategy being rolled out and our sales footprint expanded. Sales volumes grew 14% during 2018 to 10.4mkg.

The replanting programme continued with 227Ha completed and a further 205Ha uprooted for replanting at a later date.

Bangladesh

The Bangladesh tea crop was down on 2017 by 6% at 12.8mkg, as a result of a generally drier year.

The market however was very strong with exceptional prices being attained from August through to November. Our average prices were up 38% on the prior year.

Operationally, good progress has been made on the replanting and infilling programme with two ‘supernurseries’ being established, one of which is the largest in Bangladesh. The replanting and extension programme continued with 161Ha being completed in the year and an additional two million plants were used for infilling.

In order to process the anticipated increase in crop, Luskerpore factory was upgraded in the year.

Kenya

Tea production (including smallholders and managed clients) was up on 2017 by 10% and was our second highest production year ever. This trend however was reflected across Kenya resulting in record national production and as a result prices have been under pressure. Auction volumes at Mombasa in the year were at a record high of 458mkg, easily surpassing 2016’s record of 408mkg. Our auction prices peaked in February but have declined since then and from November have been below our cost of production. Our average selling price for the year was 6% below that of 2017.

Disappointingly, whilst there has been some progress, the 2014/15, 2016/17 and 2018/19 Collective Bargaining Agreements have still not been agreed although discussions with the union are ongoing. As ever, these delays cause uncertainty for us and frustration for the workforce.

As reported last year, we continue to invest in field and factory technology and our new mechanical harvester is now being field trialled. Successful trials have also been conducted on a continuous withering system leading to plans for further investment in this technology. We also installed a new fluid bed drier in Kepchomo factory which has proved successful in reducing energy requirements whilst improving tea quality.

We replanted a total of 41Ha in 2018 (2017:16Ha) and uprooted a further 49Ha for replanting in 2019. The replanting program has been mechanised significantly to improve productivity.

Malawi

As a result of ideal weather conditions with excellent rainfall and the return of the winter ‘chiperoni’, Malawi produced a consecutive record crop (including smallholders) for the year of 22mkg, up 13% on 2017. Encouragingly, our average prices were up 3% on 2017 and the market showed strong demand for Malawi teas in 2018 despite the oversupply of tea at the Mombasa auction.

Developments included expanding the withering at Ruo factory and replanting a total of 106Ha in 2018 (2017: 99Ha).

Eastern Produce Malawi now produces about 42% of Malawi’s total tea production and is therefore a key stakeholder in the MOU 2020 process (a coalition of producers, buyers and NGOs seeking to revitalise the industry and working towards a sustainable wage rate for employees). Wage negotiations and a collective bargaining agreement were successfully concluded during 2018, awarding 22% wage increases during the year. During 2018 we saw continued progress on women’s empowerment programs, farmer field schools, and the introduction of improved nutrition provision in the daily meal. These developments are positive for us, the industry in Malawi and the workforce and their communities. The tea industry in Malawi is however critically dependent on the continued support of the international tea buyers at the Malawi auction if it is to continue these developments.

Macadamia Production

Macadamia production in 2018 increased substantially as weather conditions improved. With the trees still recovering from two dry years, yields remain below optimal levels but we are optimistic as to their eventual recovery with favorable weather conditions.

Macadamia Pricing

Despite the increased volumes from Africa, Macadamia prices in the year remained firm and for certain grades increased by as much as 23%. Our average selling price for the year was 18% ahead of 2017.

Macadamia Operations

Malawi

Volumes were 43% up on 2017, a significant improvement although still 19% below our best year in 2014. Early indications for 2019 volumes are that they will be broadly in line with those of 2018.

South Africa

Production volumes were 57% up on 2017. Developments included completion of the third phase of the Zetmac cracking facility renovation and upgrade, and continuing work on the Mambedi dam. In 2018, 80Ha were planted on Mambedi estate.

Regrettably with regard to the Wales estate, which amounts to 191Ha of mature macadamia, we have made no progress towards renewing the lease for the property. Dialogue continues with the claimant community, however it is now likely that the 2019 harvest will be the last from this estate.

Kenya

Production volumes were 29% up on 2017 as a result of improved weather and maturing orchards. Developments included 6Ha of new planting.

Avocado Production

*Estate volumes only. In addition, 5mkg of smallholder fruit was received (2017: 0.9mkg)

Avocado Pricing and Operations

2018 was a very good year for avocado production with a record 2.8 million exported cartons. Our own estate Hass avocado production was 2.1 million cartons and there was also a record volume of smallholder Hass exported at over 0.5 million cartons, with other varieties making up the remainder.

However, Kenya was not the only country to see very large volumes of fruit. From May, unprecedented volumes of avocados arrived in Europe from Peru and South Africa, and as a result the prices in the European market came under severe pressure. Over the year our average estate Hass prices were down about 40% on 2017 with a consequential impact on profitability.

During the year we planted an additional 25Ha of Hass avocados and 73Ha of Pinkerton avocados which brings the total planted area to 718Ha. In addition, the planting of a 23Ha trial of avocados near Kitale in Kenya was completed and, so far, the trees are doing well. If this trial proves successful there is a total of 600Ha which may be planted.

Speciality Crops Production

*2017 was an ‘off’ year for Pistachios
** Pineapple production was phased out during 2018
*** Volumes quoted are for conversion to value addition products rather than fuel wood for our own use

Speciality Crops, Pricing and Operations

Arable

Soya volumes were down about 3% on the record levels of 2017 but Maruque farm in Brazil managed to produce the highest yields in the district. Soya prices were slightly down on last year. Maize was planted on a larger area this year and as a result, volumes were up by 25%. Average prices were up by 26%.

Rubber

Rubber is grown on areas of the tea estates unsuited for growing tea. Production in 2018 was slightly ahead of 2017 but prices remain below the cost of production.

Citrus

Following last year’s exceptional crop, volumes of Murcotts were significantly down this year but this was offset in part by an excellent Navel orange crop which also fetched good prices.

Pistachio

2018 was an ‘on’ year for Pistachios and volumes and prices were in line with expectations.

Wine

2018 started disappointingly as the severe drought in the Cape region of South Africa reduced bulk wine production by 39%. However, a new marketing strategy and the appointment of a new international agent saw sales rise by 25%. During the year 8Ha of vines were replanted bringing the total planted area to 73Ha.

Almonds

The almond crop was a little behind expectations following a heavy frost in the middle of flowering in 2018.

Forestry

Production of eucalyptus in Brazil reduced substantially, as did prices, reflecting muted demand during the year and a one-off large contract delivered during 2017.

Livestock

Livestock sales remained in line with that of the prior year with prices increasing marginally.

Blueberries

In a new crop for us, we have established a 10Ha blueberry trial at Kakuzi in Kenya. These plants are grown in pots in polytunnels and therefore require extensive infrastructure, however this means that they can be grown on otherwise unproductive areas of the farm. Following completion of the infrastructure, planting commenced in January 2019. If successful, there are substantial additional areas of Kakuzi which could be developed.

In total, the Agriculture division made a segment trading profit of £51.0 million (2017: £35.6 million) on revenue of £245.3 million (2017: £239.4 million), as set out in note 1 to the Accounts.

Engineering

AJT Engineering had a slower than anticipated start to 2018 but improved as the year progressed. Revenue for the year rose by 82% to £13.3 million. During the year A JT Engineering acquired a small company, Black Gold Oil Tools, which provides an additional aligned revenue stream as well as an adjacent site which will allow the separation of machining and fabrication activities.

Abbey Metal Finishing had slightly increased revenue in the year but with a reduced margin. Atfin’s revenues increased 6% in the year and margins improved reflecting economies of scale.

BMT (Great Yarmouth), GU Cutting and Grinding and XiMo were sold during the year.

In total, the Engineering division made a segment trading loss of £0.6 million (2017: trading loss £2.6 million) on revenue of £22.2 million (2017: £20.5 million), as set out in note 1 to the Accounts.

Food Service

With its estate of cold stores effectively at maximum capacity, additional transport contracts saw ACS&T revenues increase 7% on 2017. However, there was a minor reduction in profitability as a result of changes to the business mix and provisions for dilapidations.

Jing Tea traded in line with expectations and made a small loss for the year as it invested in line with its expansion strategy.

The remaining food service businesses were disposed of during the year.

In total the Food Service division made a segment trading profit of £1.6 million (2017: £1.8 million) on revenue of £41.5 million (2017: £37.8 million), as set out in note 1 to the Accounts.

Investments

Investment Portfolio. The gains on sale for the year were £0.4 million (2017: £0.7 million). Due to the implementation of IFRS 9, £0.3 million of this gain was reflected in the Income Statement and £0.1 million in the Statement of Comprehensive Income. The total value of the portfolio at 31 December 2018 was £39.6 million (2017: £47.0 million). The reduction reflects a number of disposals in the year and the weakening in the equity markets in the second half of 2018.

Investment Property. We continue to work on our estate of investment property in order to maximise the value and the yield. Two properties on the Linton Park Estate were converted to residential, whilst another property was acquired and is now being refurbished ready for rental.

Collections. The collections are held at cost. A number of minor additions and disposals were made during the year.

Associates

BF&M experienced an improvement in its trading performance mainly as a result of a fall in claims payable in the year, 2017 having been impacted by two category 5 hurricanes in the Caribbean. As a result, BF&M’s profit before tax was Bermudian Dollar 18.7 million (2017: Bermudian Dollar 1.9 million).

Our two associate companies in Bangladesh, United Insurance and United Finance, produced satisfactory results, broadly in line with expectations.

In total, our share of the results of associates amounted to £7.6 million (2017: £2.0 million).

POLITICAL, LEGISLATIVE AND LEGAL ISSUES

The Group is present in many jurisdictions and is subject to local legislation. We previously disclosed that at the start of 2016 the Government of Malawi put forward new legislation which proposed, inter alia, the conversion of all freehold property into 50 year leaseholds. The final legislation has now been published and I am pleased to say carries no such provisions.

In 2018, the Kenyan National Land Commission was asked by a small number of claimant groups to investigate historical land injustice claims concerning lands registered in the name of Kakuzi and Eastern Produce Kenya. The land claims have been refuted through the Kenyan legal system. A constitutional petition has been filed and also a request to stay the proceedings of the National Land Commission until the legal position has been determined. We continue to keep the situation under review.

Brexit

Brexit and the potential impact across the Group is something for which we have been preparing over the last two years. The significant uncertainty as to the precise structure and timing of any eventual Brexit continues to pose challenges for these preparations.

Whilst we expect there to be some impact on our UK operations, we are confident that the majority of our operations will be largely unaffected. The direct impact of a no-deal Brexit on our Group primarily arises from potential import and export tariffs, changes to the way trade flows between the UK and rest of the world and, from a financial perspective, the volatility of exchange rates.

Apart from our operations in Malawi and Kenya, none of our Agriculture businesses sell directly into the UK. In Malawi and Kenya, we sell a relatively small proportion of our produce into the UK. Current UK Government guidance suggests that no tariffs will be imposed on UK black tea imports, while imports of macadamia are expected to incur tariffs at 2% and avocados at 4%. Undoubtedly these additional costs will be shared by the participants in the supply chain, if they arise. Our Agriculture operations are not reliant on the UK for supplies of materials or equipment.

Our UK based operations are likely to see higher costs from import duties. However, in the short term the issue is likely to be disruption to the supply of raw materials, chemicals and parts. As a contingency, all the UK operations have increased their stock holding to provide a buffer. Export activity is limited, except at Abbey Metal Finishing where a material proportion of sales are to the EU. A no-deal Brexit could result in delays to sales and an increase in working capital requirements if there is disruption at the ports, and margin pressure as a result of import duties incurred by customers. Jing imports tea from Asia and its green tea imports to the UK may be subject to tariffs at 3%, however this is not currently a material element of that business.

Our investment portfolio has minimal direct exposure to UK markets. However its value may be impacted by the effect of volatility in exchange rates and in financial markets more widely. In addition, there is a potential risk that we could incur additional tax costs e.g. if we are unable to recover VAT on purchases from the EU or if there are changes to withholding tax rates on dividends received from any of our overseas subsidiaries.

CAPITAL INVESTMENT AND DEVELOPMENT

We continued to invest in our assets during the year and £17.4 million was spent on property, plant, equipment and investment property (2017: £15.0 million). Key projects are referred to in the operational reports above. A further £4.3 million (2017: £6.0 million) was invested in bearer crop and forestry plantings.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE

Sustainability, whether it is environmental or social is fundamental to the ethos of Camellia. Many of our operations have histories going back over 100 years and we continue to invest in them for the long-term. Ensuring, therefore, that the environments and communities on which we depend are maintained and enhanced is key to our future.

This year, for the first time we will also be publishing on our website a separate Environmental, Social and Governance report. This report will allow us to add more detail as to the breadth and scale of activities that we undertake in this area and highlight our commitment to it. Further guidance on our approach to Governance, Sustainability and CSR is also set out in the Strategic Report on pages 19 to 24 of this document.

Performance

As part of our environmental impact assessment we measure total energy consumption, carbon
emissions, and water usage as set out below.

These numbers set out actual usage, prior years have not been adjusted to reflect acquisitions, disposals or other corporate activity.

One of the largest uses of energy in the Group is the requirement to process and dry our tea crop. The investments that we have been making to increase energy efficiency in our tea factories has enabled us to reduce our energy usage from 1.33kg to 1.25kg of CO2 per kg of made tea, a reduction of 6.4%. Furthermore, we increased our use of renewable energy by 57% over the year resulting in a further drop in total carbon emissions.

Total water usage was similar to 2017 reflecting the better weather conditions offset by the increased crop.

We continue to pursue initiatives to reduce our environmental impact including:

• Increasing efficiency by modernising and introducing energy efficient technology.
  
  
• Changing our types of fuel to those which are more sustainable or renewable.
  
  
• Adapting our agricultural practices to maximise the efficiency with which we use water, fertilisers and other resources.

As part of our investment in social sustainability, we continue our long-term plan of upgrading our housing to ensure that it complies with the latest SAN standards and work with the local communities, unions, NGOs and governments to improve the local infrastructure.

One area that I would like to highlight is the increasing number of partner projects with which we are involved. These are projects which we jointly undertake, primarily with our customers but frequently with the involvement of local government and NGOs. This co-operation allows us both to accelerate certain social initiatives on the estates and also to make sure that we have access to the best solutions available globally.