Bega Cheese Limited (BGA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Bega Cheese Limited Half Year 2021 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Barry Irvin, Executive Chairman. Please go ahead.

Thank you, and welcome, everyone. Thank you for joining us for this half year results conference call. We are a little late in starting. We just wanted to give the opportunity for as many people as possible to join. So we just delayed the start while that occurred. So I will step you through the presentation. I have with me Paul van Heerwaarden and Pete Findlay, who will also share in presentation duties today. So we will step you through each page of the presentation to try and make this as constructive as possible and of course, be very happy to answer questions at the end of the presentation. And so if I go to the key messages page, which is Page 2 of the presentation, I guess from our perspective and the organization's perspective, we're very pleased with our first half results. It was a strong financial performance, and we continued to strengthen our balance sheet, pre the capital raise, which we will talk to a little later. Obviously, in what has been described as a year like no other, we continue to manage COVID-19; and again, we're very pleased with the way in which the business has been able to remain stable through such unusual times. I guess, on a number of levels, we have seen -- we did see very large initial impacts on international markets when COVID first hit. And we did -- and we obviously did see a great -- many of our people working from home. I'm pleased to say that we have brought back much of our regional staff into their offices, and we are bringing -- beginning next Monday, to phase our metropolitan staff in Melbourne back into the offices. So we've managed COVID-19 quite seamlessly. The business has performed very well, albeit, as I said, there's been volatility in various sectors of the market, including the domestic food service markets and some of the international markets. But we have -- we've obviously, by virtue of the result being presented, managed COVID very effectively. And what we do -- we did see very volatile international markets initially after COVID announced -- was announced, and we'll talk to that a little later. And we're currently seeing them still being affected more so by currency than necessarily the volatility [ in the environment ]. obviously, we have benefited in this period with the full utilization of the lactoferrin capacity. It's been complete -- was completed and commissioned back in April '20. And therefore, we had the benefit of that capacity through this full half. Also, our operational performance review outcomes, which we talked about in our last reporting period, have been implemented, and we're seeing the benefit of some of those outcomes. And those will be ongoing. It has been very good to see better seasonal conditions for our dairy farmers. It does remain the case that milk procurement still remains very, very competitive. But we are seeing stable national dairy production, certainly much better conditions on farm, for our dairy farmers, making obviously the economic viability of their businesses much improved. We've been very pleased with the performance in the Australian retail market, particularly from Bega Foods, which has continued to launch new products and grow share. So we're delighted with that performance, which I think augurs well for, obviously, what was the big announcement at the end of last year, which was the acquisition of Lion Dairy & Drinks and the further movement of Bega into branded retail and Australian-branded retail products and food service products. We were pleased again to meet a pretty challenging completion time line, and we did indeed complete the acquisition of Lion Dairy & Drinks on the 25th of January. And Paul will give you a little more insight into our initial, sort of, actions when we bought that business. If I take you to Page 3, I think this is a slide that many of you have seen before. But it's important to talk about the growth of this organization and indeed, the -- some of the things that I mentioned earlier that some of the acceleration of that growth because of the Lion Dairy & Drinks acquisition. So we've been -- the [ lines ] continue to strengthen the business, and I think it was important when we acquired what we now call Bega Foods, which is fundamentally our Vegemite and peanut butter and branded spreads business, that it gave us a strong foundation in brand marketing and that foundation could then be expanded upon with the purchase of Lion Dairy & Drinks, which, of course, gives us a significant platform to accelerate the growth of the organization. On Page 4, I think it's always important to remember how you got to the position you're in today. So we very much value our history. We all -- and we very much remember the goals that we set for ourselves a great many years ago and the people that helped us get there. And that, of course, includes the wonderful support we've had from the investment community. But it is important for us, as we move into this next phase of growth for Bega Cheese, that we do always emphasize those values and the aspirations that the organization has had. And obviously, the value that we place in our people, the culture, the safety, the development of those people is extraordinarily important as is our role in the community. So if I move you to Page 5 and we talk about some of the performance highlights from my perspective, we did have a revenue decrease in the year. That revenue decrease at 4.5% was driven by a number of factors, which I'll talk about on the next slide. But importantly, I think we strengthened the business in terms of the half year performance. Obviously, our statutory EBITDA increase of 68% to $65.8 million is very pleasing to report. As always, we think that it's important to actually focus on the normalized performance of the business, which was also an increase of 51% to $73 million EBITDA for the first half, so a strong performance in the first half. We continued our focus on working capital, which we -- I think the market was very well aware of, particularly after our acquisition of Koroit, that there was a large buildup in working capital in that time. And we assured the market that, that was a timing and integration issue. And I think we're now demonstrating that, that focus on working capital continues to be very strong. Whilst we realized that in this period we did do a capital raise, I think there has been a focus on the -- from the investment community on our debt and, indeed, what our goal was around our debt targets. And I'm pleased to report that pre the capital raise, our debt decreased by a further 21%, and we're now down in that 2x leverage total, which is what we have spoken about achieving. As I mentioned, if I move you to Slide 6, there's a number of factors that impacted our revenue. We did, in fact, achieve an increase in international branded sales, which was very pleasing, especially given some of the turmoil initially from COVID. And again, it demonstrates that focus on building a strong branding presence in retail and food service not only in Australia but internationally. And I would certainly say that much of our international branded sales growth has been in that food service sector, which is beginning to recover quite quickly. Obviously, as I mentioned in my key messages overview, we have had an increase in lactoferrin sales as a result of the commissioning of our facility at Koroit and it being available to us for all of the first half. We have also been very successful with our toll manufacturing activities, both externally, where we're having product tolled for us and within the business where we are tolling for others. For us, it's been very much part of our philosophy with what we need in the industry is efficient, highly competitive infrastructure and facilities, and utilizing those facilities to the maximum that we can, whether it is with our own direct business or through tolling, is extraordinarily important. And I think that's been important in terms of us maintaining stability within the business while there has been really strong competition for direct milk supply for example. And as I mentioned, part of the revenue impact was a lessening of direct milk supply intake largely because of the conclusion of the milk supply guarantee arrangements that we had with Saputo as a result of the purchase of our Koroit facility. That concluded at the end of last year. And whilst we were very successful in procuring the vast majority of that milk directly, we did not quite procure it all. We also saw very strong competition for milk, particularly in Northern Victoria, from the white milk or the liquid milk players, as we would describe them, and some pretty aggressive competition from other parties that have since perhaps realized that milk pricing is something you have to be very careful with. There is a lot of the decreasing global commodity dairy prices, which demonstrated later in the presentation, and depreciation in Australian dollar also had some impacts on our revenue. We did also release a -- or we did also exit a contract, cheese manufacturing contract that was low returning. So the sum total of all that revenue analysis really, but also to wrap it up, is that Bega continues to be very focused on its product mix and maximizing the value that it received -- that it utilizes both from its plant and its direct milk intake and, indeed, other food intake. And that -- this performance really reflects that focus and the improvement in mix, which leads to an improvement in margin, which is clearly the endeavor of the business, both now and going forward. Having given you that overview, I think it's probably appropriate to perhaps approach this a little differently this time. And I will actually hand to Pete Findlay to give you some more detailed analysis of the detailed financial performance, who will then hand to Paul to talk about the various operations of the business. So Pete, I'm might throw to you to take the next pages.

Terrific, Barry. Thank you for that. So look, as Barry discussed already, a really strong financial performance for the half. And I think we're seeing a lot of these projects and work that have been put in place over the last couple of years come to fruition. So we talked about the revenue decline but obviously great margin strength through the lactoferrin margins, through an uplift in nutritional powders into export markets. Also a strong Bega Foods international results, we saw a 15% growth here across branded products into Asia Pac, which was terrific and certainly helped drive that gross margin line. And that's something that really the business has been working on for some time now with investment, obviously, Koroit and the work on diversifying and building some of those international markets, which is pleasing to see that flowing through. Also, Bega Foods and Koroit, without going into detail, are certainly performing well and meeting our business case expectations. So they've been terrific acquisitions for the business in the last 3 or 4 years, and we're really seeing some benefits flow through there. And then, of course, obviously, the Koroit facility -- sorry, the lactoferrin facility of Koroit is another example of that. Profit after tax was impacted. Our effective tax rate was up at 39%. It's just worth noting that, that was due to the lack of deductibility of some of our acquisition costs that flowed through prior to year-end. So we had about a $6.3 million worth of acquisition costs that will be capitalized from a tax perspective. Therefore, we're not getting a deduction on those. And on a normalized basis, our effective tax rate would have been 33%, so still a little bit higher than usual due to a catch-up on some timing around some assets with the Mondelez acquisition. But that is a timing -- from a timing perspective. The first half performance is stronger than what our second half will be, only due to milk intake inactivity. We'll see a little bit of a tailing off there, but we're still comfortable with where we sit with consensus. And look, we think, at this stage, we're really pleased about further transformation opportunities with the LD&D acquisition. And a month into ownership, we still think that there's some really good benefits to be driven with the bringing together of both businesses. If I can just jump on to the next page, we've got a reconciliation of normalized results there. Obviously, acquisition costs, they've started to flow through prior to the half finishing, $6.3 million relates to adviser costs and legal costs. And then $1.6 million was incurred. Most of that was due to the Singapore bridging facility, which enabled us to enter the transaction with financial certainty, and then obviously, some legal costs overhang from our case with Fonterra and Kraft, which are obviously well down on historical levels as those 2 activities start to [ move ] around. But they are our normalization costs. We would expect further acquisition costs coming into this [ cost ] calculation at the full year-end, as we obviously start to incur a lot more separation costs and transition costs for the acquisition. Just on to the next page here, you'll see our balance sheet. Obviously, we had just under $400 million of cash come in for the business before December year-end. We did a $401 million equity raising and had some equity costs against that of [ $5 million or $6 million ]. But you'll see there, the balance sheet strengthens significantly. Obviously, the payment has been made since then. It's worth noting, though, that our net debt leverage ratio on a pre-capital raise was sitting at 2.02x, so down from 2.87 at the same time last year. So the business has worked very hard to reduce its net debt levels through cash realization, which has been great. And that was something we're very focused on, on reducing that net debt leverage ratio. It obviously pops up again with the acquisition, around sort of 2.7x, but we're on a fast track as we start to build synergies in the business to reduce that back down to that 2x ratio that we achieved on a pre-raised basis in December. Cash flows, obviously, some large numbers flowing through there, just the financing activities. We were happy with the way we manage working capital into this half. We obviously do have an inventory build. We would expect our working capital position to now improve as we enter the second half of the year but a good position there. I think that's it for the financials, and I'll pass on to Paul to talk about our consumer brands.

Thanks, Pete, and good morning, everyone, and welcome to our shareholders and also other members of the finance community, a number of directors on the call and also a number of employees listening on this call, including our new colleagues with the Lion Dairy & Drinks acquisition, so welcome. I'll just take us through the next few slides before handing back to Barry. And just on Page 11 now and looking at our consumer-branded segment, and it's really pleasing to see, as Barry called out earlier, on the revenue slide, the continued growth in our consumer and food service business, particularly focusing here on the spreads category, which has grown nicely for the 6 months compared to the same period a year ago, 9.4% growth. We've managed to increase our market share in this category to 30.9%, where we've grown at a rate slightly higher than category growth at 13.6% growth. And that's primarily coming out of a couple of segments, including the natural peanut butter and the core peanut butter. Natural peanut butter, which we launched a couple of years ago, continuing to increase our market share in that space. And indeed, with honey, which we launched a bit over 6 months ago in Coles and have managed to capture 11.4% share of the honey segment in Coles supermarkets in that period. So really pleased with how those 2 new product launches over the last couple of years have taken off, and we're starting to see the sort of significant benefits of that pipeline of innovation coming through the business. And no doubt, we'll continue to see that, too, with the Lion Dairy & Drinks acquisition, so really exciting to see that. More recently, we've launched the Vegemite squeezy. It's a new format, means you don't get your butter and your Vegemite mixed up, and it allows you to put Vegemite into some other applications that you might not ever be using. So if you haven't seen that, I would strongly encourage you to give it a go. It's a great new product and a product that was launched by Marmite in England a number of years ago and has certainly been very successful in that market. Export markets continue to grow despite some of the challenges that Barry called out earlier. We have seen some good recovery in China in our food service business, in Southeast Asia and also the Middle East has grown. I think Middle East, we've seen oil prices are really, really rebounding. We do start to see demand growth and good price growth in that market. That's certainly been the case in this part of the cycle. Japan has slowed down quite a bit, which we're not over concerned about because we have been able to make it up in other markets but certainly seeing some slow growth there, also off the back of increased domestic milk production. So they're consuming a bit less and producing a bit more locally. So we've seen that sort of soften a bit. And that will continue into the second half as well. But the flexibility of our business, which has now increased also with the Dairy & Drinks acquisition, allows us to move those solids around and put it in the markets where we can get good offtake and good returns. If we just move over the page now to Page 12 and just focus now on the bulk segment, the dairy nutritionals, we are seeing some good growth, particularly off the back of the Koroit business, which gives us a lot more flexibility and capacity around value-added powders. And we've talked about this in the last couple of presentations, the customer buildup we've got in Indonesian market, and that's continuing to grow for us, which is quite nice. There have been some significant challenges in the China market, particularly for infant formula, and that's been well documented in the press. When you look at some of the players that are exporting products into those markets, the drop-off in Chinese students in this country, the drop-off in international travel, the impact of the nationalism in the Chinese market and also the pantry fill that we saw in sort of February, March, April meant that we were sort of coming into a sort of a soft period as we sort of come into the second half so -- of the calendar year, first half of our financial year. So that's certainly got some challenges, which we think will be ongoing into the second half of this financial year. And that's reflecting this reduced demand from some of the longer-term customers. Last month, Reckitt Benckiser, listeners will recall with a few years ago, we entered into an arrangement to sell a dryer and -- at Tatura, an infant formula dryer, 1 of our [ 4 ] dryers up there and the canning plant based in Derrimut in the western suburbs of Melbourne. We sold those facilities to Reckitt Benckiser, Mead Johnson at the time. That was a $200 million deal, and we also had a 10-year arrangement for a service agreement on both of those assets and a 25% access agreement on both of those assets. Last month, we received advice from Reckitt Benckiser that they are looking to exit the Derrimut canning facility. What that means is we've got about 9 to 12 months to sort out what we need to do with our capacity that we use on that canning facility. We've got a number of alternatives that we can turn to during that period. And it also means that we'll no longer be providing those services at the Derrimut facility. As part of the arrangements that we negotiated a few years ago, there are penalty clauses, and we've called out there's a $21 million payment that is called out in the accounts. Part of that has been paid in this financial year and in the second half -- I mean this is reflected in the first half results. And with the balance around $15 million to $16 million paid later on this calendar year. So we're still working through what the accounting implications of that are. But importantly, the implication for us is we will consider our options. There might be some options for us to consider at the Derrimut facility, or indeed, there are other facilities that are available for us to use on either a third-party manufacturing basis or potentially some opportunities to acquire or joint venture. So we're just working through that as we speak. Barry and Pete both called out the Koroit lactoferrin facility, which has progressed very well. That's been commissioned some time ago now and is operating at full capacity. We're seeing the full benefit of that flow through in our base lactoferrin business that's been operating out of Tatura since about 2004. We still produce quite a bit of lactoferrin out of that facility, which we sell into the open market. That has softened in the last 6 months. We are seeing some softening in demand, which is flowing through just some softening in the pricing as well, which we've seen come through in the first half result. And I see that sort of experience continuing through the second half -- into the second half as well. Just turning to the next page, Page 13, dairy commodity and farm gate milk prices. And listeners will be familiar with this chart that we have been presenting for as long as we've been presenting, I think, Barry. This is the Fresh Agenda Australasian dairy export index, and this is basically an index of export dairy prices reflected in Australian dollar terms dating back for a number of years now. This chart holds 10 years of data. And it's important to just reflect on what happened as we hit COVID a little under 12 months ago. If you can have a look at the peak of the chart where we hit about 275 on the index, and then that deep dive down through April, May, there was about a 30% drop in the index through COVID, so a dramatic drop in commodity prices. We saw this across metals, petroleum and soft commodities in the post-COVID period there. And then we started to see some sort of slight recovery there. So you can see a bit of volatility still from that period through to today but a slight increase into it. So a significant drop and then some slight recovery in there. Some really strong U.S. dollar commodity pricing coming through. We're seeing 5-year highs in powders, for example, but also we're seeing currency increase pretty significantly from May last year. Then we're in the sort of low to mid-60s, up into the high 70s today. So a lot of the improvement in the commodity prices is being offset by the currency, but on a net basis, we're seeing a slight improvement. And that's been reflected in our milk price reviews. And indeed, yesterday, we announced a step-up in the 2021 milk price of $0.10 per kilogram. We do continue to see a very competitive procurement environment across dairy. We do still see areas in the milk supply chain where there is overcapacity in certain regions, and we're still seeing some of that competitive behavior. It has settled down a little bit on previous years, but it's still very much alive. And on the production side, a slight improvement in dairy production on a national basis compared to the previous year. Still seeing some of those shifts from the northern states into the southern states. But overall, it's pretty stable to slightly improving, which is pleasing. Just moving on to the following page and the operations review. I'm going to read through this reasonably quickly. With production, notwithstanding some of the decreases that we've talked about, overall production across the sites is flat. We have had -- as Barry mentioned earlier, our direct milk intake is down, but we have been able to offset that through the facilities with toll processed milk. So overall, our milk volume processed is up slightly. And that's providing us with good efficiencies and overhead recoveries through the factories. The milk supply guarantee that was put in place for a couple of years when we acquired the Koroit facility back in 2018, so we did drop off a portion of that milk as we entered into the current financial year. And as I mentioned on the previous slide, we are still seeing a competitive milk procurement environment, particularly in Northern Victoria and seeing a bit of that milk -- in over the broader in the fresh milk market, which ironically we now have good visibility of with the acquisition of the Lion Dairy & Drinks business. The CI programs across the board, which we've had in place now for the last few years are continuing to provide good efficiencies and cost savings across the plants and we see further opportunities, particularly around that solids utilization with the Lion Dairy & Drinks acquisition to better optimize our milk usage across that network. Lactoferrin was mentioned. Some ongoing projects around our valorization of protein in particular. We've got a very strong fat business in dairy with cream cheese, high fat and butter. The protein side is where we focus on opportunities with further development and a number of smaller projects there, which, as they accumulate over time, start to make a difference for us. Barry mentioned safety earlier. It has been, from my perspective, one of the key concerns in the business. We've had some slipping performance in safety across our sites. Myself and the leadership team, and certainly in support of the Board, are spending a lot of time on our safety performance. We did commission DuPont Safety Services to work with us, and they continue to work with us on that improvement, a lot of the employee leadership development and other capabilities in our sites. And indeed, as we've acquired the Dairy & Drinks business, we've just commissioned a review of those sites using the same methodology with DuPont, and we'll be able to bring those together in the coming 2 or 3 months and put it under the 1 program. I'll just -- before I hand back to Barry, I'll just finish off on Slide 15 and spend a moment to talk about the Lion Dairy & Drinks acquisition. And in particular, the transition plan, which has been operating now to a little over 4 weeks. As Barry mentioned earlier, we completed the acquisition on 25th of January. It was a bit surreal. We still had a number of people working from home. So as we started to spend the early days in the Docklands office here in Melbourne, not too many employees are returning yet at that stage. And indeed, with the recent lockdowns in Victoria, it's been very quiet in there. So we do expect that to pick up for next week at our metropolitan offices in Port Melbourne and Docklands. It will be good to start to see people coming back into the office and getting together. The main focus of the transition is ensuring that we maintain business as usual. So as you'd imagine, the fresh business, it's got a very different drum beat to the rest of our business, very dynamic and the discipline you need around providing fresh milk through that supply chain, knowing that if you miss a beat, you can certainly have some challenges in that business. So we've been very focused on making sure that we maintain that business as usual and focus elsewhere in terms of some of our activities, particularly around the organizational restructure, indirect procurement and our own back-end milk management and optimization across that manufacturing network. We did call out a fairly significant synergy program as part of the acquisition, and it's pleasing to see that we're well on track to achieve that for the FY '22 financial year. There are a number of opportunities in the business around capital projects and other initiatives, which we're just working through in the next month, and we'll be prioritizing and trying to accelerate some of those projects. Trading conditions are good. We have seen a solid sort of start to the year in line with expectations. That's been very pleasing. And just before I finish off there, and Pete called this out earlier, we do see in the Lion business a fairly significant spread in earnings between the first half and the second half, so about 80% or so of income in the first half, 20% in the second half. And that's primarily due to 2 items, the first and the more material one is just milk pricing. So we see a big delta between spring pricing and off-peak pricing. And that big delta is reflected in a much cheaper cost of milk during that spring period, which is in the first half and a much more expensive cost of milk flowing through the P&L in the second half. There's also a little bit of seasonality in the product offtake, which favors the first half profitability over the second half profitability. And that's certainly what we're seeing as we're getting under the hood and have a good look at the numbers. That's it for me. I'll now pass back to Barry, who'll continue on with the LD&D acquisition. Thanks, Barry.

Thanks, Paul. Look, I think as Paul outlined, we're very pleased with both the performance of our base Bega business and what we're finding as we begin our transformation and the integration of Lion into the Bega business. I think Page 16 is just a direct conclusion from the presentation we gave investors when we were making the acquisition. I think it is worth just revisiting the fact that we are very excited about what we've acquired here in terms of a company with a leading brand, often holding #1 and #2 positions in their categories. It's certainly a large-scale, well-invested national manufacturing capability. And indeed, as Paul mentioned, we are -- the way I tend to describe it is that we are making the Bega dairy business more whole in that we are now able to direct milk into the fresh milk market, so the white, flavored milk, the yogurt, as well as the products that we have grown this business on in terms of cheese and the longer shelf-life type businesses. So the great skill of Bega has always been able to fractionate milk into its highest value potential destinations, while we can also now enter -- access the various premium parts of the market that we were not able to do in the past. It is worth reminding people that there are a number of one-off costs that are listed on Page 16 that will come to account in the second half. As Pete mentioned, some has come in the first half, but the vast majority will come in the second half. And we did just want to advise investors from the point of view that, as previously advised, that those one-off costs will appear in the second half results. But if I take you to Page 17, I guess that is a summary of why we are very excited about both the acquisition and the opportunity that we see and, as I mentioned before, a significant -- a very good adjacency is the way I have been describing it. So with the capabilities that Bega have are very complementary to the capabilities that Lion have. And the opportunity is to make each of those capabilities more efficient and indeed deliver to the customer in a vibrant, energetic, if you like, dairy and foods business that will focus on new products, will focus on innovation, will focus on efficiency and will indeed be touching our customers virtually every day as we do with our farmers, so a genuine complete supply chain that I think is something that's very desirable, especially when you think about the large demographic trends where people are much more concerned about where their food is sourced from, how natural and good for them it is and indeed, who is actually delivering that food to them. And I'm fortunate to say that Bega can introduce you to the farmer as well as they can introduce you to the customer and everybody in between. And I think that's very exciting for the business. I won't dwell too much on the other pages. But I think if you look at Page 18, you can see both the wonderful opportunity that's being created across those various segments of both dairy and food and juice that Bega will be strongly focused on. Clearly, there is a very large family of brands there. We will be focusing on the leading brands and making heavy investment in those brands. And again, we would see that there is an opportunity to rationalize both from the point of view of infrastructure and the point of view of brands. Page 19 does outline our now national manufacturing footprint with 20 manufacturing facilities across the country. We do see -- as I've mentioned before and as Paul has mentioned, we do see great opportunity there in terms of both growing the business, but also making the business more efficient. So taking you to Page 20, I think, again, as I mentioned earlier, it's very important for us to remember where we're going, coming from and remain focused on the goals that we have set for ourselves over a great many years. In this Page 20 in terms of talking about our movement into brands and what we're looking to do, I think it well demonstrates the progress that we've made. In relatively recent times, in 2017 to where we expect to be in a steady state in 2023 or before, we've continued to grow that capability. We continue our focus on building the business. And again, we would say that this first half result demonstrates the real good quality progress we've made there. But we also recognize that we are a major dairy manufacturer, and we need to make sure that we have a sustainable milk pool. And indeed, the way to make that milk pool sustainable is to maximize the value of the liter -- each liter that we receive, which means that we can both deliver a strong price to dairy farmers in all market conditions and also make sure that we're getting a return for our shareholders. So that focus on how we utilize our milk, how efficient we can make it and indeed, the value of the products that we put the milk into, again, I think, we'll demonstrate in the first half and will be significantly enhanced, but significantly enhanced by the Lion Dairy & Drinks acquisition. So in terms of where we are today, the -- which is Page 22. As mentioned at the very beginning of this presentation, the financial results are at expectation. From our perspective, we continue to obviously work to perform well. And I think it is really satisfying that the performance does reflect a strong and consistent strategy, and we are now seeing the benefit of the Bega Foods acquisition and the Koroit acquisition in this first half result. We were very pleased to get a positive outcome from the Kraft legal case, which concluded in Bega's favor. And we are awaiting the outcome of the Fonterra case, which we did make an announcement this morning but were advised late yesterday afternoon that we would have an outcome -- we would have an outcome tomorrow. We will get a judgment tomorrow in terms of that announcement, and we'll obviously review that judgment when it's released. We are seeing our organizational process review benefits being realized. And Paul and Pete mentioned those earlier, and there's an ongoing benefit there. There remains challenges in dairy nutritional demand. As we said, we're developing new markets that are helping us manage that, and we're very pleased with the capability we have in some of our higher-value nutritional powders. That's well documented that the infant formula segment of the business is strong -- is being challenged. As I said at the beginning of the presentation, we continue to manage COVID-19 impact. And I think like the rest of the nation, we're very pleased to see that we are hopefully moving to a new phase, and the management of that will become less impactful than it has been in the last 12 months. As Paul mentioned, as far as Lion Dairy & Drinks acquisition is concerned, the results and integration are going as planned and are as expectation. Taking you to Slide 23. And our priority obviously is to ensure that the Lion Dairy & Drinks acquisition is as seamless as possible for customers and our dairy farmer suppliers. We are implementing a One Bega program, a program for growth of both the Bega and Lion Dairy & Drinks business. As mentioned throughout this presentation, our focus on our people and safety and culture is extraordinarily important. That is how we've been successful to date. It's how we will be successful into the future. We do -- our strong focus within the Lion Dairy & Drinks acquisition is to realize those synergy opportunities. And as you know, the first full year target was $36 million. And as Paul mentioned, we're on track for that. In terms of those other priorities, as I mentioned earlier, we will have a focused investment on leading brands and market development. We'll continue to leverage and rationalize our manufacturing network and product capabilities. Pete will retain the very good focus he's had on cash generation and cost management. And of course, we will support RB in their transition from Derrimut and review what our options might be there. So ladies and gentlemen, that is the presentation from Paul, Pete and myself. Thank you for your patience and listening to the presentation, and we're now open for any questions you may have.

[Operator Instructions] Your first question comes from Michael Peet from Goldman Sachs.

Just first question, just on the -- Barry, did I hear you correctly that you're expecting a lower contribution EBITDA-wise in the second half versus the first half?

Yes. Yes. Yes. So I think -- yes. There's obviously -- there's 2 things. There are some seasonal benefits in the first half of this performance. And also, we wanted to emphasize the seasonality of the Lion business.

Okay. So that's including the Lion -- any Lion contribution.

Yes. Yes.

Okay. All right. That's clear. Just looking at the margins by division there, bulk versus branded, bulk 11%, a strong performance there and branded still sort of around 8%. Just trying to get a sense of where do you think branded should be. And also on the bulk side, what's -- you mentioned a few things there, but I imagine mix is a big driver. But how have you got to 11% on bulk?

So obviously, as we've mentioned, that high -- the high returning from those micro proteins from lactoferrin obviously made a difference to the -- and we are now one of the largest lactoferrin producers in the world. So that's obviously made a difference to us. But equally, I've got to give the team credit for being very resourceful around the product mix opportunities they've had in bulk, so focusing the -- we've seen growth in cream cheese, focus on those higher-value fat products but even the higher-value dairy powders. So not infant formula, obviously, which has had some challenges, although the guys have done well on managing it in the first half. So it's really mix in bulk and the higher-value products that we're able to do. And look, I think it is fair to say that the manufacturing team has been very focused around the OPR project or the operation performance review project and the rationalization facilities and even some of that toll manufacturing that we've been able to do have all benefited the bulk segment. In terms of branded, I think there's still some work to do there, but I might ask Paul to add some additional comments. But we're pleased with the progress of what we're doing in branded. But branded does include some of that contract manufacturing we do in our cheese segment. And that's obviously -- as we mentioned, we have exited some lower-value contracts there, and we'll look to continue to refine that. We've taken a step in that direction by rationalizing some of our [ AWS ] capability, which we've announced in the previous reporting period. But Paul, anything to add there?

I think you've covered the key points there, Barry, and also with some of that third-party brand business that gets caught up into that segment. We are also, Michael, just with some of the new product launches that we spoke about earlier. So there is a brand investment into there, and as we sort of bring those new segments and new products sort of up to scale, we start to then see some better improvement in those margins. So they're probably just carrying a little disproportionate amount of that extra spend as they sort of scale up in volume with those new segments.

And just on lactoferrin, could you make some comments there on how far prices have fallen and how much of your volume's on spot versus contract?

Paul, I'll hand it to you.

Yes. So we're reluctant on calling out the exact volumes, Michael. We've spoken about the sort of corrosion, and that is the sort of the separate arrangement with the contract there. Just in terms of pricing, we are seeing sort of pricing sort of come back to what I'd just sort of describe as long-term -- longer-term average probably in that -- sort of in that sort of $700 to $800 a kilo range with some potential for further softening. We're just sort of starting to retest that in the market. But the balance with the contract business that we've got in place puts us in a very nice position as we've discussed previously.

And just finally, the RB decision at Derrimut, is there any implications for their intentions for the dryer? I mean I believe you're operating that on their behalf as well and get a fee for that. Are they firm on that in terms of the current decision? Or what do you think might happen there?

Well, we can't really comment any further detail, only to say that we're continuing to operate that. There's been no notification. We don't have any expectation of it at this stage, Michael. So business as usual.

Your next question comes from Paul Jensz from PAC Partners.

Just question, Barry, on the demand side offshore with that consumer brand good. Can you talk about that, whether that's existing customers or new customer base that you're tapping into?

It's a combination of both, Paul. So we've been -- so we do have some new distribution arrangements that -- so they're not overly new, but they are relatively new in terms of our history. So some of those arrangements have played well for us in some of the South Asian countries. And again, some of that other growth is from some very long-term relationships. And that's particularly -- as Paul mentioned, our Middle East distributor there has been with us for as long as I can remember and for almost as long as I think I've been with the organization. And they're doing a great job for us as well. So a bit of a combination of both. But -- and I think Paul's summary of we're seeing it move around a little bit in terms of where the market's strong and where it's developing but some new markets developing for us as well but I think the vast majority in long-term customer arrangements. Paul, I don't know whether you want to add to that.

Yes, it's worth adding, too, that with the acquisition, the LD&D business had a couple of overseas offices in Southeast Asia and had a strong presence, particularly in that sort of fresh dairy space throughout Singapore, Indonesia and Malaysia. And so we see some really complementary channels and customer base, Paul, that we're going to be able to leverage as we get into the second half and into next year, which is a really exciting opportunity for us actually. We've discussed previously that we are looking to establish more of a presence in our international markets, and we've commenced that in the last 6 to 12 months in Indonesia with some representation in market. And the acquisition just allows us to accelerate some of those plans.

Excellent. I will pull that later. And just on the cash flow, maybe to Pete. The operating cash flow was quite a bit down on previous corresponding period. I think you made some comments around working capital. But could you talk about why that has happened, whether there's any one-offs from the abnormals? Or is there something that we should be watching in the first half?

No, we just -- our creditor's balance dropped. So just -- I mean, that was the main movement. So inventory was pretty flat. Debt has actually improved, but the creditor's balance dropped off a little bit more than we thought -- we would have normally liked, so just year-on-year. So that was the main balance, Paul. But nothing -- no form of difference or change.

Yes. There's nothing -- you haven't got more cheese. When you've got some contract cheese, [ are there any ] extra cheese?

Yes. No, inventory is actually pretty -- was pretty flat on the previous period. So we -- it's obviously, inventory builds. So we've built it since June. But at this time of the year, it's actually sort of where we would expect.

Okay. That's excellent. And I think there'll be some more questions about Fonterra tomorrow, Barry, so we might hold them off.

No doubt. No doubt.

Your next question comes from James Casey from Ord Minnett.

I just had a question, you've commented on prior calls with regards to the cost savings you're hoping to generate. I just wonder if you could provide a bit more color on the cost savings you achieved in the first half just gone. And then just what the expectations are for the second half, excluding the Lion D&D benefits.

Yes. And look, I might get Pete to add to this. But from our perspective, if you have a look at some of the numbers, you'll see that our marketing number decreased by about $4 million or $5 million, that was not marketing spend as in advertising. That was, in fact, sort of back-office administration part of the operational performance review outcomes, if you like, so that reduced. And really, in administration, while it looks like it was similar, we did call out in that normalizing that there was some corporate charges there around the LD&D acquisition. So there is probably another $4 million or $5 million in that part of the business as well. So I guess, in terms of an analysis of those numbers that we presented to you, it's those 2 areas where you might note the impact of the OPR and obviously, we would expect those to be ongoing. But there are some one-offs in there so we're not calling out a total number. But there, perhaps the 2 areas that you would look to, to give you the sense of the impact of the operational performance review. Pete, not sure whether there's anything to add to that.

No, no, that's right, Barry. It's $6.3 million of acquisition costs sitting in admin in this half. And you're right. So the reduction in the marketing number, a lot of that was actually a reduction in our sales. We did a sales restructure as part of OPR. So most of those benefits are to OPR is probably a little bit of money in the cost of sales lying around costs, but OPR savings that are now in our operations, labor terms, that go into the cost of sales line. So that's a good breakout.

Okay. And I just wanted to clarify the capital expenditure for the second half '21 and then going into FY '22 with the acquisition. Obviously, CapEx was sharply down this period. But I suspect that will rise again, going forward?

Yes. So if you look at Bega as a stand-alone business, we did $65 million in FY '19 just $52 million in F '20. And then we sort of forecast our run rate to be somewhere between $35 million to $40 million on an ongoing basis. It was up in previous years because of the investment in the lactoferrin facility and the M3 project, which is in the ERP system. So we sort of simply sit somewhere between the $35 million to $40 million spend on a steady as she goes basis. And we think the LD&D will probably be around about the same.

Your next question comes from Mark Topy from Select Equity.

Just first question around the foreign currency that you've alluded to. And then just in terms of the commodity strength we've seen in some of the products, can you tell us in terms of the mix of that just how the outlook looks in terms of the currency where it is at the moment and the ability to take advantage of some of the strength in products like butter on the global market?

So I think there's obviously -- and this is always a talking point around farm back milk prices as well. So what we've seen is improvement in those global markets, unfortunately offset by a lot of currency. And when we looked at the beginning of this year, across the industry, farm back milk prices were down on the back of that large crash in commodity prices. I think our team has done quite well in terms of being able to maximize the returns they can get in those markets through product mix. We would see -- we would still see there is opportunities in more as those markets improve. But the commodity side of our business, at the end of the day, it's a highly competitive world. We look to be very specific with our customers and try and differentiate. But it is -- we still will be competing against all international players. And what I think, Mark, from our perspective, my view of perhaps what is positive when you look somewhat of a better way pointing across the supply chain, is that we did see that big crash in global demand, but we're seeing that recover quickly. And we're seeing supply and demand, again, look to return to balance, which I think is really important around not only farm back milk price, but around the opportunity to get returns. But Paul might have some more specific examples in terms of the specific products and specific markets we go to.

Yes. Look, it's reasonably pivoting today, Mark. Look, it's reasonably straightforward. The -- we have seen, for example, Mark, some of that drop off into the fat market into Japan, but we then see an offsetting improvement in the China market on cream cheese. So some of that frozen the fat that goes into Japan, has now found its way into China by -- as cream cheese. So there's plenty of examples of all that. I guess what you'd say is, as you put all that into the mix, we're in a reasonably good place in terms of where the overall dairy complex is sitting. We'd like the exchange rate to be a little bit lower. How far it goes, it remains to be seen. Obviously, commodities are very strong, but there's good underlying demand for that. So again, we just look at Northern Hemisphere milk production as we start to sort of come into that period over the next few months, where does that lie? And what does that actually then have implication for as we get into FY '22. So look, at this stage, there's no key concerns or call-outs. But it's -- having said that, we've just been through an extraordinarily volatile period over the last, sort of, 12 to 18 months.

So you've perhaps done some forward hedging where possible in terms of forward contract forward sales?

Look, and that moves around a bit. But by the nature of this is goes for a lot of the agricultural commodities. You tend to sell-out, depending on the cycle you're in the market and where the demand supply sits. And so in some areas, we might be sold out 3 or 4 months in other areas we might be sold out a month or 2. And we continue to maintain our currency hedging approach based on what we've always done, which is we look out 12 months, we take a level of cover that we think is prudent, gets approved at the Board level, and we just manage that as an overall sort of forward-looking book there. So we continue to do that. We do have -- it's interesting, Mark, when you look at the Lion Dairy & Drinks business, there are some imports in that business that gives us a natural hedge on the currency. So there's some opportunities there that pops looking at around our overall hedging now on currency, which is certainly going to be good for us. But for us in our core bulk dairy business, it's business as usual.

Sure. Just to touch on the LD&D integration. And you're sort of saying you're well through that process. But could we have some maybe commentary or expansion around how that business is to be run? For instance, have you wanted like a General Manager or CEO of that business as a stand-alone basis? And what parts of the business are going to be perhaps integrated more fully into Bega? And what -- and how will the business be run going forward?

Sure. I called out earlier, Mark, the importance of BAU and making sure that we don't compromise the sort of day-to-day operation of that business. So what what we're doing, and as you may recall, we operate the business on -- across business units in terms of the structure. And then we've got some group functions around finance, IT, HR, strategy and operational excellence, which includes capital, environmental, safety and indirect procurement. So any of those group functions that we've put in place we will look to incorporate and integrate those more indirect back-office functions into the group. As far as the actual dairy and drinks business itself, going to start with the easy part first, the international business is being brought together under our overall integration business, under -- out of McNamara as part of that that branded foods business. And the dairy and drinks business, the fresh business in Australia, which includes white milk, flavored milk, juice and yogurt, they're being maintained as a separate business. But what we've done is we've actually split up the back end and the front end. So the front end, the sales and marketing is effectively being retained. So that's our sales teams and marketing teams, activation teams, some of those back office sort of port processes do for that business specifically. That's been maintained under an executive that comes across with the acquisition and reporting that directly through to myself. And then one of our executives who has been running our bulk dairy business for a number of years and indeed, used to work for the National Foods business for many years, he is responsible for the upstream -- all of the milk procurement across the group, and all of those fresh milk, yogurt and juice factories. So he's running those. And that's where we've got a lot of synergy opportunities across the entire group. So by putting that under one unit, we'll be able to actually exploit that. And then importantly, in the middle, there's what we call the engine room of that business, which is all of the planning, the chilled distribution, the customer order processing and logistics for the fresh milk business. We've also just quarantined that and make sure that's going to continue operating as it is, because it's a very important part of the business. And indeed, it's probably where the most exciting aspects of the growth are for that business. And there's a lot more that we can put through that distribution channel, that's old network, and we're working on that at the moment. But it's important to make sure that we retain that, and we don't integrate that into parts of the existing Bega business, because it does need to operate as a stand-alone. So Mark, that part of the structure with the Dairy & Drinks business in the domestic market, with the sales and marketing, the back end with the booked procurement and manufacturing and that chill distribution network, we've got that structure in place for what we'll call an 18-month transformation process. So that transformation process is really about settling it down, but also starting to reset the business and take advantage of growth opportunities across that entire supply chain.

It probably is also worth mentioning, Mark, that obviously, this is a key focus for the Board, and we also have an integration subcommittee of the Board that's been chaired by Peter Margin with myself, and Paul and Peter and our head a strategy on that community to make sure that we're staying on track and executing on those key focus points. So it's structure that goes right to the very top of the organization in terms of making sure we realize these opportunities.

And then presumably outside the sort of operational side, but just to close off then, finally, just on the milk supply side, which I'm particularly interested for the LD&D. Then we did -- you talked about how skewed the milk supply is at the moment. Can you just talk about the opportunities there going forward? And obviously, you've got a much more extensive milk base now, just to maybe smooth that SKU going forward?

So look, it is very early days, Mark. But obviously, what we want to do is maximize -- the first thing we want to do is maximize the usage of that milk. So that includes -- so one of the challenges for Lion, obviously in their businesses, if they had too much milk, they didn't have a manufacturing base to send it to. And so they were a strict seller at some times of the year, and they were a strict buyer at other times of the year if their milk flow is falling short. So obviously, that should not be an issue for Bega. What we are -- we are in the early stages of working out exactly the approach we would take today across the country, that we -- but we expect that we will get some good outcomes for the Lion business, both in terms of how we manage that milk and in terms of how we move the supply.

Your next question comes from Jonathan Snape from Bell Potter Securities. [Operator Instructions]

So just a couple of questions, if I can. One first to Pete, around something in the numbers. Just on the inventory -- or sorry, the receivables facility you have. I think the full year is down $153-odd million of memory. What was that facility drawn to at the balance date?