OPERATIONAL REPORT

OVERVIEW

2021 was a challenging year, with the COVID pandemic continuing to impact trading. Poor weather conditions in India and lower production in Kenya resulted in lower bought leaf volumes which contributed to Group tea production being slightly lower than in 2020. Avocado revenues significantly reduced due to lower volumes and prices. These falls were in part offset by revenues generated by Bardsley England, which was acquired during the year but which saw volumes impacted by the late frost earlier in the season. Revenue for 2020 included the results for Horizon Farm, which was sold during that year. Profits were impacted by these important strategic changes to the Agriculture portfolio.

Strategic matters

As previously announced, the Group continues to focus on its strategy to expand the Agriculture division continuing the further diversification of crop and location, and on disposing of non-core assets.
Acquisitions and divestments
At the end of July 2021 the Group acquired an 80% controlling stake in Bardsley England with the remaining 20% stake purchased in November. The Group’s expertise in managing large scale bearer crops and its existing relationships with Bardsley England’s customer base and other major UK retailers will provide synergies. The acquisition provides a larger Group footprint in the UK, which will in time reduce our effective corporation tax rate. The market for UK apples has good potential to grow significantly due to increasing demand for local produce and a resulting reduction in apple imports.
In line with the Group’s strategy to focus on agriculture, the Group sold its interests in Abbey Metal Finishing Company Limited in August 2021 and its subsidiary Atfin GmbH in Germany in July 2021. In late December 2021, the BMT division of AJT Engineering was sold to its management. Part of the Camellia Collection was sold at auction in the early part of 2022 with further items due to be sold later in the year.

Ukraine

We have all been deeply disturbed by the reports coming out of Ukraine, and I am pleased to say that our Bardsley England operation in Kent has successfully accommodated a number of refugees and provided employment.

The war is impacting the Group in a number of ways of which the following are the most significant at this stage:

• The price of energy has risen significantly since before the start of the war and continues to rise. This is impacting directly on fuel and heating costs, and indirectly on the costs of other inputs, such as fertiliser, which rely on natural gas as a raw material.
• Shipping routes and supply chains which were already chaotic following the pandemic have been thrown into further disarray with both shipping times and costs rising dramatically.
• For the last few years Russia has been the world’s third largest importer of tea. Whilst there does not appear to have been any impact on tea prices at this stage it remains early in the season for India and the impact that sanctions will have on the market remains uncertain.

COVID
Whilst our businesses were able to keep trading throughout the pandemic, they were all affected to some extent, whether through lockdowns and absences interrupting operations, or market disruption. The Group’s operations continued to protect employees and communities, whilst taking account of a wide variation in national and cultural responses to the pandemic. All our operations have continued to work closely with local governments, communities and the Group’s clients in their response to the COVID pandemic.

Human Rights
As a consequence of the allegations faced by the Group in 2020/21 which have now been finalised, we have further enhanced our Human Rights commitment including greater governance, reporting and training and we have established significant measures around employee and community welfare. Current information on these measures can be found on the Camellia Plc website.

Brexit

Extensive preparations were undertaken ahead of Brexit to mitigate the impact on our UK businesses in 2021 and although the supply to the EU of our Jing branded tea was affected, we did not experience any material effect on our trading operations as a whole.

PERFORMANCE

Agriculture

In total, Agriculture made a trading profit of £13.2 million (2020: £nil) on revenue of £238.8 million (2020: £249.6 million), as set out in note 1 to the Accounts. The release of provisions for wage agreements offset by the restructuring costs for Bardsley England amounted to a net gain of £0.1 million (2020: £nil). Our 2020 results were also impacted by a number of one off items, the largest of which were costs of £16.1 million in respect of legal and other costs associated with the allegations arising from the actions of certain of our African operations.
Agriculture’s adjusted trading profit* was £13.1 million (2020: £16.1 million).

Tea

Estate production & manufacturing
Group tea production in 2021 was 99.1mkg, marginally down on 2020 levels (2020: 99.5mkg) due to lower bought leaf volumes in India. However, we achieved record production in Bangladesh where the impact of our investment in irrigation and replanting provided positive returns. Kenya and Malawi experienced high crops, both nationally and at the Group’s operations.

Pricing and operations

Tea pricing for most operations was above that of last year, with our estates being rewarded for concentrating their efforts on the production of high quality teas. Total sales volumes were lower.
Shipping logistics have been a challenge throughout the year with many delivery delays experienced by customers. With volatile trading conditions persisting into 2022, shipping logistics will take some considerable time to settle, particularly with the recent flooding impact at Durban Port in South Africa in April 2022.

India
Our estate crop for 2021 was on par with last year. The impact of continued poor and varied weather meant that our crop did not recover to 2019 levels.
Our net selling prices firmed significantly for both Dooars and Assam CTC teas from demand in the internal packet tea market, up over 10% against the prior year. Darjeeling prices were up on prior year by 11%, due to good quality and improved first flush volumes. 2022 has seen the last of the limited tea stocks left over from 2021 sold and the first auction of the new season opened in March 2022 with strong pricing. The market has remained firm for the early part of the new season and going forward pricing will be determined by regional production volumes and demand.
The Assam Orthodox (rolled leaf tea) market, however, was down 3% on prior year as it continued to be impacted by ongoing political and economic volatility in Iran which subdued demand and kept prices relatively flat.
North India market pricing overall has remained strong due to limited supply and is supported by 100% import tariffs. North India export volumes were down c.9%, with prices in the export market remaining under pressure with reduced sales of Orthodox tea.
State elections were held in Assam and West Bengal in March 2021, with no change to the incumbent Governments in each State. Wage negotiations were concluded in both States resulting in 22% and 15% increases in Assam and West Bengal respectively.
Investment in replanting continued with 167Ha of planting completed (2020: 164Ha) and a further 120Ha uprooted in preparation for future planting.

Bangladesh

Despite a slow, dry start to the season, Bangladesh reported a record crop up 15% on the prior year. The impact of several years of investment in replanting and irrigation contributed to our improved yields.
Our average net selling price remained strong through the season, up 20% on prior year, with limited COVID restrictions allowing local demand to flourish whilst being supported by very low volumes of imports.
National production achieved record levels at 12% up on prior year, principally as a result of a 40% increase in bought leaf volumes. The continued rapid escalation of the bought leaf sector volumes, if left unchecked, presents challenges to the market with a risk that potential oversupply results in downward pressure on pricing.
2022 has seen prices remain under pressure for prior season teas due to the high volumes of inventory carried forward. The market for new season teas has started firm and is expected to remain relatively stable as stocks are now depleted and the new season production has yet to gain momentum. Pricing thereafter will be driven by the level of production over the summer months.
Wage negotiations for 2021/2022 are ongoing between the Bangladesh Tea Association and the Trade Unions and are due to be settled imminently. Provisions have been made for expected increases relating to 2021.
Having reduced replanting in 2020 to concentrate on infilling young tea areas, the total area planted in 2021 was increased to 143Ha (2020: 105Ha), of which 131Ha was replanting and 12Ha was newly planted areas.

Kenya

Our Kenyan estates produced their second highest ever crop in 2021, albeit down 8% on the previous year. The national crop was also the second highest on record.
As a part of many ongoing initiatives to address structural issues within the tea industry in Kenya, the Government in July implemented a reserve pricing mechanism for The Kenya Tea Development Agency (“KTDA”) teas which make up over c.66% of the national production. This intervention has had a positive impact on prices for higher quality teas within the Kenyan market, including those produced by the Group. The “all average price” at Mombasa auction was 3% up on 2020, driven principally by improved quality teas. Export levels were c.9% up on 2020 with strong demand from Pakistan, Egypt, Russia, UAE and Sudan. Low retail pricing and increased competition from other beverages in western markets continues to be a challenge for the industry.
Our average selling price in 2021 was up on prior year by 6%. We have continued to outperform our commercial grower competitors in the district with a price differential of 16%, by concentrating on quality. In 2022 our prices continued to firm initially but then weakened towards the end of the first quarter with predictions of a normal long rains season. In aggregate, our average selling prices in the five months to the end of May 2022 were significantly higher than the same period of 2021 though the benefit of this has been partially offset by lower production volumes. Pricing levels looking forward will depend on production volumes and the impact of the reserve pricing policy for KTDA teas.
Wage rates increased by 7% for 2020 and 2021 and negotiations are ongoing for 2022 and 2023.
We replanted a total of 50Ha (2020: 47Ha) whilst uprooting 52Ha for replanting in 2022.

Malawi

Our Malawi crop in 2021 was the second highest on record, up 15% on 2020, with strong cropping throughout the year and good out of season rains at the mid-year point.
Fertiliser prices in 2021 increased by 45%. The impact of this on the cost of production was mitigated by careful management of usage.
Malawi prices remained under pressure for much of the year with teas from the plainer West of Rift Kenyan’s still proving a value substitute to buyers. Our average selling price was 3% down on 2020 due to the lag effect of prices responding to an improving Kenyan market. The auction was temporarily suspended in the early part of 2021 due to the previously reported lack of clarity around interpretation of VAT rules on local sales for export.
Global logistics issues, including a lack of containers and delayed shipping times, has resulted in deliveries taking much longer to reach customers.
While selling prices in 2022 in Malawi have firmed, they are below those of the same period of 2021. The market is expected to be volatile for a period due to uncertainty relating to logistics and will also be influenced by the general direction of the Kenya market. Our production volumes in Malawi for the year so far are in line with that of last year.
A minimum wage was implemented for the tea industry in Malawi in January 2021. Negotiations are ongoing with the union, with further increases expected from August 2022.
On 26 May 2022, the Reserve Bank of Malawi announced that it will stop supporting the currency and allow the exchange rate to reflect market fundamentals. This is expected to result in a devaluation of the Kwacha of c.25%.
There was no replanting in Malawi for a second successive year, a decision taken to conserve resources in light of difficult trading conditions.

Instant tea, branded tea & tea rooms

India
Sales volumes of our packet tea in India fell by 14%, whilst net prices increased by 11%. Despite increasing demand for tea, packet sales have come under pressure due to fierce competition in the branded market. However, the packet tea operation has continued to innovate with new product development and the release of new product lines in Ready to Drink, fortified (health) teas and premium tea bags.
Instant tea production in 2021 was up marginally on the previous year. Sales volumes and average prices however were both down 10% due to lower demand from a key customer, leading to a lower contribution from the operation.
Due to COVID lockdowns, our tea lounges and kiosks were closed periodically during 2021. These outlets continue to be developed as part of the India marketing and value addition strategy.

UK
Trading improved for Jing Tea as COVID restrictions were eased in many of its markets, but revenue remained below pre-pandemic levels. Supplies into the EU have also been impacted by Brexit with the business contracting for EU warehousing space during the year to alleviate import complexities. Jing launched its Ready to Drink Jasmine Pearls Sparkling Tea in 2021, which has gained initial positive traction in the market.

Nuts & Fruit

*See note 1 to the Accounts

Macadamia

Avocado 

Our own Avocado production was down 22% on last year, due in large part to the biannual nature of the production and this also impacted the volumes packed for smallholders and outgrowers. Our pricing was down 9% on last year, due to high volumes in the market from Peru and Colombia during a critical sales window. Unfortunately, due to the lower volumes the season could not be extended to take advantage of improved pricing at the end of Q3.
The Pinkerton harvest is well advanced with volumes ahead of 2021, however we expect prices to be lower. The Hass season has now started with volumes expected to be significantly ahead of 2021 reflecting the fact that it is an ‘on year’ for Hass.
We continue to strengthen our avocado growth strategy by diversifying our origin portfolio, with further plantings in Tanzania and Kenya. We planted 37Ha (2020: 13Ha) at our new farm in Tanzania and a further 44Ha (2020: 85Ha) in Kenya. In 2022 to date 96Ha have been planted in Tanzania. At Beja farm in South Africa 80Ha has been prepared to be planted in 2022, of which 38Ha has already been planted.

Other fruits

Apples & Pears
Bardsley England was acquired at the end of July and we have taken significant steps to improve costs and profitability including closing one of its two packhouses and streamlining its administrative operations. The benefit of these will be seen in 2022. The orchards were severely affected in April 2021 by frost resulting in a lower than expected level of apple production. Partner grower crops were also similarly adversely affected.
The last of the 2021 season stock is being sold at prices in line with our expectations. It is too early to predict the crop profile for 2022.

Grapes
Grape production at our South African operation was up 8% on 2020. The grapes were high quality and were sold to local commercial-scale winemakers. The 2022 harvest in South Africa has resulted in a record production, well ahead of expectation.

Blueberries
2021 was the second year of full production of our 10Ha trial in Kenya, with production rising steadily, although it is still below where we would like it to be. The majority of the crop was sold locally at good prices.
Indications from the trial are that the variety planted does not perform optimally in Kenyan conditions and that other varieties will have to be considered. There are already other varieties being trialled in small areas and at least one of these is showing much greater potential than the current dominant variety planted. The reason for establishing a trial was to test plant establishment, agronomy practices and varieties and this is being achieved very successfully, particularly on the initial two objectives. The results indicate further work is required on optimal variety selection, which will continue to be the focus going forward.

Other agriculture

2021: Revenue – £11.4 million (2020: £10.2 million), trading profit £4.8 million (2020: £2.2 million)

Arable
Despite some challenging weather, we were overall very pleased with our soya, maize and sorghum crop production results. Prices for our soya crop were 60% higher than the prior year and our sorghum prices more than doubled, reflecting global markets. This led to substantially increased profits for our operation in Brazil.

Rubber
Production was up 5%, with pricing up 39% on last year, due to increased demand from manufacturing sectors and also an increased price for petroleum-based synthetic rubber products. However, prices remain lower than the cost of production.

Forestry
Kakuzi’s forestry volumes were on par with last year with the main focus on fence post sales. The production of quality timber products are also being investigated as a potential diversified and value-added product line.
Our Brazil operations had no eucalyptus timber sales during the year but expects to restart these in 2022. Pine timber sales were more than double the previous year and resin sales continued throughout the year, both providing a useful contribution to profits.

Livestock
Births were down significantly on last year, however, revenues were up on last year as COVID restrictions were eased.
Goat production was introduced at Kakuzi during the year. It is anticipated that the herd will provide a diversified source of revenue to complement beef sales.

In terms of the Group’s London property portfolio, the decision was made during the year to close the Group’s offices at 1 Hobart Place. A residential property in central London was sold in February 2022. Both these properties were categorised as “held for sale” at 31 December 2021.

Collections
Part of the art and manuscript collection with a net book value of £2.7 million was classified as held for sale on the Group’s balance sheet at the end of 2021, and is scheduled for sale during 2022. To date, a portion of this has been sold realising proceeds of £3.0 million and generating a gain on sale of £1.0 million which will be reflected in our 2022 results.

Tom Franks
Chief Executive

30 May 2022