Bega Cheese Limited (BGA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Bega Cheese Limited Full Year 2022 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 hello, everyone. I'm very pleased to be presenting you the results Bega achieved for the FY 2022 year. And what a year it's been really. I think a year of extraordinary volatility in our people, and we're very pleased to be able to present these results to you and particularly pleased with the achievements that the company have made over the past year. For those of you following the results presentation, I will guide you to the pages as we go through. But I guess, our key messages, which are on -- is on Page 3 are important. We are pleased to present what we would describe as a solid financial performance in what was a very challenging environment, which we'll talk about a little more in the body of the presentation. It is the first time the company has exceeded $3 billion in revenue, which is obviously a milestone for the organization and a testament to the growth and acquisitions that the company have made over the past decade. A normalized EBITDA of $180.1 million and statutory EBITDA of $149.9 million, I think, in the environment that we have been operating in is a pleasing achievement. Particularly pleasing is the strong operating cash generation of $158 million in the FY 2022 year, which, of course, then allowed us to reduce debt and make further investments in the business, but we have reduced debt by $60-odd million, meaning that our leverage ratio has dropped below to 1.8. We have obviously now owned Lion Diary and Drinks for a little over 18 months. And so very pleased to have this is the first year where we've reported line as a whole for the full financial year. The Lion Diary and Drinks business, which we now refer to as Bega Dairy and Drinks, the integration has gone well and pleasingly, the synergies that we expected to achieve have been achieved. Importantly, it does represent some of the strategy around that further transition to a branded company and indeed some of the brands that we now have in the portfolio, which Paul van Heerwaarden will discuss a little later, are truly iconic in the Australian market and indeed mainly our #1 or #2 brand. In the year past, just past, we've seen a very -- a strong rise in global dairy commodities, and they remain relatively strong. So that obviously with a business style of Bega Cheese mean that we've been able to take advantage of some of the strong commodity prices in the year just past. We talk regularly about our sustainability programs and we continue to implement them as a priority as we work towards ensuring that we have a lot of footprint as possible as we reduce the food that is so much needed by our customers here and around the world. Obviously, I've touched a little on some of the disruption in my opening comments, but obviously, there was significant COVID-19 costs in the year just past which we'll outline in a little more detail in the presentation. And there was also some knock-on effects from the COVID-19 disruption that meant that other disruptions were more difficult to handle, particularly things like the extreme weather events and the floods. Farm gate milk prices continue to be -- farm gate milk price competition continues to be very robust and we continue to try and -- we continue to be competitive in that marketplace and pleasingly have secured the milk we require for the coming year. Leading you to the next page, you will see that we've done some rebranding for the company. We now refer to the company as Bega Group. We're of course very proud of our origins. And of course, Bega Cheese and Bega Region remains the heart of the company. But of course, the company now encompasses brands like Vegemite and Dairy Farmers in there and many other iconic brands such as Farmer's Union and Juice Brothers. And we thought it was more appropriate to now refer to the company as Bega Group, recognizing the expansion and growth of the company, but still remembering where the home of the company is. So we've done a little bit of corporate rebranding. It's only corporate rebranding in now referring the company as the Bega Group. And talking about our purpose being to create great food for a better future, which we think is very appropriate for the times that we live in. If I move you to Page 5 of the results presentation, I touch on the performance highlights, which we'll go into more detail. As I mentioned, exceeding $3 billion of revenue for the first time, with branded sales now representing 82%, the branded segment representing 82% and our Dairy Ingredients and Nutritionals segment representing 18% of our revenue. Our normalized profit is $46.3 million with our statutory profit of $24.2 million. We were pleased to announce -- complete our year with a strong announcement around dividend and that will be issued shortly. Moving to Page 6. I think this is a slide that many people are seeing around the transformation of the company. And I think in a volatile environment, the path that we've gone down in terms of acquiring some of those brands that I've mentioned, making sure that we are a diversified and balanced business that can service both Australian and international companies can participate in both the branded, in the branded segments of food and particularly dairy and also the commodity sector that dairy ingredients is a key feature of our organization. And what that really goes to is, it allows us to manage risk and manage volatility very effectively even in difficult times such as the time that we have just been through. Moving to Page 7. We have spoken regularly about our sustainability programs and indeed, our progress on the circular economy projects that Bega Cheese been waiting. I think importantly, we have made announcements around our commitments and carbon targets for emission and those working on the programs, so those reductions have been a priority for this year. And we will have more information on how we think that we will indeed achieve those -- that 50% reduction in emissions intensity by 2030 for our Scope 1 and Scope 2 emissions. This year, we will be focusing on compiling data and information on Scope 3. And of course, the circularity project will be part of what informs us in terms of how we deal with and manage Scope 3 emissions into the future. I just wanted to really give a little bit of an overview in terms of where the company is at and how it's performed. I think as I said in my opening comments, we're very pleased that in a very challenging environment, we've been able to achieve most of our key strategic objectives which Paul and Pete Findlay will speak about in a moment, while still delivering an acceptable financial result and reducing debt. So that said, I might just hand over to CEO, Paul van Heerwaarden, who will take you through in more detail the results, and I'll come back and talk to you at the end of call and Pete's presentation. So Paul, over to you.

Good morning, everyone. I will provide a summary of major initiatives and operations before handing over to Pete who will provide further details on the financial results. Following Pete, I will cover the commercial market overview for the company. So Page 9, which outlines the major initiatives during FY '22. And from my perspective, it was very pleasing to see the ongoing progress during a very challenging year in terms of disruption and unavailability of internal and external resources. Our key focus coming to FY '22 was to ensure that we realize the synergies with the acquisition of the Dairy Cheese business, which we did, but there was also other sizable projects, in particular, the transition from the Lion Group IT infrastructure to one cloud-based network, which was completed ahead of schedule and with minimal disruption in our operations. We're also investing in our digital platform and network infrastructure with ongoing automation and rationalization projects. We're continuing to reduce our cost to serve, improve our service and delivery performance. The termination of the record agreements announced last financial year were finalized during FY '22 with a reset of our fixed cost base and arrangements put in place for third-party accounting to support our [indiscernible] business, which has stabilized following the market disruptions we've seen in the China market in the last couple of years. The rationalization of some of our processed cheese manufacturing lines has provided increased efficiencies and this business continues to grow particularly in export markets. But we also see opportunities in the domestic market. We have processed cheese provides at our retail price point compared to natural cheese in a inflationary environment. I should also note that our processed cheese manufacturing and technical capability and support the development of our launch of plant-based cheese products, which are only small volumes will provide good growth in the coming years. I'll cover the various sustainability initiatives later in the presentation and that we remain on schedule with major capital projects across our manufacturing logistics network. This includes large investments in packaging sustainability across our flavored milk business and also growth into new and growing platform actually over business. Moving on to Page 10, in the commercial overview. It's fair to say that the growth and new product innovation that we're very proud of for the year has been overshadowed by the impact of COVID-19, devastating floods across South Australia earlier this year in New South Wales and Queensland in March as well as global supply chain issues that we continue to closely manage. Each of the points on this slide will be covered in further detail throughout the presentation. Page 11 outlines our business model and the 2 segments that we report on. While we focus on growing and developing our core branded segment, our bulk segment continues to perform a critical role in supporting the branded segment with ingredients on a flexible basis throughout the year. As an example, during periods of channel disruption in the branded segment caused by the Omicron variant, we were able to immediately divert milk from our fresh milk plant into our commodity plants and take advantage of strong international prices. And this allowed us to maintain a profit basis for the upstream bulks segments, which remains an important part of how we manage and report the financial performance of the business, which Pete will now take us through. Over to Pete.

Pardon me, ladies and gentlemen, we have just lost Pete's line.

Thanks for that, Paul, I'm just turning through [indiscernible], my line just dropped out. If I just start with the segments, so the branded segment had obviously strong revenue growth and earnings growth off the back of our acquisition of the Bega Dairy and Drinks business. However, we were pleased to note that we did have good underlying revenue growth in all of our categories in the Bega Dairy business with particularly strong growth in yogurt, juice in calorie, which will run the 3% growth rates. Our spreads business continued to perform very strongly, both in retail sales with leading peanut butter up nearly $10 million in sales. And we've got very good growth in our natural cheese and processed cheese through our contract manufacturing business. A little bit challenging in our cream cheese international business as we start to hit price points that were quite hot for local Asian markets, so there was a bit of a decrease there. Obviously significant impact of the -- of coated costs, which I'll speak to in a couple of slides at time. And also we began to see the start of significant commodity cost increases through the back half of the year that actually going into FY '23. The bulk business down a little bit in revenue and earnings. That was really off the back of mainly volume declines with our milk. But we were able to change or shoot that around. We've got good strong commodity prices, particularly in cream cheese and pounds, but our volume was down a little bit, which ended up impacting our infant formula business and also our [indiscernible] business just through volumes of processing. In this, the unallocated overheads were favorable by $7 million. That was as we recycled some restructuring costs that were in the prior year numbers and we lowered our employee incentives for the year. So that gives you hopefully a breakdown of our segment results. We move to the next slide, which is a reconciliation of our normalized results. You'll see there that the 2 significant items were the termination of the Reckitt's contract and the continued LDD transaction costs. So we picked up $25.7 million in income from the termination of Reckitt that was netted off against just under $6 million of redundancies and restructuring costs. And the team have done an excellent job to pull out a lot of that fixed cost overhead that was attributable to that earnings stream, which is about $10 million a year. Project [ Kingwing ] incurred $43 million in IT-related costs and another $6 million in consulting and legal. We did get a stamp duty credit of $3 million in the year, which was from the prior year. Those IT-related costs were mostly around our transaction services agreement and shifting onto our Bega infrastructure, which was completed on time and the budget, was a significant project. Other costs incurred around the transition for work day and black line and a new source to pay system, which was solely as a service implementations and they will be nonrecurring. If we move on to the next slide, which is around the balance sheet. So I guess the key callouts here was despite our earnings being hampered by significant total cost increases, we were still able to reduce our reduction in net debt, down by 18%. And our leverage ratio, as Barry alluded to, has come down from 2.3x in the prior year to 1.8x this year and down from a peak of about 3x a couple of years ago. So we're really happy with the direction that's taken. It's also worth noting that we've -- we pushed down our tenure and increased our syndicate from 2 banks to 4. So very pleased with where our net debt is heading. We have actually got at Port Melbourne property held for sale. It's worth about $60 million on our books, but should deliver more cash than that, and that will also continue to improve our leverage ratio significantly and probably get a standard just over 1x if that transaction goes ahead. We're not doing that transaction necessarily to reduce debt. We're very comfortable with our current position, but it obviously shows the strength of that balance sheet. Really good working capital management. So we've got a $73 million benefit in receivables. About $20 million of that was due to the -- in increase in trade receivables facility, about $40 million of that due to the receivables from record, but there's a genuine $20 million improvement there. Our inventory was about $27 million lower as we pushed hard on sales to take into -- or take advantage of the strong commodity pricing and payables was up a little bit around $30 million just due to the timing. You know there that we have got still an extensive property portfolio. It's about $430 million, including the Vegemite property or Port Melbourne property. So still about $370 million without that. And we think that the market could be significantly higher than that. So still a really strong property portfolio underpinning that balance sheet. So very happy with the way the balance sheet is heading. If we move on to the next slide, just with the cash flow there. Operating cash flow was up by $158 million, once again off the back of some really good work with our working capital. We spent $72 million on CapEx. That comes out as a number a little bit below that, around $64 million, but was offset by that $7 million of property sales as we continue to clean up some of our property portfolio, those properties related to our cold chain distribution network and the small warehouses that we sold off as we continue to consolidate and optimize that cost structure. We paid back $83 million of debt, so net debt reduced by just over $50 million. Obviously there's the dividend payment there of about $29 million, but a really strong cash flow result and we're very happy with where that's heading. If we move on to the next slide, just around COVID-related costs. And we've spoken quite a bit to that at the half year and during a market update. But with the COVID, we had some significant direct COVID cost impacts, particularly in the second half of the year and particularly around our branded business. So absenteeism, as we saw the Omnicom virus spread, absenteeism sort of peaked at around 30%, which put huge pressure on our factories. So we had a direct absenteeism cost, predominantly cost out branded business of about $6 million. We had additional RAT testing of close to $3 million. We had shutdowns in our plant with about $7.5 million to $8 million, where we just couldn't open plants and actually had to stop lines. We had materials not turning up, which also caused stoppages. And we had a number of customers ring up and cancel orders at the last minute because they were unable to start their venues. So overall, a little bit more than $40 million worth of direct COVID costs related predominantly to around that period. And most of that is in the branded business. It would be fair to say that we anticipate that those direct costs will not be repeatable at this stage of the year. And we'll start to see some benefit from those costs flowing through in the next year. Also significant challenges created by floods during the second half. We saw floods in South Australia that cut off rail lines into WA. And floods across Queensland and New South Wales, which cut off access in our northern markets out of Victoria, and particularly impacted our yogurt sales. Because of the shortage of truck drivers in Australia, those problems were exacerbated. And we saw a significant spike in logistics costs, which we haven't included in that covered cost breakdown I just gave you. I might hand back to Paul now as he talks about our strategy.

Thank you, Pete. And apologies for the slight delay there. As part of our cost saving measures by sharing the phone today. Actually, we've set a couple of technical difficulties. Just moving to Page 17, which details our transition from July 2017 as a commodity process from contract [indiscernible] till today, where we're positioned as a diverse and growing a multichannel integrated branded business operating across both international and domestic markets. You won't have seen this slide before, just prepared just to provide an overview of the process that we have gone over, over the past 5 years. I won't go into detail on this slide, but I'd like to draw your attention to the box on the left-hand side of the page, and note that for many years, the profitability of Bega was driven by major long-term third-party packing contracts and an export dairy commodity business. Significant headwinds across both of these businesses required a change in our vision, which was to become a great Australian food company with the strategy focused on building a multichannel branded business. The middle box lists various acquisitions and other major initiatives that we've been executing over the past 5 years. These acquisitions and initiatives are all about diversifying and growing branded business and addressing the major headwinds we were facing to pre-2017. The divestment of some [indiscernible] assets in 2017 and the closure of the Coburg Cheese facility a few years ago were also necessary to right-size our manufacturing network and align with market opportunities. Today, we are one of Australia's largest branded food and beverage companies. It's fair to say that we've had to navigate a number of challenges as we've made this transition, including the impact of [indiscernible] fire and floods. We commenced calendar year 2021 with a [indiscernible] and we finished the year with a RAT shortage. And of course, the impact of COVID and the current global geopolitical issues that are causing the ongoing challenges for us. I'll talk about the outlook for FY '23 later in the presentation, but note the recent material spike in input costs that has provided further challenges will impact us in the short term, but doesn't lessen the opportunity for future growth. Moving on to Page 18, which includes our longer-term sales growth chart, which shows an approximate 30-fold increase in sales from approximately $100 million 20 years ago to $3 billion in FY '22. The bar chart on the right-hand side of the page provides the increase in the proportion of branded sales over the past couple of years as we reflect the full year impact of the acquisition in the dairy and drinks business. Page 19 includes the growth in market share of our portfolio of brands. As you can see, we're experiencing strong growth in most of our categories and maintain our market-leading position. Yogurt continues to be a highly competitive category with each of our brands playing a key role in the overall portfolio, a leading milk-based [indiscernible] led by Bega continue to grow as has Vegemite and our peanut butter range with new innovations to -- covered on the next page. Investment in our core brands increased during FY '22 with a number of activations across all categories, new product variations and pack formats, such as the Squeeze Simply Nuts innovation. The launch of lactose 3 offers for Pure White Milk and our famous Farmers Unionized Coffee in South Australia have performed very well in market. Over the page on the Slide 21. And I'll mention the disruption we've seen in our market channels and this page provides an indication of what impact this has had on volumes in some of our product categories. The top chart is an index of the volume of white milk sold nationally through the grocery and non-grocery channels over the last 3 financial years. The shaded areas cover the periods of significant disruption and a further explain in the text the right-hand side of the page, which you can read for yourself. You can see that during the periods of disruption, we saw a lift in volumes through grocery and a fall in the volumes through non-grocery. Within FY '22, you can see the drop in volumes for the non-grocery from the delta lockdowns and the Omicron outbreak. And during the Omicron outbreak, surely apply across our manufacturing and logistics network, but also importantly, for our customers resulted in a sharp decline, which has continued to recover as we progress into quarter 1 of the new financial year. We saw a similar story with Dare iced coffee, which is covered in the bottom chart. You'll also notice the vertical dash line, which is the date that Bega completed the acquisition of the Dairy and Drinks business. It was very pleasing to see that despite the channel disruption, there continues to be strong underlying growth across our key product categories. Moving to Page 22, which shows our manufacturing network, which is provided on previous investor presentation, but it's worth revisiting for a moment. Our national network of manufacturing sites, along with our extensive chilled distribution network continues to support the growth of both our national accounts, but also very importantly, our local business. We continue to see opportunities for rationalization and optimization across our own network and indeed across the industry. Page 23 includes the dairy export trend index, which is a red line in our southern farm gate milk price trend, which is a green line. As expected, these 2 lines are highly correlated and they're also highly variable. You can see the low point of the dairy export trend index in the middle of the slide around May 2016, and the doubling of the index over the next 4 years when COVID emerged and the index quickly plummeted by 40% and it rebound to new highs about 6 months ago. We've now included an additional index, the blue line, which represents the private label milk price index for the major grosses. This line is basically the dollar-related milk that was introduced in January 2011, which remained flat for over 7 years until the $0.10 diluted too payment was introduced. The price was increased last year followed by the moderate increase to $1.55 per liter based on the 2-liter bottle. We've seen a cumulative 40% increase in private label milk prices since we acquired the Lion Dairy and Drinks business in January last year. And I would say that this is a really important development that we've seen since the acquisition, which really does position us well as we will see a change in the cycle in the coming years with the dairy commodity pricing. The rapid increase in global dairy commodity prices since the start of FY '22 saw a 40% increase in the index, immediately benefited our commodity business, notwithstanding the increase in farm gate milk price to cause margin pressure in our branded business, which was unable to quickly pass through the quantum of these cost increases. This pressure has continued as we enter FY 2023, which I'll cover in our earnings guidance. Moving to Page 24, which provides key highlights across our 5 focus areas for corporation responsibility. We continue to progress an improvement in the nutrition of our products, aiming to reduce salt and sugar contents as examples. A number of initiatives across diversity to inclusion, which is a personal passion to me, includes becoming a signature to the 40:40 gender diversity pledge. And we're on track to achieve our target reduction in Scope 1 and Scope 2 carbon emissions by 2030 and commence measuring our Scope 3 emissions which represent a material component of our overall carbon footprint. And being dealt with as far as the sustainability economy initiatives as Barry explained. Packaging targets also on track as we approach 2025, and our commitment to the national packaging covenant or water sustainability and the reduction of water across -- water usage rather across our manufacturing sites is also on track to achieve the 2030 targets that we've set. Before I hand back to Barry, I'll cover the earnings guidance for FY '23, which was provided early last month for the market, with normalized EBITDA in the range of $160 million to $190 million. As outlined in the guidance note, we had initially expected the Victorian farm gate milk price to increase in the range of 15% to 20% over FY '22 closing prices. Strong competition for milk through June and July, resulting in further increases in pricing, which were approximately 30% higher than the closing FY '20 farm gate milk price. Along with other cost increases, for example, with oil, resin, packaging coffee and sugar, we've seen a significant year-on-year increase in costs. It will be partly offset by accelerating some cost we have efficiency programs and increased returns from international dairy commodities. The overall net increase in cost is circa $350 million to $400 million or about $30 million to $35 million per month. During the first quarter, we have phased in price increases in market to cover these increased costs and these prices should be normalized by quarter 2. The timing of this phasing of pricing in the first quarter is impacted by a number of factors, including the 13-week notice period with groceries for price increases. Farm gate milk pricing was still lifting during July, but is back dated to commence from July 1. And the ongoing monitoring of competitive pricing market and the consumer response to ensure that we're not dealing with a drop in volumes. Thank you, Barry. And I'll pass on to you to take us on.

Thank you, Paul, and always good to have some memorable quotes from the CEO. So thank you very much for that. Well, ladies and gentlemen, I'll take you to the last page of the presentation, which, quite frankly, just outlines where we are today. And I have to say that in a year where the challenges were many and the projects were many, I feel very comfortable with what we've been able to achieve and what the team has been able to achieve. And frankly, I think it's a testament to the knowledge, experience and capacity and capability, both from a people point of view and an infrastructure point of view and a business point of view that has allowed us to navigate what has been one of the most volatile periods I think in recent history. As Paul has outlined, we continue on that transition to a branded food company and the balance of the business we now have where we can take advantage of commodity pricing and global demand when that is there, but also have the comfort of the greatest ability that ultimately a branded business will bring us, I think, puts us in a great position to manage any headwinds or risks or geopolitical changes or whatever it might be in terms of where this business is positioned as compared to our competitors and indeed as compared to the industry dynamics, both domestically and globally. As Paul outlined, we've now got strong underlying brand growth in a number of our key brands and seeing the market settle and seeing a return to post-COVID conditions, if you like, where we're seeing a more settled market and seeing that come through in brand growth is very pleasing. I think it is very important to note that the inelasticity of pricing around white milk has now been changed in recent times. And we are seeing movements in white milk better reflecting both the cost of production for farmers and the alternate returns. So I think that's a very important thing as we move forward. There were indeed significant cost increases late in the financial year 2022, which we have discussed and Paul just alluded to them, but we are managing that through the business with some impacts from a timing point of view. We do still see that there are a great many further opportunities in business efficiency and cost-out programs. Whilst we've been very happy with the integration of Lion Dairy and Drinks or now Bega Dairy and Drinks and very happy with how the businesses are coming together with a fresh dairy capacity and a manufacturing capacity as far as dairy is concerned and then those are the key brands that we have in the portfolio, also adding strength to the business. But we do see there are greater opportunities and there are more stages of improvement in our business and improving in that integration. So we're very comfortable that there is more to be done, although we're very comfortable with what's already been achieved. As I mentioned, we are seeing prices increase, price increases being realized in the market with timing impacting some of the realization of those prices during quarter 1. We are -- and I mentioned earlier, we are very much an integrated dairy commodity business, providing flexibility in risk mitigation in this very competitive environment to milk and indeed an environment where we have continued to see a reduction in overall milk supply in the industry. We've been able to secure the milk that we require for the year ahead and very confident about securing beyond the year ahead. And I think the reality is our long-term relationship with our farmers and a deep understanding of the issues that our dairy farmer suppliers manage assist us greatly in securing that supply. We continue to execute our sustainability and circularity initiatives, and they are something that, as Paul mentioned about, particularly in the circularity space I continue to live and have a direct involvement in. Of course, there has been a lot of discussion around both geopolitical risk and biosecurity risk, particularly foot-and-mouth disease, and we work closely with government and industry in that space to make sure that we're having our input and also are aware of and trying to [indiscernible] any particular risk that may emerge across the business. Ladies and gentlemen, if I was to summarize where we are today and our feeling about moving forward, we are a very diversified business, well-positioned to respond to various market scenarios, some -- much of which has been demonstrated in FY 2022, and we certainly see will continue to be demonstrated in FY '23. But we can be very comfortable that the infrastructure, the capability, the knowledge, as I mentioned earlier is what is required and indeed what we are able to monitor well to create value for our shareholders and other stakeholders. And I think perhaps on that note, I'm really happy to hand back to the operator and take any questions which I'm sure Paul and Pete will assist me with.

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

And I think, Paul, you probably answered part of this with that comments on the cost increases. I'm just looking at the guidance for this year, $160 million to $190 million. And I'm wondering if you could give us a little bit more color on what's the sort of swing factors between the bottom end and the top end? I mean, are you factoring in any further increase in the farm gate price at the bottom or any further disruption or inflation in your costs over and above what we see today and timing of those price rises at retail? Is that still uncertain?

Michael, I might have Paul on the market side, but I think on the farm gate side, I think everybody would recognize that they are very, very full prices and what we're really seeing in the farm gate these days is that those price increases that you said, one happened throughout the year as the market unfolded, that's really now being pushed very much to the beginning of the year unless you saw major market changes in things like commodities, which, at the moment we're not seeing that. Paul, on that.

It's worth noting the -- I mean there's a number of swing factors and that's obviously still early in the year being the play between the commodity price and milk price that is a factor of -- I mean it was interesting to note overnight from Fonterra decreased their milk price forecast in New Zealand, which is often a very good deal with, obviously, the commodity price outlook. And we're sort of seeing that in their own business. But we've also got a very keen eye to part of this, which I mentioned, which is around volumes and what sort of response we see in market to these price increases. A lot of the price increases, a significant portion of the price increases in both grocery and non-grocery have been pretty marked in the first quarter, Michael. So you will start to see them come through across all categories like green spreads and over in drinks categories in market. So I think that answers your question.

So just to clarify, it's probably a little bit of uncertain is sort of what sort of the elasticity of demand there is with those price rises coming through. Is that fair to say?

Look, it's feedback, and we saw this a little with the [indiscernible] announcements and their outlook. We're not seeing any -- we don't know any may be concerned with what's happening on consumer demand. There seems to be discretionary spending impact, which is not in the categories that we're participating in and a little decline in out-of-home dining. But grocery remains pretty robust. We'll see how that flows out over the next 6 months. And of course, we've got very low unemployment rate. So -- and reasonably good levels of savings at a household level. So overall, we're not -- we don't have any cause for concern as we start to see these prices roll through in the first quarter, which is really, really pleasing. We're more concerned about non-grocery here. We sort of tactically play back across the various markets and also just understanding what the competitive responses are in the market, which, of course, we do at all times, Michael, but it's particularly active [indiscernible].

The next question comes from Phil Kimber from E&P Capital.

I just had a question. If you go to Slide 23, and thanks for putting the new blue line with the private label milk prices, the only thing I did notice on that dairy commodity chart is that they have come off and you just mentioned in about Fonterra in New Zealand. How does it work now that your farm gate prices for fiscal '23 are essentially locked in, they might not go up, but it's very hard to take them down, are you exposed in FY '23 if there is a continued fall in dairy commodity prices? I know that's fantastic for FY '24, but I guess I'm just worried about FY '23 and the risk of commodity prices coming off.

Phil, I mean it is a constant part of our business, right? And you can partly answer that question by looking back over the last 10 years and just seeing the various costs. What's interesting is over the last 4 years, if you have a look at that slide, that index, it just continued to rise, and we've seen a number of our competitors in the market who have come into the market during that period or expanded their business in that period and not necessarily have to deal with any significant longer-term decline in commodity prices. So that's going to cause a few challenges across that as we see with some of our competitors. We're reasonably well-covered into the first half. And as you know, we have peak milk in that first half as well. So a lot more disproportionate amount of our volumes in the first half and that's got the strong cover, a bit of exposure in the second half, which we did factor into our numbers. But it's fair to say that they might come through a little softer in the second half and we put a little bit of downward pressure on that result. We do see other opportunities elsewhere be able to put that up.

Can I ask another one? Just one of the businesses that you picked up in that was the Lion Dairy and Drinks business was a pretty amazing route business. And I know you were taking your time to better understand it. And maybe the COVID period has made it hard to get a full rate on that business. But is there -- are there significant opportunities over the medium to longer term to further develop that business? I think there was a comment somewhere in that presentation 40,000 orders a week, I think.

Yes. Yes.

So yes, can you give us a bit of color on that...

So Phil, again, yes, I think you're right to identify, we did indeed identify that we now own the largest food distribution network in Australia, and we do see that as a great opportunity, particularly in those foodservice and convenience channels and beyond. Obviously they've also been the channels that were very affected by COVID. And so probably flawed our plans there a little, but we indeed have -- still remain very enthusiastic around what we think we can achieve in those channels and Pete's been championing some of the work there. So [indiscernible] Pete and unless Paul has got some other comment that he might want to add.

Yes. Just to add in there, Phil, is that as you see, the COVID disruption, a lot of the people in that who worked across that field distribution network, both in logistics, planning, customer service and then our infield sales teams really, really limited in terms of being able to progress a lot of our development work in this space during the year. So just in terms of the additional retention there is put in place to just get product and we get product and the customers get orders processed during that period through Christmas into January, our teams we are dealing with those 40,000 orders, there was a very high incidence of orders being canceled on short notices and restaurants and cafes have been closed down, we didn't have people to work in there. So really disruptive period and then for the floods as well, particularly with the logistics claims, who did a tremendous job. So just getting traction with our people have been able to focus on some of these growth initiatives. There's been a -- let's just say a little frustrating in terms of the priorities that we had before in the business. You will notice a couple of months ago, we announced Pete moving into a COO role as we're recruiting a new CFO. And Pete focus, which I'm going to ask him to talk about for a few moments is really on driving and accelerating all of those growth opportunities that you're asking about. Pete?

Yes. So we have got growth in that route or cold train network happening this year, which is terrific. So we're back in growth. And then there's sort of a few key areas that we're focusing. So we are in the process of buying back a lot of those franchise agreements that we had. So -- and controlling that full end-to-end value chain and customer experience. And so as we do that, we're sort of attacking it from a couple of different angles. So obviously, the cost of the actual cost to serve. So we're streamlining and trying to automate where possible from the end of the line and how we get the best cost to serve there for our customers. So we're doing a fair bit of work around that. We've got some capital planned for that over the next couple of years. We'll also be consolidating our D.C. network, which I sort of talked about previously with the sale of some of those networks, but continuing to compress that to get better efficiencies out to our customers. So that's from a cost point of view. I mean from the customer experience piece, we've just done a fairly significant work where we've met that all of our customer touch points and pain points. And now that we've done that, we're looking to invest in our digital offering to streamline along that and increase our customer experience and make that far more frictionless. And then the way we're structuring our sales team. So we look at that across national accounts, but also what we would call unstructured accounts. And we're just doing some work with our sales team to create dedicated territory managers and to really focus on servicing our existing customers better, but also build up our new customer base. So that's really the main focus across FY '23. We're still very optimistic about that channel and the differentiation it gives us against a lot of FMCG players in this country. And we think that there's significant benefit we can drive through.

The next question comes from Evan Karatzas from UBS.

2 from me. Firstly on the cash conversion, I mean that's a very sort of impressive result of around 88% there. So I take it, it was around sort of $40 million, I guess, one-off record benefits you had there, but I'm just interested, now you've sort of bedded down Lion Dairy and Drinks, is this the level of conversion we should expect going forward? I guess if not, can you give some color on what conversion rate we should sort of expect going forward, please?

So Evan, we did a fair bit of work on receivables. And just we've actually put a fit because we bought -- when we bought the Bega Dairy business, there's a large lump of outstanding receivables that have been many offshore and the existing management has literally just done a terrific job of just set it up back in Australia, but it was fair to say there's still a fair opportunity there. We've put a fair bit of RPA or robotic process automation into our receivables function and we streamlined a lot of that and worked really hard with our customers on streamlining a lot of that and getting our money in quicker. So it would be fair to say that that's probably a little bit of a one-off kicker. I think there's about $10 million or $20 million there. And then the inventory NAP amounts were really us just driving hard into our inventory numbers and taking advantage of some really strong commodity prices, particularly around butter and skin. And that's a business we'll continue to take. And it's probably all -- yes, a really, really good result when you look at particularly some of the shipping issues that we had in the last quarter with the shutdown of Beijing and China. So we'll continue to try and drive that. So it will be somewhere in between where we were previously and that result. But cash realization is obviously really important to us that we wanted to drive down our debt. We wanted to be very efficient with that cash in a time of uncertainty and we we've been having a fairly significant hit with COVID.

Yes, you've done a really good job there. Just finally, second question. I'm just interested to an idea for Barry or Paul. What you're hearing from some of your peers or competitors regarding sort of industry processing capacity? You started seeing or hearing any capacity potentially coming out of the market, just so I guess move more in line with what is unfortunately a declining milk pool in Australia at the moment?

I'll have a bit of a go in and then get Paul. So what we are hearing is that people are reviewing their capacity. And I think -- indeed, I think which is normally the case when you hit it for the highly competitive circumstance of the Australian dairy industry, we're hearing that there's a number of pieces of capacity on the market and some of that is remark. So we're not entirely clear on that, but I think we would. Obviously, what we would like to see is capacity reduced rather than just moved around for the better putting it. And so I think we are seeing some of that pressure and perhaps to go back to the question Phil asked earlier, I think those that are entirely exposed to commodity. While it's been quite good on the upward swing of the cycle, it does give a very big exposure should they come off. And I think that's where we've positioned our company very well to deal with that occurrence, and that may well be a -- that will be no doubt part of the trigger that could see some capacity rationalization. But it's more sort of speculation and rumor at the moment, Evan, but probably it wouldn't -- it doesn't surprise me that, that speculation rumor is around and some of it will have some substance. Paul, I don't know whether you can add to that.

I think that pretty much covers it, Barry. We are seeing this across in New Zealand as well, we're seeing sort of milk volumes down. And there's a fair bit of pressure. Evan, if you look across a number of these dairy companies and just profit performance. You're just seeing some -- a fair bit of red ink actually, and for some of them, I'm surprised because they should have been making money with the higher commodity prices. Just on the commodity prices for a moment and up until about, I'd say, 2 months ago, the story for the previous sort of 6 to 12 months has very much been on the supply side. So we've seen the largest 12 dairy milk exporting countries rather, in that sort of January to June period, year-on-year milk production is down about 1.8% to 2%. And that's been pretty constant. And then there's also the case in Australia or across in New Zealand. In the last couple of months, we're just starting to see a bit more coming through on the demand side, which is what's pushing the prices. And that's out of China. We're seeing a bit of demand decline in China with the lockdowns. We're seeing a bit of an increase in milk production in China, and we're also seeing a reducing of the stock levels, but normally see about sort of 3 or 4 months' worth of stock [indiscernible] reduce. So you've got a market there with about 45 billion liters of milk, so about 2/3 of that's domestic production, 1/3 is imported. So you get a couple of percent increase in domestic production and a couple of percent decline in demand. And you drag your inventory holding for sort of 4 to 5 months down to 3 to 4 months, you can quickly get about a 20% to 30% reduction in imports in that market, and we're starting to see that flow through and that's the lesser activity we're seeing with [indiscernible]. So we're very conscious of as we sort of get into Christmas, just saying if that demand and some of the inflationary pressure we're seeing in some markets, which is pushing demand also across Southeast Asia. Middle East is pretty strong, but Southeast Asia is certainly a little bit of pressure. Just seeing we get a bit of a reset in some recovery in the second half. But if we see further declines, I think we're going to start to see a number of companies who are coming off the back 1 of 2 tough years really start to show the pressure. And whether that manifests itself in plant closures or just another set of cheap assets, which someone else comes and picks up remains to be seen. And that's why we think our strategy, which really focused on that growth in the branded business and getting the interplay between the branded and the bulk business working properly and then the growth opportunities that Pete spoke about in that ratified. If we're continuing to just drive hard on those, we continue to expose ourselves less and less to that dynamic and which is really important.

Yes. That's super helpful color there. And just one quick follow-up, if I can. I take it that your comments especially maybe, Barry, you're not super interested in sort of acquiring some of that capacity that could come on market. Is that the message that you sort of trying to leave, I guess, of your comments?

Yes. Look, I think you all -- there's always lots of factors that come into what we might think about. But we would want to make sure they were acquiring them was part of the capacity rationalization might be the right way of putting it, Evan. So if it was -- if you were getting a really good outcome for the business and you were getting capacity rationalization, maybe the 2 things that would probably drive us to think about it. But I think -- and look, I've probably said this a little bit before, we always remain on the 2 opportunities, but we're really comfortable with the assets that we have under our control at the moment and the flexibility that they give us. But so I would never say never, but I'd certainly be leaning more towards saying we will be motivated by rationalization more than -- rationalization, of course, business opportunities and efficiencies and those sorts of things. But that would be what would be our driver.

The next question is from Paul Jensz from PAC Partners.

First question, maybe for you, Barry, on the international side. There's usually some data as to the sales international. Could you make some comments about that and how that's progressing, particularly the branded sales internationally?

Sure. So look, I might throw that to Paul. He will be able to bit closer to it. But yes, so Paul, I might get you to talk about it. Obviously, there's been some interruption in the international market as we've seen in the Australian market around COVID, but I'll get Paul to maybe add some more color.

I think Pete might have those numbers at hand.

So look, our bulk sales, so we sort of split between obviously the bulk and the branded sales. So branded sales were a little bit down year-on-year, and that was particularly around our cream cheese in the Southeast Asia. Just as we start to hit price points that were probably a little bit high. And that was not really our product that was more market forces. That was probably the money piece with our export business. But as Paul alluded to, still strong in process cheese everywhere and in particular, Southeast Asia and the Middle East. So the branded business did take a bit of hit around cream cheese and a little bit around much relevant dominant cream cheese was the biggest hit there. And the bulk business, our volume is just down a little bit. We saw that, that impacted our cream cheese sales were actually up in the bulk business, substantially up, and we get really good returns from that. We're down a little bit in our powders mainly through volume. We actually had a little bit of a price premium there, but we're down in volumes in our powders. And then the lactoferrin business was down a little bit in volumes, mainly because of our milk process volumes were down and that was also down a little bit in price. But we remain very bullish about lactoferrin into the future and the strength of that market. And that's why we're really happy with our volumes as they're playing out this year and the fact that we've stabilized in this year.

And I suppose it might get a bit more strategic here. But what sort of value do you think is going to be in that international business? Is it going to be a sort of 30% of business going forward? Or do you think that, that could climb up or down from there?

I think there's a number of factors done on there. So if we talk about the branded business, the first instance Paul would say that that's got a lot of opportunity for further growth and particularly in the consumer space. And that's not a part of the business that's necessarily going to have a lot of milk. The ability to actually support growth there is really positive. The bulk business is really going to be dependent on how much demand we have from looking at domestic market. And that follows through, I mean, just in the longer term what takes place to sort of milk supply, that question that Evan was asking earlier about plant capacities and competition and so on. There is -- I was just with Japanese customers yesterday in Australia and the long-term Japanese customers. They're certainly under a fair bit of pressure sort of longer term for high-quality dairy products, which we've been providing to that market, a number of these as do a number of our competitors. There's a bit of an oversupply as we sit here today for various reasons. But I do see good opportunity still for the higher-value commodities into the export market. And we may over the next 5 or 10 years see increasing supply of sort of everyday products like [indiscernible] cheese, [indiscernible] and butter out of New Zealand. I think that's something that we started to see in the market over the course of the last 5 or 6 years more and more. And I think that will be an increasing trend. And so as we position ourselves with the high-value powders and the higher value-based products to service a listed market, but we can get better premiums into export. And see that will place coming through with some of those base commodity products out of New Zealand into particularly the foodservice market. I think that's a trend that will continue, which I think plays well into where our strengths are in that bulk business.

And final question is around I suppose the goodwill, which might come back to Pete is, [indiscernible] highlighted as one of the key audit matters as they usually do. But we would think that with reasonable earnings going forward, that discussion might have been a bit more reasonably robust this time. And just if you can give us some insights there on goodwill and I suppose the run one you have? Pete, Barry or Paul?

I'll just add with that for long in the last question, Paul. Obviously, in terms of that international business more Paul's talking about there, it's -- there is a bit of a cascading impact, if you like, because -- and this probably will lead to another question. But obviously depending on what farm gate volumes do in Australia, that does impact our export business as well. And one of the great flexibilities that we have is that if there is growth in supply, we've got the ability to deliver that supply into a variety of products and market destinations. And you cascade the value according to the milk that we received equally because we do have that wide range of products, if you like, in a wide range of markets. When milk contracts we can obviously focus on the markets that returned us and produce that returned us the best returns. Which probably does go a little bit into the conversation, the question that you're just asking, which I'll probably say Pete to talk about around how we think it will.

Sure, Paul, so we've got about $350 million of goodwill on the balance sheet of about $190 million of brand. So we sort of look at the goodwill across sort of straight chunks of our business. You've got the spreads business, which is in terrific shape, and we're very happy with where that's in. You've got our branded business, which we've just acquired and despite a really tough COVID year, we think we've got good growth in that business, and we're starting to see more and more of that flow down to earnings as we pick up synergies and optimize our network. And then you've got the bulk business, which the things that impact that goodwill are really the arbitrage between obviously farm gate price and commodity prices, which can flow in out of balance a bit. And it'd be fair to say that that's sort of hard to look at on a year-to-year basis, but it's remained reasonably consistent and obviously, milk volumes. And we saw a decline in the volumes last year, but we're really pleased to say that that's flattened out this year. And then we continue to see opportunities in that bulk area to add that around our streams of revenue like infant formula powders and going up the value chain. So if you look at that bulk business, it's really about that arbitrage between farm gate commodity prices and sort of after tightening this year, do they sort of re-correct themselves next year, do we start to see a turn in volume? And are we able to keep investing in value-add or high-value products like cream cheese and like [indiscernible] and infant formula powders. So at this stage, they are the sorts of things we look at when we look at in payment. We feel that with the tightening of that gap in farm gate pricing and commodity prices and a reduction in volume. They were things that we did look into and assess carefully. But it led to us thinking that those assets have still got good value and still support that goodwill that we've got put against them. If those things were to continue to tighten over the next couple of years, we would have to reevaluate a lot. It's interesting. Our assets are becoming more and more integrated, particularly as we start to see optimization between our brand and bulk business with excess proteins and VAT and now we can ship milk around. There's a high quite level of integration. But these are the things we continue to look at as a business, that arbitrage and commodity found that prices and milk volumes. And the ability to keep realizing high value strengths.