Bega Cheese Limited (BGA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Bega Cheese Limited Full 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 hi, everyone. Very nice to join you today, and thank you for taking the time to join this results conference for our 2021 financial year. It was certainly a very busy year for the company and one with plenty of opportunities and plenty of challenges, and I'm delighted to present the results that we've achieved to you today. And for those that are following on the slide presentation that's been previously released, I will let you know when I'm moving to each slide. I think -- so I suppose the key message is -- from this year is that it has been a very strong financial performance by the company in the context of challenging and changing markets and a major acquisition. Revenue of $2.07 billion, inclusive of 5 months of Lion Dairy & Drinks, is yet again another increase on revenue from the previous years. We're very pleased to announce a statutory EBITDA, which Paul van Heerwaarden, the CEO, will speak more about later in the presentation, of $182.7 million and a normalized EBITDA of $141.7 million. Importantly, we're seeing the balance sheet continue to strengthen, and we now have a leverage ratio of 2.25. Obviously, there's been a lot of discussion over the last 6 to 9 months as we were first bidding for and then successfully acquired Lion Dairy & Drinks, and we were delighted to complete that acquisition and, indeed, a successful capital raise back in January. And that's obviously seen the business then embark on a strong integration program for LDD. It is worthy of note that from an accounting perspective, LDD has been assessed provisionally as a bargain purchase. So I suppose in a year that has had a lot going on, it is very worthy of mentioning, obviously, that we continue to manage all the impacts of COVID-19, whether that's operationally within our business or indeed the impacts that are occurring in the market. And those changes in the market obviously occur from time to time depending on exactly what impact is happening in both the domestic market and the international market. There has been a structural change in the Chinese infant formula market that has been well documented and that market and channel has to be represented as a structural change. And obviously, we have looked to manage the impact of that on our nutritionals business. There remains very strong competition for milk and, indeed, that's relating -- translating into strong prices at the farm gate and very strong competition for milk. I'm pleased to say, and I'll speak about it a little later, that the company has confirmed emissions targets for the business going forward for both 2030 and 2050 and, indeed, embarked on what we think will be a significantly important project around the circular economy and pilots associated with that being initiated in the Bega Valley. I think importantly, over the last few years, we've had to speak with you around legal cases. Both those legal cases have come to a conclusion, and we're pleased with the outcome of each of them, which again we will discuss a little later. Moving to the value slide of Bega. I think it is fair to say as I often talk about that it is the values that drive this company. I think it's the values that have seen us set a strategy that covers everything from how we behave commercially to indeed our impact on our community and our environment and the approach we take to the business we conduct. It's very important for us that we continue to have that passion for our customer and our consumer, that we grow our people and we invest in our future, which has been very strongly demonstrated this year. And indeed, we support one another across our entire supply chain, including our dairy farmers, our peanut growers and our -- the farmers that produce our various juice products. And so we're very pleased with exactly where we are at the moment in terms of both the development of the business, the values that we've looked to maintain and the financial outcomes we're achieving. If I direct you to the next slide, it obviously does tell that story of continuing growth, very careful acquisition to meet a target, a vision to create a great Australian food company, that we continue to very carefully and very strategically step through each step strengthening the business, seeing us see the benefits of scale and the strength of brands that we now have under our control. And I think that's been a -- it's something that we're very proud of, both not only in terms of how we've managed to grow the company but the manner in which we've been able to execute that growth. And it is actually all about creating sustainable growth through an integrated supply chain. And while I move you on to the next slide that talks about our vision and our values, it's probably really important for me to talk about the business enablers that, I think, have made the difference within this -- within our business. And it starts with that deep industry knowledge in dairy and FMCG. So as we strengthened the business, we've always had a core knowledge around dairy, but we've strengthened our knowledge in the supply chain and particularly in FMCG that has seen us being able to very deliberately implement a strategy that sees us achieve these results today. We have always been very close to our farmers and the core piece of our supply. That means that sustainability -- sustainable practices, circularity that we're now introducing is very much a part of our DNA, and hence, why we're very pleased to be able to talk about some of the initiatives we have there. That careful financial management that I think is beginning to come through as well around capital and balance sheet is again evident in this year's results, as is the fact that we've been able to manage what is a very changing and volatile marketplace, and I think our risk management and governance has been very important in the last -- it's always important, but in the last 12 to 18 months with the impact of COVID and the constant changing around the market and supply circumstances and some volatility in international markets have all been very carefully managed because of the experience we bring to the table. And of course, the acquisition of Lion Dairy & Drinks, if I move you to the next page, has really been very important and a logical next step for the company, and we've been delighted to be able to make that acquisition. It does fit with our core capabilities. It is a strategic alignment that we -- that's been well documented, as we now have the capacity from farm gate right through to our end customer, wherever they may be in Australia or around the world, to deliver value-added products and branded products to the consumer but also manage our milk in the most effective way. So each liter of milk can be directed to a product or a customer that maximizes the return that we can generate from that product. Still work to do, obviously, in the integration of Lion and, indeed, the opportunities that we identify throughout the business, but certainly, we're well down the path around synergy opportunities, and we continue to want to invest in our business to improve those returns that we get out of every liter of milk or, indeed, peanut or piece of fruit that we process through this business. If I move you to the next slide, we do -- we are very proud of our record around creating that wonderful portfolio of our iconic brand. And it's fair to say it's been a path where we've been acquiring brands and then investing in them and building them and reinforcing some of that consumer loyalty. Quite frankly, we've been bringing iconic Australian brands home. Whether that's Vegemite, whether that's Dare flavored milk, Farmers Union, the Master brand in Western Australia, we've been bringing some of Australia's favorite brands back into Australian ownership and then building on the strength of those brands. And we're delighted to sort of show that story from pre-2017 through to today. So in this year, we've gone from pre-2017 to be less than 20% in brands and consumer goods to now in this year with just 5 months of Lion under our belt at 73%, and we'll expect that to increase to an excess to 80% with a full year of Lion Dairy & Drinks in our portfolio. So ladies and gentlemen, just to move on to the next slide, which I think is very important in the context of all that is occurring in the world today, and that is that it was important for Bega to review its sustainability and circular economy approach and, indeed, think about carbon targets and emissions targets for the company. It was the right time, especially given the acquisition of Lion. So we are using a baseline of 2021 in terms of the targets that we will set for the future. And I'm pleased to announce that we've -- in terms of emissions intensity, we've announced a goal of a 50% reduction by 2030 and a 40% reduction in absolute emissions by 2030. And perhaps to explain that a little more, what -- obviously, we have different products and different facilities in our portfolio that have different emissions profile. By announcing a reduction in emissions intensity, that means that every one of our staff members, every person involved with the operations at Bega Cheese think about how they can get a 50% reduction in intensity on the product that they are responsible for. So intensity around a particular portfolio of products or a particular site, if everybody is working toward a 50% intensity reduction, that is what we want. And we believe that, that will yield us, in absolute emissions terms, a 40% reduction by 2030 and, of course, a net 0 emissions by 2050. The Board and I and the senior executive team believe that these are our minimum goals. We would obviously like to achieve better and more than that, and we will be working to achieve better and more than that. And indeed, it's part of Paul's and my performance criteria to make sure that we are meeting these goals around emissions and, indeed, around circularity in the Bega Valley. And just to dwell a little on circularity, we're very proud that we've been championing along with KPMG and Rabobank and approach to circularity that is community wide in the Bega region. And we are soon to be in a position to launch a non-distributing community-based cooperative, which obviously Bega will support, along with many others. That will see us focus on the entire impact of business in our region. We believe this will be a pilot for many, many others to follow. It will assist us in dealing with our business across all 20 of our sites, but importantly, it sees the collaboration with government, small and large business community organizations, the indigenous community to make sure that we are managing our environmental footprint across more than just emissions but across indeed all that we do in our operations. That all said, I'm very pleased to hand over to Paul van Heerwaarden, our CEO, who will give you his perspective on the performance this year. Thank you. Paul, over to you.

Thank you, Barry, and thank you to everyone for joining us this morning. As we normally do, Pete and I will take you through a review of the year. And if you can turn to Page 12 of the presentation, you will see a list of items, some of which Barry has already touched on and others that we will provide more detail on in the following pages, including the financial performance and the acquisition and integration of the dairy and drinks business. I would like to draw your attention to a few points on this page, including a couple of years ago, we started talking to the market about the Koroit lactoferrin investment and also the organization and process review. Both of these initiatives were concluded in fiscal 2020, and we benefited from the full year impact of these 2 initiatives in FY 2021, which has been a very important contributor to the results. Also, if I take you back over 4 years ago, we completed a transaction to sell infant formula dryer and infant formula canning plant for $200 million to Mead Johnson, who were subsequently taken over by Reckitt Benckiser. We also entered into a 10-year access and service agreement, which would approximately provide a further $100 million in earnings over the contract period. Earlier this calendar year, Reckitt [indiscernible] served termination notices on these agreements and, as a result, they're required to provide termination payment to Bega, which Pete will touch on later. While our preference was to continue these contracts, the material payments we will now receive will allow us to reset this part of our business and position with further growth and consolidation. We continue to focus on safety and diversity and inclusion programs. And finally, from both a Bega perspective and also personal perspective, it was very pleasing to see the positive conclusion of the litigation with both the Kraft and Fonterra cases that commenced a few years ago. If you can now refer to Page 13, and I won't dwell too long on this slide. Barry has touched on a couple of these points earlier, but it is worth reflecting for a moment on the continued growth of the company over the past 20 years from both acquisitions and business development. And importantly, again, Barry mentioned this. You can see from the pie chart on the right-hand side increase in sales in a significant growth environment from our branded business, which will continue to grow into FY '22 as we see the full year impact from the acquisition of a dairy and drinks business. Page 14 provides headline financial numbers, and it's certainly pleasing to see our leverage ratio to continue to improve, though the 2.25x leverage does not include yet [ full 10 ] months of earnings from the dairy and drinks business. And Barry mentioned some of our earnings and revenue numbers earlier, so I won't draw your attention to all of them but focus on the profit after tax, the statutory profit after tax result of $72.2 million and also the normalized profit after tax of $39.6 million, both increasing compared to the prior year. And I should also point out, the EPS numbers reflect only 5 months of earnings from the Bega Dairy and Drinks business. So we certainly expect to see them increase materially as we get into FY '22. I will now pass you over to Pete, who will continue discussion about our segment results, further details on the financial result and also an update on the acquisition and integration before he will hand it back to finish off. Thanks, Pete.

Terrific. Thanks, Paul. This next slide, Slide 15. Those of you who followed us last year would be aware that in the results in FY '20, we introduced our new bulk and branded segments and moved away from our traditional view of the business, which had been based around legal entities. And what we're just trying to do is as out here. So the bulk segment really focuses on the parts of our business that produce bulk product that we sell in the markets and would include a plant, for instance, like, Koroit, whereas our branded segment actually includes those assets that produce branded products or do secondary processing for branded products that are ready for shelf. And down there, you'll see the core capabilities and how they relate across those segments that Barry touched on before. So this is very much how we're looking at the business and, obviously, excited about the exposure we're getting to the branded segment and the margins and extra value it offers us to be able to add to our materials. We just go to the next slide. We've just cut a segment view [ to a year ]. You'll see there that both earnings in branded and bulk increased over the period. Obviously, you have the 5 months of Lion Dairy & Drinks trading in that result there. And it's worth noting to the intersegment elimination of $344 million of revenue. We do actually track that number. That's the amount of product that was sold from our bulk segment into our branded segment to add more value to it. So that's a number that we're pleased with and continue to try and add value to those bulk products. The branded business, obviously, benefited from the Bega Dairy and Drinks earnings since January. We had really good sales growth in spreads domestically and our cream cheese product in Asia, which was a good result there. And we actually [ have ] cost of redundancy in those results with the transfer of our individually wrapped slices production as it was consolidated into Strathmerton. Obviously, bulk will benefit in nutritionals from the full 12 months operation of our new lactoferrin plant at Koroit that was put in place just before the start of the financial year and operated superbly. We produced 30 tonnes of product out of that facility, and that actually more than mitigated some of the headwinds we had in the infant formula part of our nutritionals business. We also had some favorable commodity pricing in some parts of our business there, which was a really good result. Just move on to the next slide. Reconciliation of our normalized results. There was a huge amount of activity, obviously, with the acquisition of LDD. So we did have quite a few adjustments this year to make to the result, and I'll just walk you through some of the key points from those. So you'll see the statutory EBITDA number of $182 million on the left-hand side, EBIT of $107.7 million and profit for the year of $72.2 million after income tax expense. The first key adjustment was transaction costs related to the Lion Dairy & Drinks acquisition. Just the material numbers there. We had stamp duty of nearly $30 million, transition costs of $13 million. We had redundancies for the Lion Dairy & Drinks, organizational review that we put through of $6.5 million, and then another $5 million or $6 million of consultancy costs and advisory costs. They were the predominant numbers there. You'll see that, unfortunately, we weren't able to pick up as much deductibility as we would have liked because of the stamp duty costs being nondeductible. Barry touched on it before. We did have a bargain purchase entry, which is provisional at the moment, but that's due to the difference between the price paid for the asset and the provisional [ items in ] balance sheet when we've gone back to do further valuation work and that sits at $70 million. So a provisional number, but we're very comfortable with where that is at this stage. And as Paul mentioned, we had the termination of fees from Reckitt Benckiser. This is the first portion of those that we've picked up in the financial year. So just under [ $3 million ] of earnings coming through there from that termination. We're showing [ $14 million ] in the revenue line and the other [ $14 million ] you see further down the P&L. That's just the split of treatment between service fees and access fees. We've then got the Kraft legal settlement. It was terrific to have that finished. That was for $9.3 million. We've obviously removed that from the results. And then just on the costs. Some of those were write-off of some SaaS assets we had on the balance sheet. We've put in BlackLine accounting system and an HR system that had to be written off from the main costs there and just some legal costs for the Fonterra case. Of course, that's to be finalized this coming financial year. So that gets us to a normalized outcome of $141.7 million of EBITDA. It's worth noting that we did incur just under $10 million of restructuring costs associated with the AWS transition and also the completion of our organizational process review, which we had talked to you about last year. They are in the results -- in the normalized results. So that just explains the movement between statutory and our normalized earnings. If we just go to the next page, just around the balance sheet. Obviously, a lot of impact to the balance sheet this year with the addition of Lion Dairy & Drinks. As I said, that number is still provisional, but there was about $600 million of new assets that came across. Obviously, we had the capital raise for $393 million to fund the acquisition of $528 million, which was the [ ending ] cost of the acquisition [ when we ] netted off our working balance [ deal ] after settlement. And net debt increased by $94 million, which was the balancing number there. We've also brought approximately $400 million of property into the asset base. So overall, the balance sheet is in a good position. We're very happy with where net debt is at the moment. That was one of the objectives when we did the deal to ensure that we have the balance sheet in a position where it could rebound strongly, and we're comfortable with that. If I just move on to the next slide, which is around cash flow. Operating cash flows were down slightly on last year, but still a really strong performance. We're happy with that. We were able to make some really good gains last year with working capital improvements. It was difficult to repeat those again this year, obviously. We've also built a little bit of inventory towards the end of the year. We got some opportunities around some extra milk procurement in the last couple of months. And we had a terrific peanut crop up in PCA with the crop exceeding 20,000 tonnes. So that's also added some inventory there. But we're very happy with the balance sheet. Obviously, increase in net debt, but still at 2.25x, which is an improvement on last year. We have only got the 5 months of earnings, and so we would expect that leverage ratio to fall further as we get the full 12 months of BDD earnings into that equation, and also as we start to achieve those synergies that we talked about when we did the acquisition. We'll just move on to the next page. Just a little bit of an update on the integration of Lion Dairy & Drinks. In summary, we're extremely pleased with how that's going, and we're very happy that we've purchased a business that is consistent with what we've found out during DD. And so we've implemented a 100-day plan, and that was really focused around stabilizing the business, doing a cultural assessment to ensure that we can understand the cultural differences and how we might navigate those so we could retain the people that we wanted to retain and keep the people engaged within the Lion Dairy & Drinks business, and then from there, plan our synergies. That's gone particularly well, and we've actually executed on all of the organizational synergies that we wanted to do, and we're well in line to achieving the $36 million cost-out program that we said we would in the full year balance sheet, and that's flowing into $41 million of annualized synergy savings. That's going very well. TSA agreement. We undertook a TSA agreement for 15 months when we bought the business, and we're pleased to say that we've moved off payroll, accounting, treasury and tax and that the only thing still remaining is technology infrastructure, and that's looking towards completing by January next year. So we're very happy with that. New capital projects in place. We've already kicked off a couple of significant projects that we think will get -- help get the business on a growth platform, and that's around the yogurt with some improvements to the Morwell facility. And then we've also done a significant packaging cost reduction project with blow-molding [indiscernible], which fits with our sustainability goals but also provides us with some strong financial benefit. Earnings performance for the 5 months was very strong. We saw some good tailwinds with our milk-based beverages and yogurt, which continues to do well. And while we've seen a mix change with COVID-19 at the moment, some of our on-the-go channels have certainly been reduced and demand for our milk-based beverage products in those channels has come off. We are seeing a good strong lift in grocery, particularly around yogurt. So we still feel like there's good momentum in the business. And our supply chain continues to stand up well in the COVID environment, obviously, having a significant cold chain [indiscernible] flexibility there, and we think that that's particularly good in helping us mitigate risk. I think that's it. Paul, I'll throw it back to you.

Thanks, Pete. I should thank you also, Pete, for everything you're doing, and the last couple of years has been pretty busy, we've had a lot on, and you've been thrown in the deep and then you continued to turn up each day. So that must be a positive. But you've presented a great set of results. But I know from Barry and my perspective and, more broadly, the Board provides a lot for us and makes our life a lot easier. So thank you. If I can ask listeners now to turn to Page 21, which is a page that contains a lot of brand logos and a lot of numbers. And it's worth noting that none of these numbers or brand logos existed within our business over 4 years ago. This is a true transformation, which we're very proud and excited about, seeing iconic brands like Vegemite sitting alongside Farmers Union, Dairy Farmers and Dare and also smaller brands like Zooper Dooper sitting on the same page as an emerging brand like B Honey. We now compete in major food and beverage categories and have a dominant market share position in many of them. These numbers include structured convenience and grocery channels but do not include a lot of our route trade business, which continues to grow and services up to 30,000 customers a day across Australia. So a really impressive portfolio of brands and a reach across multiple channels in Australia and in international markets, which is -- which we're really proud of and look forward to continuing to grow. Turning to Page 22, and I'll just provide a bit of an update on the next couple of pages on various initiatives across the product lines. And it's pleasing to see that the significant investment in our brands and new product innovation has continued following the acquisition of the Lion Dairy & Drinks business. And throughout FY '22, we will see some product -- exciting product launches, and we can present further detail on it at a later date. The integration of the business has also provided a strong platform for further growth, as I mentioned earlier, in the international markets, which is a really important and growing part of our business. As outlined on Page 23, the growth of our Spreads business continues with B Honey gaining over 10% here in Coles and with increasing distribution across Woolworths and the independents. We'll continue to see this significant growth for us in FY '22. Vegemite, which is such a wonderful iconic Australian brand, continues to extend with new packaging formats. And also, this is the case with Simply Nuts peanut butter brand that we launched a few years ago and continues to grow and worked very well for us in the market. It's also pleasing to see that we've launched the 180 Nutrition range of products into the grocery channel and also extended the Happi range of lactoferrin-based nutraceutical products in the pharmacy channel. So really good to see those emerging categories in these new growth areas for us. Moving on now to operations and the map on Page 24, which Barry touched on earlier. And this provides a real sense of the extent of our manufacturing network across Australia. We now have 20 facilities producing our extended product lines and supporting our extensive chilled distribution network across the country. As Barry mentioned earlier, this extended network provides us with scale and flexibility as we continue to optimize and extract value from not only milk but also now juice and also peanuts and now honey supply chains. Page 25 provides an overview of operations, including a number of initiatives that have already been covered by Barry, Pete and I in the presentation. I will point out the synergy program across the entire supply chain continues to provide opportunities for ongoing savings and efficiencies. And we have a number of targeted capital projects in fiscal year 2022, which will build on the work that we've already done to date in the current fiscal year. Moving on to the following page. And COVID continues to provide challenges and opportunities for the business, as stated previously, and our priority is the safety of our people and our customers. For almost 18 months now, we have had our crisis management team and our site operations team meeting as required to respond to those challenges. This process expanded to include the Bega Dairy and Drinks business following the acquisition back in January. In recent lockdowns, we have seen a negative impact across our route trade business, particularly in Sydney and Melbourne, and this will be offset by growth in our grocery trade, and also offset with cost saving initiatives and other growth initiatives across other parts of our business. Moving to Page 27, which includes a chart which we've been presenting for many years now. And while the proportion of our branded products that we sell continues to increase, we still need to ensure we closely manage our bulk commodity business and the risks associated with commodity and currency volatility, along with the domestic milk pricing. This chart tracks the export commodity index and our Southern region milk price. If I can draw your attention to the gray and green lines just to the left of the shaded light gray area, you can make that the commodity index at the time we set milk prices last year was in rapid decline, which presented challenges that we navigated through during the first half of the financial year, and we saw a strong recovery as we got into the second half of the year and supported increases in farm gate milk prices, and this is carried through to the FY '22 opening milk prices, which are record prices. Our business following the acquisition of Lion Dairy & Drinks is larger, more diversified. And while we announced we're significantly less exposed to commodities and currencies, it remains a key focus for us. Before handing back to Barry, can I please turn your attention to Page 28, which includes progress on our CSR targets across our 5 focus areas. This is a slide again that we've reported in previous years and provides a good, a good update across each of these focus areas. In addition to good progress on our improved nutrition targets, we have made good progress on the diversity and inclusion with a number of initiatives, but we still have a lot of work to do in this area. Barry covered our carbon emission targets earlier, which provides further focus on the business as we address the challenges from climate change. The importance of packaging continues as we grow and increase the proportion of our branded suite of products across our business, and we are on track to meet our commitments to the 2025 packaging covenant and more sustainability initiatives across our supply chain have contributed to further improvements in this particular focus area. So that's it for me, Barry. I'll now hand it back to you.

Thanks, Paul. And I think as you mentioned around Pete, it certainly also applies to yourself in terms of the work done this year. It's been a heavy workload in a very changing environment. But as I said at the opening of my comments, I'm very pleased with what we've been able to achieve during this period. It is worth reflecting on where all of that work puts us today. So if I move you to next slide, I think we're, as we've sort of repeatedly said, very pleased with the work that's done and the progress of all the initiatives that we've put in place, inclusive of the point of time we are at with the integration of what we will now refer to as Bega Dairy and Drinks. We've been talking about it in acquisition terms as Lion Dairy & Drinks for a period of time now. But internally, it is now known as -- that division and that work is now known as Bega Dairy and Drinks and that's what we'll refer to it from this point on as we continue to integrate, and we continue to recognize and invest in new opportunities in that component of the business. We do -- we continue to be pleased with the improving financial performance that we demonstrated last year and the benefits of scale that we're now achieving given the size of the business. That does include a strengthening of our balance sheet in the year that just passed. And as Paul demonstrated in his presentation, we now have a strong suite of brands many in really good growth categories, which obviously will be our focus as we move forward. There is -- we see in the existing business that we now have, there is good opportunity for further growth and good opportunity for further business improvement. The geographic product and channel diversity that we now have, whether that's in milk procurement across the country or, indeed, even in products like peanuts and -- or it is in our customer base where we are delivering both major retailers through a significant chilled network, helps build the business resilience that we think is required in these changing times. I should say that, of course, we should never forget that, that diversity of markets does include the international markets where we continue to have a strong presence exporting to approximately 40 countries around the world. So I think the fact that we've got geographic diversity in procurement, customer diversity, both in terms of who we sell to and the channels in which we sell to them and market diversity in both Australia and international helps build that resilience for the business. As Paul mentioned, we have seen, again, strong farm gate milk price increases. In some cases, competition for milk has seen in some product ranges that being in excess of returns to some of those product streams. Hence, it's really part of our strategy to make sure that we're focused on the higher value and branded and the business. Still work to do there, but certainly very competitive circumstances for farm gate milk prices, but that's returning good prices to farmers in an environment of good seasonal conditions, which I think is seeing a much more optimism from our farmer base in general. As I mentioned in my opening comments, and I'll just reinforce that, we have a view that there is now a structural change in infant formula market and channels, particularly related to China, and that's obviously particularly related to the Diagou channels but also related to consumer preferences in those markets. We have been producing infant formula for a great many years. It is very much a part of our core competency. We are very pleased to still be in that space. We have been there -- while we have seen significant demand increases for infant formula and recognized the opportunity there, both in terms of supply but also in terms of realizing some value for some assets, we will look to make sure that we right size our infant formula capability and that we have the right assets to make sure that we are servicing existing customers and no doubt new customers as that segment of the market begins to settle down. But we're -- I'm just emphasizing that we do see that demand change that has been well documented staying with us, but we also see that we will adjust our footprint and our business accordingly. Paul mentioned the COVID-19 lockdowns, in particular, impacting food service and convenience channels. Something that we have to manage. Obviously, we understand and are very concerned around community health and, I guess, reinforce the wish that people comply with the government health orders, but equally something that we will be very pleased, as I'm sure the entire community will be, to see those lockdowns come off and, indeed, vaccination rates go up and those markets return to normal. But that will be -- that does impact us in some ways, but as Paul outlined, that is something that we need to manage, and we do see some benefits in other areas. Going to the next slide in terms of our priorities, and this is our last slide, and I'd be very happy to take questions after it. In terms of our priorities, it should always be emphasized that the safety of our people, and all associated with Bega Cheese and their wellbeing is our #1 priority. That, of course, in recent times, has also included how we've dealt with COVID-19, and Paul has outlined that in terms of our teams, and it's very senior teams and people throughout the business that are making sure we are making our environment as safe as possible. We do need to manage the external impact of COVID-19, and it's important for us to continue to focus on realizing the synergies in Bega Dairy and Drinks, which we are, as we've outlined, on track to do. We will increase our investments in brands, markets and capabilities where we see opportunity. We think that there are great opportunities, whether that be in capacity or indeed in delivering to the consumer innovation that they are looking for. So we will continue -- we will make sure that we are building on the quality assets that we have purchased. We think there are further manufacturing optimization projects, which we will continue to work, particularly around Lion, but across our entire integrated network. We do think there are opportunities for further rationalization and business development, and that's obviously something that's always on our mind within this business and, indeed, externally as well. It is important for us and, Paul mentioned, we think we've got more work to do around diversity and inclusion, but it's an important initiative in the business that continues to get the full support of the Board and executives, and it is very much part of our priorities. And I think I'll finish with sustainability and the circularity initiatives that I mentioned earlier. Very pleased to be announcing our targets today and are particularly proud of the circularity initiative that we've only spoken briefly about. We will have more detail, obviously, in our sustainability report that will be out very soon, we would expect in the next couple of months. And -- but certainly pleased that as you would expect from a company with a DNA as Bega, where we have those close links right back to the farms and right through manufacturing and in regional communities that those initiatives, it's nice to formalize them, but they have always been a part of what we do and how we approach our supply chain and indeed our farmers. So look, thank you, everybody. Very, very pleased to have presented these results to you today, and happy to take questions.

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

Just first question on the Bega Dairy and Drinks business. Could you just give us a sense of -- you mentioned that it outperformed a bit in the first 5 months. I'm just trying to get a sense of what contribution that did make in the '21 year?

Obviously, we reported the segments the way we reported them, Michael, and haven't split out the performance of BDD. Obviously, we had a pro forma P&L for what our expectation was for BD&D, but Pete, Paul, I'm not sure whether we want to go into too many specifics around the outperformance. It was -- it was a pleasing outperformance, but I wouldn't say that it was overly excessive to what we actually predicted in our initial forecast. But Pete, Paul, I'm not sure whether you have anything to add to that.

I think that covers the sentiment, Barry, and it's worthwhile we just point out, too, that it's off the back of some good growth in both grocery and also in the route trade channel. And no doubt, we've got a good boost to the Australian ownership, and that sentiment coming through actually very positive, particularly in that route trade. And that provided some of the impetus for that improvement in the result, and that's momentum that we'll carry into FY '22 as well. So just pleased to be on that side of the ledger, and then we can come through these cost synergies that Pete mentioned earlier that will allow us to achieve these targets that we've set ourselves.

I think you've mentioned the $36 million, I think, synergy this year and maybe $41 million in FY '23, but were there any synergies banked in the '21 year?

We had some, but there's also the cost of executing those synergies, which I think, and Pete, correct me if I'm wrong, but the cost of executing a lot of the synergies, which is in the normalized result, were offset within that 5-month period, Michael.

So Michael, we went into the 100-day plan and didn't -- we really executed probably in the last few months of the year, a lot of those organizational changes and so forth. If you do the math, we were looking to achieve, we want to ended the year sort of $2 million to $3 million of run rate per month and we have. But that's happened really in the last couple of months. We brought at the end of January, did our planning around February and March and then sort of really executed over April, May, June. So there wasn't that a lot.

And just going forward, we should -- that earnings split for BDD, it's sort of 80-20 of the EBITDA line is what we should be factoring in?

Sorry, earnings between?

First half, second half.

Seasonality split between first half and second half?

Yes, yes, still very strong. So we obviously didn't have that impetus in the result. So the profitability of the business looks significantly between now and Christmas.

That's great. Just a final one for me. You've got -- Barry, you've got sort of over $400 million of land and buildings on the balance sheet now. I'm just wondering strong property markets out there. You've got opportunities in front of you for either selling property outright or rationalizing your footprint a bit/maybe sale and lease leasebacks. Just wondering how that might pan out over the year.

So Michael, obviously, we are happy with the sort of progress like strengthening the balance sheet through the operational performance that we're getting out of the business. It is very good to have that sole property portfolio. It does present us with options. I think the right way, I would put it is that the properties that we see as long term required for running this business, we're very pleased to own them. If there are other opportunities outside of that, we'll obviously consider them. I think it's good to be in a position to have options. It's not something that we're feeling that we urgently need to do, but it does present an option for us that we would probably take the philosophy, which we have for quite some time now that core assets required for the business we like to own, but some that we might identify as noncore or non long term, we would consider other options on.

Next question comes from Phil Kimber with Evans & Partners.

First question, the debt situation was very pleasing and a lot better than what I thought it would be. But I just wanted to check, at the time of the acquisition, you've mentioned, I think the numbers were $21 million of upfront integration cash costs, and then $60 million of transaction separation cash costs. I just wanted to know if many of them were incurred in the second half? Or are they more likely to fall in FY '22?

Yes. I feel the net debt from the pro forma that we put out when we did the listing is obviously considerably higher than where we ended. I guess the big swings there were that when we were doing that pro forma, there was about $80 million of debt-like items on the balance sheet of LDD and that related to leases and in negotiating the final bank agreements with the banks, they -- we negotiated that we didn't have to include leases in net debt. And so that was removed. And so that's one of the reasons why the net debt is lower, that was about $80 million. And then we just had better cash benefits. So we didn't have the RB settlement payments built into the numbers. We've got the -- we didn't have the Kraft settlement built into the numbers. We've underspent a little bit on CapEx towards the end of last year. So there's been a raft of things that have helped our cash build. We're not that far off, we're pretty much on target with our spend. So obviously, there was about $60 million of transaction-related costs around stamp duty and so forth. And we're pretty much on target with that. So reasons for the net debt benefit were what I sort of alluded to first half.

Okay. So there's not -- there isn't some -- I know you've taken restructuring costs through the P&L, but I just wanted to understand if there's the cash payment of those costs, is there a material amount to come through in FY '22?

No. No.

Okay. And then my second question, perhaps to Barry, was twofold. One, farm gate milk prices seem to come as a bit of a surprise. They started off rational in early June and then sort of got to be crazy towards the end of June there. Maybe I'd just be interested in your thoughts from -- as a dairy industry person, what might have driven that? And then the second part of the question is just around -- I'm just trying to understand the risk for the remainder of FY '22. So what would happen if commodity prices were to come off from here? Because I mean, I don't think you can change farm gate milk prices now until next season. So just wanted to understand how you're thinking about that?

Look, Phil, I think your summary is pretty good. I think we were very comfortable with where they -- where farm gate milk prices started during those initial announcements, and we were very comfortable with the announcement we were able to make which needed to include a harmonization of prices between what were traditional Lion farmers and the traditional Bega farmers. Look, the reality was we had a couple of new entrants in the milk procurement market that added some additional pressure, which probably also saw that we hadn't seen a lot of milk growth despite a good season and reasonably good prices. So companies were all in a position where they didn't really want to lose milk. So that meant that I guess we found our competitors pushing themselves reasonably hard to make sure that they retain the supply. They got in a very heated competitive environment. We thought we had to be there to ensure that our suppliers were receiving a competitive price. From my perspective, Phil, and I guess that graph that Paul puts up. It's not the first time that we've seen pricing in commodity -- in farm gate prices push above commodity pricing as people have wanted to secure throughput and indeed secure the milk required for their market. So yes, it got very willing, but it then settled down and we did lose a little milk through that because we couldn't justify going any further in the pricing. But we did -- but in the end, we now manage our milk suppliers across our network, which is one of the advantages that we obviously have through the new acquisition. So yes, very, very, very heated competition. And I suppose the other thing I should say is that, that also probably still reflects the position where there is overcapacity in the industry. It's still not fully rationalized and that causes companies to need to keep those factories operating, if you like, and therefore, the competition naturally follows. My perspective is that we will manage that. Obviously, as we think about pricing as we set pricing, we set it with a very close eye and a lot of experience around what we think the international commodity markets will do and indeed what currency will do. So -- and obviously, in terms of the pricing that we ended up settling on or not moving any further was where we thought that our risk tolerance was as much as we were willing to take, but we will now manage for the rest of the year. It is notable that we've seen some downturn in global commodity prices, but that's also been aligned with some downturn in currency as well. So all part of what we're very used to managing and we will continue to do that throughout the year. So yes, very competitive environment, but something that we've experienced in the past and managed in the past.

Sure. And last one, if I can, quickly, just CapEx outlook for FY '22. Sorry, if I've missed it in the presentation summary. But can you give us a sort of forward steer on what we should be thinking from a CapEx point of view?

I might throw to Paul for that. We were a little down on what our normal run rate on CapEx would be this year, which obviously also in terms of the -- where our debt land is in terms of cash flow and whatever, that did help. But I think we will see a return to more normal CapEx. But Paul, I might get you...

Yes. Thanks, Barry, and good day, Phil. Yes, so as Barry -- so we'll see capital much more broadly aligned with our depreciation rates into FY '22. So -- and Pete referred to it before when he talked about cash flow and debt that in the second half of last year, we did have some sort of an underspend on capital, generally with the range of other initiatives and some COVID disruptions, delayed some of our capital projects. So we'll catch up on that. But we've also recently approved significant projects across the business, which have well and truly kicked off now. And they'll see us -- we're fully expecting that target capital expenditure in that depreciation range for FY '22.

Your next question comes from Josh Kannourakis with Barrenjoey.

Barry, Paul and Pete. Just first one, just around the branded segment and good growth there. Just keen if you can give us a little bit more context around that platform when you think about how mature maybe some of the new branded products could be and also just some context around the existing ones in terms of any repricing opportunities there.

Paul, are you happy to take that question?

Absolutely. I'm just -- just bear with me, Josh. I'm just trying to operate about 4 screens at once here in getting my slides back up in order to go to the slide that actually covers off the -- and I think I've lost it somewhere to bring it up here in a minute. Just bear with me a tickle. It's worth noting -- and Josh, can you just provide some clarity on your question regarding pricing? Just what you're...

Yes. Yes, sure. So the first part was just around how material some of the new brands can be and how material you think that can get to over time of that segment? And the second pricing question was just with regard to in terms of selling into the retailers, whether you see any potential for inflationary or pricing adjustments that you might be able to put through across any of the branded products?

Yes. Look, we certainly, on the second point, we are seeing -- certainly seeing across multiple channels, some upward pressure on pricing with the milk pricing increasing end of the year, and that was the subject of Phil's earlier question too. So we are seeing that across multiple channels starting to flow through. And also, seeing that that's a bit of a trend that's been increasing over the last sort of 18 to 24 months, we have seen a fair soft commodity price increase across the globe, but also domestically seeing food price inflation through the major retailers. So that's certainly seeing that where we see much stronger value growth in our core brands and we do volume growth. We're actually seeing that that's over indexing. So we're certainly seeing that flow through. In terms of where we look for opportunities for further growth in these categories and how we're thinking about them. A lot of them are operating, if I think about yogurts and flavored milk, in particular, good, solid growth categories. I mean these are categories, Josh, that are growing at around 5% a year. So -- and if we maintain our market share and pick up that growth, that's a very good outcome. But our plans are in place through product innovation and increased ranging in distribution to exceed those market growth rates in those core categories. And as we bring the businesses together, the ability to sell more products off the back of a truck into more customers is also going to help with that. So certainly very excited about how that will progress. And a lot of those initiatives have already kicked off in the last 6 months or so. So I'd say it's pleasing. And pricing will be part of that. But we've got some pretty good margin products here and volumes going to drive the bottom line in many cases, a lot more than pricing will.

Got it. And just in terms of the first one around some of the new branded products, you mentioned B honey and a few others. Just interested in terms of how you're thinking about new product rollout or potential bolt-ons within that segment?

In which segment? In the spread segment you mean or just across?

Yes. Well, across the broader branded segment. Yes, absolutely.