OPERATIONAL REPORT

OVERVIEW

2020 was a difficult year as a combination of the pandemic, litigation against the Group arising from allegations against our East African operations, poor tea prices and a possible no deal Brexit all had the potential to impact trading. Despite this, sales in our agriculture division grew and underlying profits saw only a marginal decline. We also continued to implement our strategy of investing for long term growth and refining our portfolio of businesses.

Covid

Whilst all our businesses were able to keep trading throughout the pandemic, they were all hit to some extent, whether through lockdowns preventing operations, or markets closing. However, I am proud of the efforts that have been made by all of our employees to ensure continuity of operations no matter how tough the challenges. Whilst there is optimism that the impact of the vaccine will start to return things to normal, there remains no doubt that 2021 will also be challenging for some operations.

Litigation Concerning our East African Operations

In January 2020, the Company announced that it and certain UK subsidiary companies faced legal claims in the UK based on allegations against two businesses in its African operations, namely Kakuzi in Kenya and EPM in Malawi. These claims have now been resolved (without any admission of liability) through settlements of up to £4.6 million in relation to the Kenyan claims and £2.3 million in relation to the Malawian claims. These are in addition to £9.2 million of legal and other costs associated with the defence of these allegations which are also reflected in the 2020 results. We have also put in place significant progressive measures around employee and community welfare, details of which are set out in the Environmental and Social report below. Such measures include, for example, building social centres, establishing a specialist female leadership programme and appointing female safety marshalls. Up to date information on progress on these measures can be found on the Camellia Group website.

The serious human rights claims the Group faced relating to its operations in Kenya led to a number of European supermarket chains suspending Kakuzi as a supplier of avocados. We are proactively working to address these customer concerns, including with the assistance of leading human rights advisers and are pleased that a number of our customers intend to resume trade in the new season. Eastern Produce Malawi has established and Kakuzi is establishing an Operational-level Grievance Mechanism (OGM), as defined by the UN Guiding Principles and by Human Rights specialists. Consequently, the claimants’ UK law firm has agreed it will not bring or support any other claims relating to or in connection with the Camellia Group's operations in Kenya or Malawi for a substantial period of time. This reflects their confidence in the development of the Group’s OGMs.

Tea prices
The pandemic has interrupted both the supply and demand for tea in different ways in different countries. However, the world remains over-supplied with tea which, combined with a desire across the industry to raise wages and living standards could lead to a long-term decline in the profitability of tea growing. We are pleased to see the major producing countries begin to take steps to help address this imbalance for the good of the industry and the hundreds of thousands of people who work in it and whose livelihoods depend on it.

Brexit

Our UK businesses in particular made extensive preparations for the impact of Brexit. Things have now settled down and we do not anticipate any material effect on our trading operations.

Investments & Divestments
Despite the difficulties in doing business in 2020, we continued our strategy of diversifying our agricultural products and production base.

During the year we replanted a total of 316Ha of tea, and established a further 98Ha of avocado and 36Ha of macadamia. Since the start of 2021 we have planted an additional 37Ha of avocado in Tanzania and 174Ha of tea in our India and Bangladesh operations.

We continued to invest in our assets during the year and £10.7 million was spent on property, plant, equipment and investment property (2019: £14.5 million). Key projects are referred to in the operational reports below. A further £3.7 million (2019: £4.6 million) was invested in bearer crop and forestry plantings.

We also announced the sale of our Horizon Farms property in California for a total cash consideration of $31 million. This was brought about by concerns over the long-term future of the farm given the scarcity of reliable sources of water.

PERFORMANCE

Agriculture

In total, the Agriculture division made a segment trading profit of £2.2 million (2019: £23.9 million) on revenue of £247.2 million (2019: £238.7 million), as set out in note 1 to the Accounts. This includes costs of £16.1 million (2019: £1.3 million) in respect of legal and other costs associated with the allegations arising from our East African operations. Agriculture’s underlying trading profit was £18.3 million (2019: £19.0 million).

Tea Production

2020 saw the Group produce slightly lower volumes of tea, due in part to the lockdown of the tea estates in India at the start of the pandemic although this was partially offset by record production in Kenya.

Tea pricing and operations

India
Our own production in India was down by 19% against a national reduction of 22%. This was a result of a complete lockdown of all tea gardens in the early weeks of the pandemic followed by cyclone Amphan and an unusually severe monsoon season. The smallholder sector was particularly impacted and our Bought Leaf production was down by 40%. Prices for CTC teas however improved significantly as domestic demand rose and supply fell. In the Dooars, prices were up 32% and in Assam 13%. In Darjeeling however, the loss of the lucrative first flush due to the lockdown resulted in average prices 12% down on the prior year.

Exports were well down on normal years as a result of strong local demand and the very high volumes emerging from Kenya.

Due to the many disruptions to the estate operations as a result of COVID, it was agreed by all parties that wage increases would be suspended for 2020. Interim wage increases for West Bengal has been agreed at 14.8% for 2021 and in Assam the wage increase is subject to a court process.

Packet tea sales volumes in India grew by 16% to 13.1mkg, reflecting our continued marketing efforts. The high price of purchased tea however impacted margins.

The replanting programme continued with 164Ha completed (2019: 239Ha) and a further 62Ha uprooted for replanting at a later date. In 2021 a total of 117Ha of replanting has been completed in the first quarter.

Bangladesh

Our crop in Bangladesh was down by 12% as a result of a very slow start to the season caused by dry hot weather, followed by torrential downpours from cyclone Amphan.

Average prices were down by 17% as tea consumption in Bangladesh relies heavily on the hot tea stalls, many of which were closed for a significant part of the year.

A wage award was agreed in the fourth quarter of 2020 with a 17.6% increase in the daily rate effective from 1 January 2019 with the possible introduction of improved productivity measures later in 2021.

The replanting and extension programme was scaled back in favour of infilling young tea areas which had lost a high number of plants as a result of a very dry start to the year. A total of 105Ha of tea was planted in the year (2019: 161Ha) of which 95Ha was replanting and 10Ha of new planting. A total of 3.8 million bushes were planted to infill existing fields. In the first quarter of 2021 a total of 57Ha of replanting has been completed.

Kenya

Production (including smallholder and managed client volumes) was up by 36% which broke all records and was 11% above our previous best year in 2016. 2021 production volumes in the first quarter are lower than last year, particularly in the West of Rift region. Pricing remains under pressure with average prices in quarter one of 2021 3% below the same period last year.

The greatest gains were seen in the smallholder sector where our 2020 production was up 51% whilst our own estate volumes were up 34%. This picture was reflected across Kenya where smallholder volumes were up 25% overall against 23% from the commercial plantation sector.

Such a huge supply of tea put significant pressure on prices and our average price was down 12% on last year. However, our factories performed well in relative terms, with prices 17% above the average commercial plantation sector auction pricing.

To help control the levels of production and prices, new tea regulations were proposed in early 2020 and resulted in the signing of the Tea Act 2020 in December. The new Act makes a number of significant changes to the way in which the tea auction system and export markets work in Kenya and we await to see how they will impact the industry.

There were no wage increases agreed with the unions during the year and discussions are ongoing.

We replanted a total of 47Ha in 2020 (2019: 51Ha) and uprooted a further 50Ha for replanting in 2021.

Malawi

Production (including smallholder volumes) was down on 2019 by 5% due to the drier conditions experienced, particularly in the second quarter. Our production levels for the first quarter of 2021 are 7% higher than last year.

With the very large volumes of tea available in Kenya, pricing has been under pressure, and sales through the auction were suspended in April 2020. On resumption of the auction, prices improved significantly in July and overall average prices for the year were in line with 2019 levels. Pricing in 2021 is slightly higher than the same period in 2020.

The newly elected Government of Malawi announced the implementation of a new minimum wage from the start of 2021. A wage increase reflecting this was subsequently agreed with the unions at 19% for 2021 alongside certain productivity improvements.

As a result of cash conservation measures, no replanting nor any new irrigation schemes were carried out during the year.

Macadamia Production

Macadamia kernel volumes produced in 2020 decreased to 1.1mkg (2019: 1.3mkg). This 17% drop on 2019 was due to a period of very hot weather in Malawi and South Africa at the end of 2019 which affected flowering and nut set. Kenya’s volumes reflected an increase of 45% as the orchards continued to mature and benefited from benign weather conditions throughout the year.

Macadamia Pricing

The pandemic has resulted in reduced demand from tourism and the food service sector. Imports into two of our main markets (USA and Japan) were down significantly. Despite this being partially offset by increased demand from retail, macadamia kernel prices fell and averaged 4% below those of 2019.

Due to the reduced demand in 2020, we believe that inventories of kernel from the 2020 season are higher than normal. Production in 2021 is also anticipated to be increasing which could bring prices under pressure for the new season depending on the speed of recovery in the hospitality sector.

Macadamia Operations

In total we planted another 36Ha of macadamia in South Africa, to which an additional 6Ha has been added in the first quarter of 2021. We harvested our 2020 crop from Wales estate before vacating the property as planned and previously reported.

Early indications from the 2021 season in Malawi show that kernel quality has been adversely impacted by pest and disease damage which could result in lower production volumes and reduced average prices. There are currently no indications of similar damage to the crop in Kenya and South Africa. Initial assessments of our

Avocado Production

Avocado volumes from our own estates in 2020 increased to 10.9mkg (2019: 7.1mkg). This increase reflects the increase in mature hectarage and 2020 being an ‘on’ year for avocado.

Avocado Pricing and Operations

Average prices for Hass avocados (which made up 95% of our volumes) were down 41% on the record levels that we saw in 2019, partly due to the closure of the hotel and restaurant sector, but also due to record volumes of fruit from Peru overwhelming the European market during the summer. Prices recovered rapidly in the autumn once the excess fruit was sold.

A total of 98Ha (2019: 79Ha) of avocado orchards were planted during the year of which 34Ha was the Carmen variety.

We continue to monitor the 23Ha trial of avocados near Kitale in Kenya which we initiated in 2017. The first export crop was completed in the year with satisfactory results. The timing of the production and harvest indicates a later market window than the Kakuzi fruit which will be beneficial for prices. We expect to take a decision next year on whether to move forward with the full development.

In Tanzania, the purchase of the Mgagao farm is complete. The first 13Ha of avocado were planted in 2020 with an additional 37Ha planted in early 2021.

In South Africa the land clearance on the new farm reported last year is under way and the first 80Ha of avocado will be planted in 2022.

Speciality Crops Production

Speciality Crops, Pricing and Operations

Arable

We grow a variety of annual crops in Brazil including soya, sorghum, wheat, maize and barley. In 2020 all crops grew well and achieved good prices, assisted in part by the devaluation of the Brazilian Real.

Rubber

Rubber is grown on areas of the Bangladesh tea estates unsuited for growing tea. Volumes produced in 2020 were in line with 2019, as were average prices which remain below cost.

Wine

Although grape production was up 51% and wine sales up 63% compared with 2019, the continuing losses of the operation have necessitated implementing a restructuring process. In 2021 all grape production will be sold to third party wineries and branded sales will continue under an agency agreement.

Blueberries

The blueberry trial continues – the first commercial crop was harvested this year but, as previously indicated, volumes achieved were below expectations due to cool, wet weather and the crop was sold locally.

Citrus, pistachios and almonds

2020 was an excellent citrus season for both the Murcott and Navel Orange crops. Following the sale of Horizon Farms during 2020, this will be the final crop of citrus and there will be no further production of pistachios and almonds.

Forestry

Production of Eucalyptus in Brazil increased 53% in the year due to continued strong demand from the paper industry. Kakuzi saw a 17% decline in production of forestry products for the market in Kenya due to a reduction in demand resulting from COVID restrictions.

Livestock

Births were up this year due to benign weather conditions leading to excellent volumes of good quality grazing which ensured the cattle were in peak condition.

ON-GOING LITIGATION
We previously disclosed that 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 by us and also a request to stay the proceedings of the National Land Commission until the legal position has been determined. This matter is on-going and we continue to keep the situation under review.

SUMMARY

2020 was a difficult year for the Group for all the reasons set out above and 2021 to date continues to show some market disruption. We remain in hope that the impact of the vaccines will result in a return to normality but anticipate that this will not be possible in many countries before the end of next year.

However, I am very pleased that we have been able to stay true to our strategy and to continue to invest for the future. I am also enormously grateful for the way that our people have tackled the pandemic and the significant challenges that it has brought with it.

We continue to invest in sustainability; our ESG report in 2020 showed the strength and depth of our commitment in this area and the steps that have been taken following the claims in Kenya and Malawi has helped strengthen our Human Rights processes and governance. Our balance sheet remains strong with £76.0 million of net cash in the Group and money market deposits amounting to £5.1 million at 31 March 2021. Whilst some of this cash is committed to long-term projects it gives us the scope and financial resilience to continue to develop Camellia for the benefit of all our stakeholders.

Tom Franks
Chief Executive

3 May 2021