Bega Cheese Limited (BGA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Bega Cheese Limited Half Year 2023 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Barry Irvin, Executive Chairman. Please go ahead.

Thank you, and welcome, everyone, and thank you for joining us. For those that are following on in the presentation, I will guide you to which page that we're on. And I suppose in saying that, the opening slide or the introduction slide for myself is clearly one that emphasizes that wonderful portfolio of brands that we have. And while the first half of the year certainly had its challenges, and one of those was indeed dealing with the significant step change in the farm gate milk pricing and other inflationary costs, and getting those reflected in the Australian market. And as we said at the full-year results and at our AGM, that lag de-causes a reasonable amount of challenge in the first few months of this year. But pleasingly, which the team will talk about a little later, the brands that are much loved by the Australian consumer have stood up well to the fact we've had to increase the prices significantly, and we're really pleased with the foundations that the brands offer us as we look forward to FY '24, despite the fact that our first half was reasonably challenging. So when I go into the next slide, which is the key messages slide, I would note that we had -- reflecting that rather large increase in pricing that we needed to push through into the marketplace, particularly in Australia and strong commodity prices. We had an increase in net revenue to AUD 1.68 billion, up 11% compared to the prior year. As I said, the majority of price taken in the first half will see us with performance and mix benefits through the second half and beyond. The pleasing thing is that those price increases have not materially impacted on our brand share or indeed. They've actually seen consumers remain loyal, and we've actually seen volume growth in our brands, so extraordinarily pleasing there. Obviously, as previously announced, in terms of the things that we would draw your attention to in the first half, we have exited the Vitasoy joint venture, and that has been -- that transition has been done smoothly. We did receive AUD 51 million on the 30th of February. And we will continue to be involved in the plant-based sector, and we are already making good progress on how that involvement will manifest itself as we move forward. Our statutory EBITDA of AUD 71.6 million, and a normalized EBITDA of AUD 74.6 million was, of course, lower than the first half, and I think it's well understand what drove that. It was largely the timing of price increases in the market, which lagged significant cost increases. I think on the more positive side, really good to see a strong performance from our spreads business, peanut butter and Vegemite performing really well, continuing to grow. And of course, we, as always, we're able to demonstrate the value of the diversity of this company and the infrastructure that we have and the fact that we were able to take advantage of strong global dairy commodity prices in the first half with our bulk dairy ingredients division performing well with the team. We will talk about a little bit more. I think it has been a subject in the dairy industry for a while around the opportunities for consolidation and how those consolidations may occur. I think what I would observe is that we are seeing companies such as ourselves and some of the other major dairy companies and look more strongly at our infrastructure and see where we can consolidate. So, I think what we're seeing at the moment is, obviously, we announced yesterday that we are closing down our manufacturing capacity in Canberra and transferring that to Penrith. We do think that there is still more opportunities for further consolidation internally to our business. We recognize that other dairy companies are also doing the same thing. I would probably say there's still further opportunity for industry consolidation as well. But it's good to see some of that, if you like, infrastructure that is surplus to requirement given the level of milk production in Australia today. That [ theme ] is still being consolidated out of the industry is helpful in the longer term. We did see an increase in leverage ratio. I think it's really important to emphasize that we had a very large value increase of inventory on the back of those very strong commodity markets and indeed, the significant increase in farm gate milk pricing. And of course, as is always the case this time of year, the cows do tend to want to give you more milk in the spring. It is a very natural product. And at the end of the day, we build inventory in the first half, which we look to realize the value for in the second half. So, we will expect that, that will diminish in the second half. There remains, as is well documented, strong competition for milk at the farm gate, and that's been elevated further by a reduction in supply this year. It is fair to comment that, obviously, we've had -- there's been some challenges around farm gate milk production for a number of years. The prices are very strong this year, but our farmers have found it very difficult to access labor, which has seen them not be able to respond necessarily to those increases. We're also seeing the impacts of flooding and indeed, the longer-term impact of higher land prices at the moment and alternatives such as beef, perhaps seeing retirements happen a little bit more quickly than what have otherwise been the case. We are expecting the decline to slow as the next year unfolds. Just moving to the next slide, and I will leave it to Gunther and Peter to talk about the financials in more detail. I think I've really probably hit on the high points to that. We were pleased to be able to announce only a small reduction in our dividend at AUD 0.045 per share, which I think reflects the fact that we remain very confident of an improvement in improved performance rolling into FY '24, as those -- as the full year benefit of the price increases that we had to move through last year is felt, and we take advantage of some more opportunities to strengthen the business internally as well. Moving to the next slide. I will not dwell on either. I mean I always do think that this is a company that has a great history and heritage and indeed a great future, and it is always important that we take in -- I think, in our business, we take a very careful long-term view and the short-term view on the values that we create, the brands that we create, the customers and markets that we create are all linked back to this core purpose of creating great food for a better future. We think we're really well progressed in being a business that people are proud to work for and being a business that builds loyalty with their customers, which I think was shown really well in this first half as indeed without continuing to dwell as we push those prices through, but saw loyalty to our brands. I think we obviously continue to focus on ensuring that we get our ESG right, and ensuring that we are indeed running a business sustainably, both from a financial point of view and an environmental point of view. The next slide, Slide 6, is one that you will have all seen before. And again, this has been about how we put a business together that can, quite frankly, in times like the ones we've just experienced, which, when we think about the challenges over the last 2 years, where we had significant disruption associated with COVID and then significant changes around cost inputs. This business was able to be flexible enough to be able to take advantage of commodity markets, diverse enough to see businesses like our spreads businesses performed really well and nimble enough to be able to move price rises through, albeit with a lag, that we'll see us -- see the foundation set very well for the following year. And really, the transformational activity that we've done, where we now see ourselves predominantly with strong brands in what is now a stable domestic market and a somewhat volatile international market is the key to the foundations that we have been looking to build over a number of years. So, I guess that's a slightly long way of saying the strategy that has been in play is a strategy that we continue to have great confidence in as we look forward and move forward. I won't dwell too much on the next slide, which is our sustainability and circular economy slide. I think there's perhaps 2 things to mention. Obviously, reinforcing the fact that we align all our activities to the UN Sustainable Development Goals. We've obviously already talked about the targets that we're undertaking in terms of 2030 and 2050 goals around emissions. And we continue to be the very strong driver, if you like, behind the circularity project in the Bega Valley, which has the ambition to not only see fast proof of concept and really solid learnings in some of the subject areas that people talk about a lot around things like emissions, but it's also about how we deal with waste, how we deal with water, how we improve biodiversity. That project has got tremendous support, both from government and the local community and indeed, much of Corporate Australia and a number of universities. So, very pleased with the progress of the circularity project. And I am, obviously, internally very much focused on how we make sure we meet the -- our stated goals, whether it be in the areas of packaging and emissions, but we continue to have a very good team working on that. I think that's probably enough for me as far as opening comments are concerned. Great to have Peter and Gunther here with us today. And obviously, this is Peter's first announcement as CEO and the first for Gunther as CFO as well. But I would say that I'm very pleased to introduce what I'm very comfortable is an exceptional team and certainly the right people to make sure that we deal well with the challenges we faced this year and move forward with confidence into FY '24. So Pete and Gunther, with that, I'll hand over to you.

Terrific, Barry. Thank you for that. And I think we talked to the market about the significant price increases that we had at the end of last year. And I think the year is actually playing out pretty much as we thought, which has been good in the way because we've been able to test a number of elements of that business, and we feel that they've stood up pretty well. We turn to the next slide. We'll just look at the innovation and growth in our consumer brands. And I think the journey that Barry talked about sort of evolving to branded businesses actually stood us in very good stead. And when you think about the significant price prices that we put up, we're very happy with the way our brands and our categories have actually performed. In fact, our branded business volume actually grew by 4% for the half, which is -- which we're very pleased with. It really speaks to the strength of our brands within the categories and the way we're positioned within those categories. So the different price points and different sizes and product offerings we have, we feel has protected us really well. We did front weight or up-weighted a lot of our market investment to support that significant price increase. We put through another 10% price increase before Christmas, and we focus very heavily on making sure that we spoke about loyalty to our customers, value to our customers. We spend a lot of time in activating our marketing on shelf. And we feel that, that really helped us in that transition to an increase in price and maintaining our volume. A lot of work was done around the Dare brand. We did work around Farmers Union yogurt and Dairy Farmers white milk and Vegemite and increasing the occasions of Vegemite and try to sort of draw the use of that product. And we're extremely pleased with the fact that Vegemite increase value year-on-year, but also volume, which is for the first time in some time. So, a really strong performance by that brand in particular. We also had accelerated growth in foodservice. We talk about our strategy, and we've got this very strong distribution network and great brands. And so there was a focus on increasing our brand awareness in food service and increasing the -- doing some work around some key lines in foodservice to enable growth in that area. And the Dairy Ingredients business actually grew by 31% in foodservice year-on-year for the half and the Bega Foods business grew by 21% half-on-half. And we see that as a really good opportunity for us moving forward. We're also incredibly strong in grocery, but that food service area, we think, is an area we can do well in the future. And I'm pleased to say that we did some really good sustainability activity around our brands. We obviously had some work with our packaging with our Juice Brothers brand going to fully recyclable packaging content. Our Vegemite packaging is now 100% recyclable, and did a lot of work around Dare and having a Rainforest Alliance with our coffee in our Dare product, which also helps increase our coffee credentials and that brand continues to be incredibly strong for us and maintains our #1 position in milk-based beverages moving forward. We also did a lot of work around Dare and yogurt and our flavored milk ranges. We introduced lactose-free and reduced sugar, which went extremely well with the market, and we'll continue to roll out that capability across our business. We added probiotics and high protein into our yogurts and some of that white milk, which has also been incredibly successful. I alluded to sort of development of some products around food service and we've evolved Cooking Cream, which is going very well in its early stages of helping drive that foodservice growth. We also think that can dovetail into our grocery offering, which we're excited about. And something that we're starting to test, we export between 25,000 and 30,000 tonnes of cream cheese throughout Asia and have a very good reputation for our high quality of cream cheese, particularly discerning markets like Japan. So seemed only natural that we would launch a cream cheese into the domestic market under the Bega brand and that's been in sale for about 6 weeks now. And we think it's a really good test of that brand equity and expansion into another strong retail offering within Australia. And early signs are that, that's progressing well. And then once again, coming back to the strength of the Vegemite brand I spoke about before, we've been able to get some terrific leverage out of increasing licensing opportunities. We've done work with Le Snak, [indiscernible], the Australian [indiscernible], and that provides us with really good credentials, great coverage, and also quite a successful commercial licensing set up. So really excited about some of the work we've done around our brands in a tough environment. We'll just move on to the next page that highlights where we sit from a grocery perspective here. Really pleased with our market positions. We've maintained #1 or #2 position across most of the categories. We've actually really pleased with our fresh white milk performance in grocery. It's been particularly strong over the last 6 months, and we're seeing some new rejuvenation in our Dairy Farmers and Pure brands and also yogurt. If you look back, yogurt has access to the market, #2 position with the acquisition of [ Yoplait ], our volumes are actually up. And our performance in that category is really lifted over the last 6 months. And we're particularly excited about some of the innovation we've got happening there, but really strong. We've come out of a very tough retail environment with a really, really strong position on our brands. Let's go to the next slide, which is our manufacturing network, and this is something that you will have all seen before. This is a source of great strength to us in a period where we look to try and optimize our position with our location close to our customers and our suppliers. This gives us lots of optionality. It's also an area of opportunity for us. And Barry talked about our execution of the closure of the Canberra site yesterday, which ultimately plays into a far better cost base, but also allows us to extend our product capability in the Penrith site and volume and efficiencies there. So, we now have developed through that change a full lactose-free offering out of Penrith, which we look to push into the New South Wales market. And so that positions us for a period of growth. We think they're probably -- or we think there's definitely further opportunity with our network, both at a physical location, but also the capability within location. And we think that we can continue to realize benefits by looking at that network over the next couple of years. It's been really interesting the dynamic that milk market to see where [ milk tea ], but we think we have a really good handle on that now after 2 years of ownership of the full network. And we'll look to continue to optimize that in the future. And just moving on to the next slide. This is really interesting. This slide, we've used this before, but it basically shows -- the red line shows the trend in the global commodity market. The green line shows our Southern farm gate milk trend. And in the blue line, we've linked to the major grocers private label milk index. And what you'll see there that is really since September 21, there's been significant movement in all 3 lines here. And certainly during '22, the commodity prices really led the way strongly and probably created quite a gap between farm gate price and the white milk pricing index, white milk price index. And then farm gate prices followed. But what you'll see there is, if you just look at the end of the chart, the global commodity prices have fallen quite steeply over the last couple of months, which is something that we've had to manage with our commodity markets through the remainder of the year. But you'll see there that the white milk [ RD ] index now is outstripping the commodity price fall quite significantly. And what we think is now with our really strong connection with retail pricing and branded offerings on shelf in Australia and also our ability to flex in amount of different commodity markets that we are extremely well placed to compete for farm gate milk over the next 3 months or 4 months. And in fact, we said there's a real opportunity to compete strongly there against our competitors. We move on to the next slide, just some major issues before I hand over to Gunther. Just go through some major initiatives that we've worked through. So unprecedented price changes in the Australian domestic market. We've put through about AUD 260 million of annualized price increase across 3 waves since August last year. A huge amount of work was done by the team. That's worked across about 1,000 SKUs, and that's done with an eye to our competitors and their different channels. So an amazing amount of work. And as I said, extremely pleased that during that process, we've actually seen an uplift in our volumes. And we think that places us in extremely good stead for FY '24. It's interesting to note that as those commodity prices have fallen away, which we talked about in the graph, I think it's about 33% since the start of the year, there's actually been a number of movements within that. And so what we saw with the slow openings around Japan and China, we actually had some volume pressure on cream cheese, which has traditionally been a very strong export market for us in the commodity part of our business. We're able to pivot out of that quite quickly. And through our different facilities, we're able to increase our weight into mozzarella and parmesan and cheddar, which was actually able to soften up low. So, a lot of work was done within our commodity business to maintain pretty strong commodity earnings in the first half, which we're very happy about. I think it just reflects our flexibility now and the strong manufacturing capability we have across a number of different channels. I think also places us in good stead next year as we evaluate what's happening with some of those foodservice markets, albeit, we are seeing a slight opening of China and Japan next year. But even if that doesn't occur, I think we're still well placed to play into strong commodity markets. We continue to have capacity rationalization and processing optimization across our different footprints that was reflected by Canberra, the closing of Canberra, but also the ability to shift milk into different markets as we saw different growth. We did see really strong growth in our domestic white milk business. We're able to flex with that with milk out of our commodity business throughout the year and adapt to that. And also just with optimization, with the ability to screen proteins and fats out of our domestic business back into our commodity business. We're going to see some new wins there, protein optimization at places like Chelsea provide us with additional earnings opportunities. And during all of that change and significant cost increase, but also breakdowns in our supply chain network. We've been really happy with our capital program, which we think will start to really kick in and give us some advantage in FY '24. In particular, I call out our blow molding capability that we're putting at Wetherill Park, which is on time and on budget, and we'll kick off next year, which allows us to blow our own bottles at Wetherill Park, saving several cents a bottle in costs. It also allows us to go to a fully recycled packaging option in the near term, which is really exciting, and that's something that changes the cost structure there. And we're putting in a new yogurt pouch line at Morwell, which will also -- is on budget and on time and will open at the start of new financial year. That increases our capacity -- yogurt capacity by a little bit over 10%. What it also does is it exposes us to trends around single-serve yogurt at different day times, and allows us to really play with our functional enhancements in that space, and we're extremely excited about that additional capacity and capability that we're putting at Morwell. And we've done a lot of work around our new digital sales platform, which should be finished by the end of the first quarter of next financial year. At the moment, we're using a 15-year-old portal to engage with our 40,000 deliveries each week. It's out of spec and out of market. And so we'll bring ourselves into the 21st century with this new digital platform. It will address about 170 pain points that we currently have with our customers. We've done a lot of work with them around what they want to see, and we think it will be best in class. It also helps lead into that foodservice push that we talked about, the non-grocery push that we talked about and fits with our cold-chain capability that we have. So, we're really excited about that. We'll continue to assess footprint opportunities, including the Port Melbourne site. We're working hard on that at the moment. We signaled that, that facility was for sale. We still feel really strongly about the desire for people to line that facility, and [indiscernible] are working busily at the moment. If we just turn to the next page, this is a slide that you've seen before and really comes back to what Barry was talking about. We still think that we -- the 4 key capabilities of being able to engage directly with our farmers, have a very competitive global supply chain with lots of strong global footprint, have a diversified portfolio of brands and have an efficient distribution network. We still think that, that interfaces with our strategy moving forward and allows us to fulfill our strategic objectives over the next 5 years and to continue to grow the business. As we think about growing outside of the grocery chain, growing inside our core brands, utilizing that footprint for a really cost-effective model moving forward. We think that we've got all the tools that we need to play with. I will now allow Gunther to take you through the financial components of the half.

Fantastic. Thank you very much, Pete and Barry. And on Slide 15, we talk to our segments, and I think the results pick up a lot of the themes and initiatives that you heard about from both Barry and Pete. On the branded side, we had just under AUD 1.4 billion of sales, and that's up 13%. And within that, pleasingly, as Peter alluded to, 4% of that growth is actually volume. So even at a time, we were taking substantial pricing, volume continues to rise. And I think what also gives me comfort is that within that first half, even though there was a mismatch between the timing of our pricing and the cost inflation, November and December were among the best months of that half. So, you saw that price feeding through increasingly with multiple waves and then you saw volume continuing to get stronger into November and December. So that was very good. We did have a decrease, obviously, due to the timing lag of the pricing. So we're down about a little over 40% in normalized EBITDA to 43.5%. Within that, though, just under 1/4 of that change is the higher marketing that Pete referred to. And so it was a very deliberate strategy to invest ahead of the curve and to make sure that our pricing stock. And I think that strategy was a successful one and an important one, and it was a bet on making sure that the consumers would sort of recognize the strength of our brands and offerings and innovation within that. On the bulk side of the business, we had just under AUD 440 million of sales. It was up 2% in net sales. Really behind that is a reduced volume of commodities, obviously. The milk pool was down about 7% this year. And so while we had slightly less volume in our bulk business, the commodity prices, as Barry said, were considerably higher. And so it really shows the strength and breadth of that business. And everything from cream cheeses to skimmed milk powders to butters to different sorts of cheeses, I think the opportunity for Vega to move into different streams to optimize its returns is a really excellent opportunity in a challenging environment. So, we were up over 1/3 in EBITDA in that bulk business, reflecting those strong commodity prices and their ability to play across a broad portfolio. I think the final thing I'll point out on this chart is we did have an increase in unallocated overheads. And there's a few factors to call out there. About 1/3 of that is IT. And whether it's the portal that Pete talked about, we continue to invest in different IT initiatives, how we procure as a business. And the cost of IT, frankly, have also gone up a bit. So, you see some inflation in that number as well. There are some consulting costs in there as we look at our footprint, and I think you'll see the benefits of those over 12 months, 18 months, 24 months as we make footprint moves just like the Canberra one that you heard announced today and yesterday. So that's a look at the segments. On the next slide, we have a reconciliation of normalized results. I'm not going to spend a lot of time on this one. The normalized items are much smaller this year, and they really relate predominantly to those IT and digital investments that we're making. So those are important, and they set us up really well for FY '24 in terms of trying to have frictionless interactions with our customers. That's really where we want to go with those sorts of investments. The only other call out I'll make on this slide is you do see on the left and the right side, finance costs were about AUD 10 million in the first half, and we expect the second half to be broadly similar, even though there's a Vitasoy sale, the spring milk peaks out between sort of November and February. So interest costs in the second half would be very similar to that first half. If you flip to the next slide on the balance sheet, there's no question here, a couple of call-outs. Trade receivables are higher compared to June, but it's often interesting to compare them to where they were in December of last year. It's a very seasonal business, and there is often a strong Christmas trading season as we've had this year. So on that receivables, it looks to compare June to AUD 275 million. But if you step back to December of 2022, the receivables then were AUD 302 million. So, you can see that we continue to follow those seasonal trends, but at higher prices, which are also increasing the receivables. Inventories are well up against June. But again, we've just gone through a bunch of that spring milk receipt. So if you cast your mind back to the prior year, our inventory was a little under AUD 370 million at December. So there, you see that seasonal peak last year as well. Finally, trade payables are also higher. That reflects kind of the inflation and cost and the larger size of our business, and we also have a program with medium to large suppliers extending payment terms and that's important to generate cash from our working capital. So the organization is certainly pulling in the same direction on that. I'm going to finish off with the next slide, which is really about cash flow. And no question, we do have a slightly negative operating cash flow as we fund that increase in farm gate milk and that spring milk receipt season. It's really about the inventory. And then the second half, as Pete mentioned earlier, that's really about selling now the inventory we've built during that spring season and recognizing value from that at the much higher prices. So, I'm going to pause there and hand back to Pete. And he's going to sort of wrap this together in our outlook for the second half of next year.

Terrific. Thanks, Gunther. So if we look at the things that we've put in place this year to mitigate that significant cost wave, AUD 260 million worth of pricing initiatives that will have a tail into next year. We've also focused significantly on our site performance around utilization of our lines. There's been a number of costs that have come out around wastage and so forth. I mean, if you look at some of the projects we've got in place with the increased capacity out of our Morwell pouch yogurt line, the packaging line, the new packaging facility that we've got in place at Wetherill Park, and also the potential for further synergies as we bring our businesses together, and we continue to restructure and align our overheads. I think there's a really good line of sight to a significant improvement in financial year 2024, and we're very comfortable about what 2024 looks like. However, in 2023, we still reiterate our guidance between the AUD 160 million and AUD 190 million EBITDA range. What we would say it's probably going to be at the lower end of that range due to the 33% drop in commodity prices, which has occurred just post Christmas. But we still think that overall position of the business is incredibly well positioned for next year. I want to hand back to Barry.

Thanks, Pete and Gunther. I think the team has painted a very good picture about how we are feeling about this business even though the year has been quite challenging. And I guess I would summarize by going to the last page, and obviously, I'm very happy to take questions when I finish this. But I think we have -- the team have emphasized the themes that give us confidence around both the strategy and the medium term, which is that strong underlying brand revenue and volume growth. There's been a step change in Australian domestic market dairy pricing, which we believe is a genuine step change, which will stay with us as we move forward. And those significant cost increases that we took in late '22 and in the first half of '23 are now being appropriately reflected in the Australian market. There are further opportunities in business efficiency and cost-out programs. And of course, the team are always looking at that, but we think we will endeavor to accelerate a number of them. The integration, which I think I've said enough, so I won't dwell on too much here, but the fact that we can move from dairy commodity to strong domestic market brands, it remains important. And in fact, I think if we not have had that this year, we would have found life much more difficult ironically up next year. It is likely to be more the other way, where we see the strength coming from the Australian market. And as I mentioned earlier, we would see that as a more stable avenue, especially given the strength of our brands. We do see continued growth and good performance in that spreads category. So it's an area of our business that we can be really confident with each year now. And people that have been with us for a long time would recall that when we first made that acquisition, we were faced with some challenges, but we worked through those challenges and came up with really what is now a great business. And I think that the learnings from the past can perhaps point to the future as we look to get through some challenges that we faced over the last couple of years. But the business that we're presenting to you today it has got lots of great opportunity. As I said, we continue to execute sustainability and circularity initiatives as our shareholders and indeed, the community would expect us to do so. There is still, I would say, further need for rationalization of capacities within the Australian industry, and we do very regularly, particularly in [indiscernible] reflect on where we think supply in Australia might go over the medium term. And there is no question that there is still too much stainless steel in this country for the level of supply that we have. But good to see that some of that rationalization is occurring, whether it be us or a number of our competitors that are making decisions that will, I think, make for a more healthier processing sector in the medium term. People do often ask me whether I think there is more room for industry rationalization? I would say yes. But of course, they are at times that it's always very important that when we look at industry rationalization from our perspective, it's about how it creates value. So look, I would probably reiterate what both Pete and Gunther have said around 2024, and we think we're really well positioned for an improved business performance. And indeed, the challenges we had this year, I think, are very straightforward to point to. We know what the challenge was. We are seeing that shift in commodity prices that we will need to manage in the second half. But overall, we would say that we're very comfortable with the strategy that we're presenting to you and the business we're presenting to you today. So more than happy now to take questions.

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

Just trying to look into '24 and think about the mix of sort of production versus where maybe price might go on to farm gate and what's that's going to sort of mean? Obviously, commodity prices coming off a bit maybe means that there could be a bit of downward pressure, but with production yet to sort of show a bounce back, it sort of might keep the market tight. I'm just sort of thinking, what's your expectation on farm gate prices to '24? And then with that in mind, what happens with these retail price increases, do they stick? Is it just a lag as they come back down? Or what do you expect to happen there?

It is a little early to tell, Michael. And obviously, we'll watch that commodity market very carefully, but I suppose we could make some observations that clearly what drove that farm gate milk price up was the very fast ramping up of the global commodity price. And it is, of course, not the only factor, but it was the factor that drove it up with an overlay of scarcity of milk. But I would say that it is too early to call on farm gate milk price. But I think it would be notable that you would not expect that it would be probably at the very least stable, if not some level of downward pressure on it, which we would then say. Which then leads into your second question, which is what we think that means in the domestic market. I think as we've always seen, those price increases tend to be much more stable and stick for much longer in the domestic market, and I would expect that to be the case. And indeed, we see some pricing already announced for milk into the domestic market. So some of the prices that are announced into domestic retail and what we've got to remember across the profile of supply we collect. In some states, it is very much destined for domestic markets and the farm gate price will remain stable. It's in the southern states where it moves around and reflects more some of the commodity markets. So on balance, we would probably say that there is a little bit of downward pressure in some regions. It's probably because of scarcity, be a little more stable than might have otherwise been the case. But as I say, I think all players would say you need to reflect the market returns in your price -- in your farm gate milk price. And obviously, there is a change in those market returns as far as international markets are concerned Domestic market, we would say, will be more stable.

And just another question. Final question on margin. Thinking at the sort of EBITDA and EBIT line. Cost of goods looks like you've adjusted with the price rises to get your GP back up to where it was. Is that a fair comment? That's probably going to go back up to that 24-ish or equivalent given the timing difference. So that looks like it's done. But do you need further price rises to recover your EBIT margin? Or will you be attacking those costs? I'm just trying to get a sense of cost of doing business and the inflation that's in those lines.

I think a bit of both, Michael. So, I think we'll continue to -- so you're right that margin will continue to decline as we see the timing lag play out next year. And then projects like what we did yesterday with Canberra, some of the projects I've talked about earlier before with utilization of our plants, further optimization of our plants, some of the synergy benefits I've talked about before as we go into another stage of bringing our businesses together, but that will help the bottom line.

Your next question comes from Evan Karatzas with UBS.

On the trade receivables facility, just on my calcs, I'm just tracking you back the last few years since it started. It looks like you're now right at the upper limit of that AUD 200 million. I take the fact you've extended it with Rabobank to Jan '24. But I guess, I'm just interested, just firstly, if you expect that level to decline for the 2H? And then also if there's been any change in the conversation there with Rabobank, whether to increase that facility amount or alternatively even to potentially decrease it?

Yes, and I think that's a good question. So at the end of the half, we did use the majority of that facility. And I would say that to take the second question about what do we expect in the second half, I mean, that's a half where seasonally we take the inventory that we have and we sell that down now at higher prices. So I do expect the utilization of that facility to be lower at year end than it was at December. Right now, we haven't had any specific discussions with Rabobank about varying the size of that facility. I think what you're also seeing with this Canberra announcement yesterday and Pete's discussion on the footprint is we're now looking at, hey, there's so many other places for us to also go for cash. We've talked about sale and leasebacks of Bega might weigh as a potential when do we look at selling leasing back the Canberra facility. When you start to get into the footprint work, we've got this great asset base. And as we really hone and focus that asset base, it provides us cash opportunities. So final summary there is, end of the financial year, we'll be using less of that facility and our leverage ratio will improve. And then we'll be looking to multiple places for sources of cash, including working capital and footprint.

And I think, Evan, just to add to Gunther's comments. So if you think of where that -- the large inventory balance comes in, it's in the commodity business. So a lot of our branded business is daily or weekly. So you actually -- your inventory levels cycle pretty quickly there. Where you get caught out with the inventory level is the cost of milk or the cost of inputs. Those inventory levels have risen AUD 70 million or AUD 80 million just in the cost of imports. So this has been a particularly -- if you consider a record high round out milk costs going into commodity product that lands at inventory levels of the volume point of view are reasonably consistent. So this is a pretty unusual year. If your commodity-based milk drops, so do the level of your inventory, but that -- we'll see how that plays out, but that's the other thing you've got to think about as you think about this facility in future years.

Just -- sorry, just another one on farm gate milk prices. I came to get your thoughts just how the recent announcement from Kohl's, which I'm sure you've all seen obviously expecting to increase the price they pay quite a lot over the next few years. Just how you think that's going to impact the farm gate milk price discussion coming up in June, if at all? Just came to sort of get your thoughts on that Kohl's announcement, please?

So I guess from my perspective, it's Barry. I think interestingly, it reinforces the stability of that part of the market, which is the white milk market, et cetera. So which we obviously participate in heavily. So to a certain extent, that price increase -- and I'd also emphasize that if we talked about prices to farmer in New South Wales or prices to farmer in Queensland, it's a different price to the price we talk about in Southern New South Wales. So I think for all players in the market, you can always quote a very high price from a particular area for product best into a particular market. So my perspective is, look, it demonstrates that I think Kohl's beliefs that, that part of the market is stable and requires a stable stream of milk flow, we would agree with that. And because we're exposed to that, we're actually quite pleased to see that stability. I think elsewhere, it represents one part of the market, it would be what I would say, I think elsewhere that it is what I answered earlier. The way we ultimately come up with a farm gate milk price, the way our competitors do is a mix of the markets we're exposed to and the products that we produce. And so I saw it as a reflection of the market that they're looking to service.

I think, yes, it's 450 million liters of 7.5 billion. So Barry is right, you need to think of it in that context. I think what it indicates though is that the cost of the product on the shelf is sustainable in the consumers' mind and in Kohl's mind. And so given that we're an 80% branded business, that's I think something that we can be pretty positive about.

Your next question comes from Phil Kimber with E&P Capital.

Just following on, on the farm gate milk price, a few of your competitors have stepped up late in FY '23. Is that what you've done as well? I haven't seen any official announcements, but just wanted to check whether you've stepped up late in FY '23?

We haven't as yet. We would probably comment that most of those movements have been -- have brought them to our price or around about our price. I think we obviously keep our competitive position under constant review, but we're reasonably comfortable with where we sit today. We'll obviously keep it under review for the remainder of the year in terms of wanting to make sure that we're offering a competitive offer to our farmers. But some of the announcements that we have seen when we do the assessment. And again, it's a little like the market we're describing earlier, there are a number of moving parts within an assessment of a farm gate milk price. But when we do our assessment, at the moment, we see ourselves as presenting a competitive offer to our farmers.

And then just on -- you might have alluded to this actually on the result with your price rises. Just trying to get a sense, I think on branded, you were up 13%. You said 4% of that was volume, but that's an average over the half. I mean, I assume the exit run rate price rises are a lot higher than minus 13% minus 4%. Is that correct? And is that what you're sort of saying when you're saying AUD 260 million of price rise that's an annualized number?

Yes, because we're exiting on a monthly run rate in the first half in the very low-double-digits sort of 10% kind of and then there's some further pricing that we've taken earlier in the second half. And so we want to get up into that low-double-digits on an annualized level on the branded business, and that's how you get the AUD 260 million that Pete talked about.

And last one, just on the route business, the old line and Bega Dairy and Drinks business now skewed heavily certainly from a -- maybe from a profitable point of view -- profitability point of view to the route non-grocery trade, and then unfortunately COVID happened. What -- are you seeing that part of the business bounce back now? I know you're not going to give exact numbers, but just as a general comment, is there -- is it back to where it was or there's still a lot more opportunity just getting back to where that business was in the route market?

So I gave you some light on that with the foodservice numbers, which is only a component of that part of the business, which you're absolutely right, Phil. But the growth numbers there have been pretty striking. We're seeing good recovery there. And so we're really happy with how that's going. What I would say is we think the opportunity in that space that was significant. So both -- we think we're underrepresented in that space compared to grocery. We think there's significant category growth in that space. So we avoid [indiscernible]. And we think that we -- that's why we're investing in this new sales platform. We think there's also the ability to get better utilization and better cost efficiencies out of that network. So as we think about the next 5 years, we think there's some really good opportunity in that space. And we're really happy with some of the work that's being done. Also, just some of the focus, as we sort of have -- we really look at our product offering, how it can benefit and how it can play in that space. We think there's some, I wouldn't say, easy wins, but we think we have the right to play harder and better in that space. So we're pretty excited about that. We're pretty excited about some of the things we're seeing in this -- some of the growth opportunities we're seeing, and that's why I sort of called out those foodservice numbers.

Your next question comes from David Errington with Bank of America.

Gunther, it's been a long time. I can remember when you're working with Mike Clarke at Treasury Wine. So it's funny how the world goes around in different circles, Gunther. Here we go, talking from wine to milk. Probably, Barry, I'm not being fastidious or trying to be here, but you've forgotten more about the milk industry than what I will ever know. But I'm looking at Slide 12 and I've got some concerns. I'm worried about that slide where the global commodity price is coming off, which probably impacts your bulk market from a revenue perspective, correct me if I'm wrong. But the local price, the local milk market is likely to continue to rise, while we've got this situation of a short milk pool and an overcapacity in processing. So I'm worried that you're in the perfect [indiscernible] system here where revenues that you receive from -- in other words, there's no real correlation between international and domestic and that the domestic could continue to rise with the international falling and I don't see that being a good outcome for Bega. But I'd love to hear what your views are because whilst we've got this situation where we've got excess processing and a shortage of the milk pool, that's not going to be great. And I'd love to hear what your views are on that and whether I'm just being far too simplistic?

I can see how you come to that conclusion, but I guess, I would say 2 things. I'd say, better or for worse, we've been doing this for a long time and we've actually had for much of my time at overcapacity in the stainless steel in this country and a falling milk pool. It's been -- so it's not a new phenomenon for us. And if you look at the things that ultimately drive how the industry plays, it is all about how you expose yourself to each of those markets and it's all about your mix. So even within that commodity price fall, if you went deeper into it, you would find that some products in that global commodity market is still performing quite well and others are not. So it is about how we sort of make ourselves competitive from a farm gate milk price. But if I was to sort of make the brutal assessment, at the end of the day, the strategy for us was to get ourselves more exposed to the Australian domestic market where 80% of our business is actually done as far as brands are concerned, and we sit there going -- or as far as the branded business is concerned. And I sit there going, that exposure, which is looming is stable, we'll see us get some advantage as far as mix -- or potential advantage as far as mix is concerned that farm gate price, right? So will it write itself as dramatically as that graph might indicate, I don't believe that will be the case. But even a stability or a small correction is something that we can manage within our business. And we are actually seeing more capacity come out. I went through a period where we were seeing the milk pool drop and capacity go in. That was what used to worry me more than the circumstance we're in now. So I look at my competitors, their exposure. It is different for each competitor. And I see where I think that land then in terms of -- they have to reflect 2 things. Ultimately, you can't keep paying a price above what you can get a return from a market. I think we're well positioned to make sure we've balanced that and I think probably better positioned than most because of the way in which we've evolved the business over time.

Sorry, David, it's a really good question. I think the way we sort of think about the milk pool is 7.5 billion liters, 5 billion roughly goes into domestic and 2.5 billion goes into -- the excess 2.5 billion goes into commodities. And so it's understanding where that sits in relation to particular regions and capacity to understanding the farmers that are producing seasonal milk versus flat milk, their cost structures and dealing with them. It's also, as Barry said, aligning yourself with sort of that one plenty of options within the commodity market because even at the moment within that 33% reduction, there's a AUD 0.30 per liter shift on returns within different commodity streams. So some commodity streams continue to do pretty well. And so have you got exposure to 1 or 2 commodity streams or have you got exposure to several commodity streams. And I think we're pretty fortunate through the foresight of previous management, we've got exposure to several commodity streams. Some are very high end and stable like lactoferrin. We've got exposure to different cheese as well as sort of basic commodities like skim milk and butter. So I think you're absolutely right. It's something to keep an eye on. But I think we're still in a strong position to manage that.

So we'll just keep building on the answer because I think it is a question that is very appropriate. But the reality is that you could see a reversal of what you've seen this year in terms of what we're reporting to you. So a stable milk price with us pushing all those price increases through in the domestic market, we'll see us feel much more comfortable next year than this year given that we were chasing a very fast rising farm gate milk price. There's no suggestion that there's going to be another very fast rising farm gate milk price. So the question really is, does it stay stable or ease a little. And that would say that we would say on balance that works in our business if you like.

And can you give us just -- Barry and Pete, that was great answers, but can you give us a little bit of confidence because you're in a better position to know than us. I mean, we can do our due diligence and whatnot. But can you say a few comments as to what gives you the confidence that you are in a significantly better position than your competitors? I suppose it's your mix in that commodity market, as you say, you got in lactoferrin exposure and higher quality products. Is that what you're talking about in that regard that you can -- you're in a much better position than your competitors at the moment to be really bleeding? Can you give us a bit more in-depth on why you have such confidence that you are in such a great position relative to your competitors?

Yes, I'll let Pete build on it. But the only thing is, I would say, as long as we are in the capacity to compete in the commodity markets with our competitors, we will see our advantage come from the Australian brands in the Australian domestic market. So it's not that I would sit there saying, we've got the perfect commodity mix as compared to our competitors. We've got flexibility in our commodity mix. We will see some things that work for us and some things that work against us. But we've got capacity to flex that, as Pete said. But in that sort of market where you're seeing, I guess, no signals that, for example, farm gate milk price would improve, what we would say we can compete well in that space, while taking advantage of the diversity of the business in the other space in the domestic market. Pete, do you have anything more to add than that?

Yes. We've got good flex. And we flexed this year quite substantially. We fixed out of cream cheese into cheese, mozzarella and parmesan. We look at some work this morning. We will flex again next year as we've seen the commodity market take place. If I was to put it in the most basic of terms from my perspective, we need to be able to compete on commodities because nobody should be as sort of for the one of a better way pointing [indiscernible] to say, I know all of our global commodities and I know exactly which one to go to. I think we should be able to compete on commodities and win on brands.

And I think second half, David, for sure, see the branded business moving ahead is that pricing coming through. But sequentially, the bulk business will be lower in the second half in profitability than the first.

And just to finish, Barry, have you ever seen conditions as tough as this where costs have risen so fast ahead of your ability to pass prices on it? Have you ever seen it in your career?

I simply think [indiscernible] and it wasn't. So I think I've said this publicly so I don't mind repeating it. I mean, I was watching very carefully going up farm gate milk prices will move about 20%. And we were sort of set to that, we weren't set to the 30% movement, which is a faster movement as I've ever seen. And it occurred over a 6-week to 2-month period. And it occurred into this financial year. So it wasn't even like we had a gap between the end of last financial year and any space to get ready to occur over in June-July period, which I have never experienced. So it keeps me agile.

And given the circumstances, you guys have done damn well when you throw all that into the mix.

Your next question comes from Mark Topy with Select Equities.

I just -- I know you don't comment on pre-speculation, there was an article talking about divestments of brands or Bega is thinking about that. I wonder if you can knock that one on the head or do you have any comments on that?

So I'm looking at Pete, but I'll help him a little bit. It was an unsourced article [indiscernible] So there was no -- you might have noted in that article, there was no commentary from the company. It was an unsourced article. [indiscernible] and all that.

Just to talk then on the supply. I'm just wondering in terms of the global commodity price, can you talk through the supply situation? I'm just wondering about New Zealand. Was there sort of a pretty harsh conditions that they're experiencing the demand and if the milk supply came off a lot in New Zealand, do you think there's scope that supply might be impacted? And perhaps in terms of how you're seeing that might feed into the global pricing?

So Mark, I'll make a handful of comments and some of them are which are repeated what's on the slide. But what have we seen in terms of what that all sort of farmers joke that nothing picks as high prices like high prices. So we have started to see a response to those high prices. What we saw out of Europe was probably a little unexpected and that we saw supply growth in Europe largely benefiting from a very mild winter, which I think was pretty well documented around the world. We saw which is fairly normal that America is one of the -- the U.S. is one of the first quick responders to high pricing and we saw a response out of the U.S. market. So we saw supply growth in the Northern Hemisphere through the last year. And I would say probably a little bit unexpected in terms of how much it grew because there are a number of headwinds in the Northern Hemisphere, particularly in Europe for milk supply. We've seen Australasia continue to decrease, although New Zealand I think in recent weeks, to answer your specific question, has actually lifted a little bit of supply in terms of year-on-year comparison in terms of the particular month. But we would sort of say overall that those supply increases, which you wouldn't necessarily say were overly dramatic, but they are also coupled with the extended lockdown in China that sort of demand suffer a little bit and also some softening of demand in Japan and some price points in Asia that saw dairy come off because it just became not affordable. So I would not feel overly gloomy about the supply-demand circumstance from a global perspective. I think it will probably move to a reasonable rebalance over the coming 12 months and that's what we sort of see. But some of that quick drop-off I think is driven by a bit of unexpected supply and some soft demand, which that demand will return and the supply will probably start to even a little.

And you did mention that domestic supply was down 7% through December and you're seeing some improvement, I suppose, has been a bit milder. So I'm just wondering, can you give us an idea of how you see the milk supply numbers? Like are we thinking $1.3 billion for the full year? Are you perhaps in a position to comment on where your milk supply is at?

So we've been down a little less than the total industry. So if there was a bright spot, which is obviously, we would rather see supply going up, but we haven't seen our supply diminish as much as the overall industry. In terms of the industry view, we feel like is that, that sort of reduction in supply will slow, but there's still some, I guess, trends that cause us to hope -- or not hope, that's not the right way to put it, that wouldn't say that we'll make sure we design our business where we're expecting that there will be still some more contraction of supply and that contraction of supply is around some of the issues we've talked about. There are some short-term issues around. There is no question that in the last 6 months, and it's still with us a little bit, the impact in some regions of the significant flooding. And then -- and the impact of labor issues has hurt the industry. And the way I would describe the industry, Mark, is that it's not like all our farmers are decreasing supply. We've got a number of farmers that are making significant investments and growing. They're just not quite growing at a pace that is dealing with the retirements. And some of the things that are driving retirement, one of them is farmers that can't get labor and are certainly saying, look, I think you might retire in 5 years' time or whatever, I can actually -- I can run these cattle and I don't need labor for that in my farms worth a lot of money. So those factors -- those ones are a little more medium term, but certainly, the return of labor back into the Australian market will help those that are wanting to grow because that -- when I move around the country side, they talked to me a lot about the fact that I'm happy to grow, but I just can't get the people.

And just I suppose if we head back to the Lion acquisition, I'm just wondering -- and it might be difficult to say, I know it's all merged. But in terms of Lion now reaching its sort of business case and in terms of the business, whether you can give us some insight as to how that's going? And also I know you produced a great chart for us there. But I noticed we don't get the Bega Cheese numbers on that. It would be helpful to have the Bega Cheese. It seems to me that you might have picked up some market share in the cheese space because cheese consumption seems to have gone backwards a little bit and perhaps Bega has picked up market share there. So just wondering if you can talk about Lion and how that business now within business is performing?

In terms of the business case, Mark, we could drop out COVID and drop out I mean the surge in pricing that we had to push through the market. We would probably say that all the other activity that we're undertaking is as we would have expected and we continue to sort of stick to the strategy. But I wouldn't -- the way I would put it is that I wouldn't characterize the last 2 years as normal or built into the business case that we built for Lion, but it doesn't mean that we're not confident that, that business case stands up really if you took out those 2 exceptions.

And on the cheese market share, can you give us some insight whether perhaps you picked up share there or how that segment of the market is going?

Which segment, Mark, because we obviously -- we don't see processed cheese in the Bega Brand?

Yes. Just I suppose in the block cheese market, the retail...

So the Bega brand continues to grow and continues to be a really strong brand and the #1 brand in the cheese piece. What we have seen is a bit of a drift or a bit of an arbitrage be setup between the Australian domestic cheese price and global cheese prices. So cheese cheddar, mozzarella are experiencing Australian cheddar and mozzarella are a fair bit above global pricing because retailers are still continuing to want to sell Australian made cheese predominantly or some retailers are. So that -- cheese consumption despite a significant increase in cost remains very strong and that flowed through to our contract manufacturing business.

Your next question comes from Jonathan Snape with Bell Potter.

Look, just a quick question. I hate circling back on this farm gate stuff, but obviously, the big question for 2024 and kind of how it all lands. And I think you kind of indicated what fresh milk is as a component of the market being kind of relatively small. But kind of looking across the Pacific and New Zealand at the moment, their futures price is probably around NZD8.50 a kilo, but if you were to stick all the SMP and SW and WMP pricing, it's probably close to AUD 7.70 would be with the spot. So I think when you put that in an Aussie sense, you're talking AUD 7, AUD 7.70 a kilo. So I guess, my question is, how does an Australian processor compete against a New Zealand processor where the cost of milk sold looks like it's going to be call it 15% to 20% lower than where we are today if the farm gate stays static? And I guess, the follow-on to that would be, why would a rational domestic processor produce cheese in the first place or anything like that? Why wouldn't she just buy it from New Zealand at a materially lower cost per kilo of milk sold and flip it into the Australian market? Because I would have thought that if you get deflation on the cost of the milk sold across the Pacific, it will eventually flow into our retail shelf price. And so it can't kind of stay static. Am I reading to that all wrong or...

So that's a pretty fair calculation, Jonathan. And I think the key word you had there was eventually. So I would just make a couple of comments. One is that those calculations are absolutely right and the calculations that I think you and I always do in a falling commodity market because we start thinking about what does import look like compared to domestically produced. Now of course, those calculations look terrible in a rising commodity market where suddenly you're trying to service the domestic retail market where price rises might go from more slowly. So the -- I think your eventual comment is right. And I would sort of reinforce what I said earlier. You and I have been around longer halfway where we have to -- and when I say we, I mean, the industry. We've seen the pain in the past where the industry does not reflect the long-term stable returns for the various products they get, which means you don't necessarily go to the bottom of the dip and you'd end -- and the top of the rise is something that you better make sure you're managing very carefully. But the truth is you do need to deliver stable supply. So I think the retailers in Australia would say, well, I wanted stability in my pricing and I would like to see that for a longer time as possible. I can't take either a really fast rise or a really fast fall. And so I think for us, we do -- absolutely do that calculation all of the time. We make those decisions which goes back to what mix you make and what products you make and where you send it. And it is why no surprise the exposure that I've always wanted for this business in fresh dairy was so important and will be so important going forward as we moderate that risk with the fresh dairy presence that we have in Australia. But those calculations -- and that's why when I'm asked now what do I think farm gate milk price will be even in a very quick declining market. I'd say, it's still a little bit too early to tell because we will make those calculations on what we're seeing in the market as it unfolds through the December and through the next year. So we'll be -- so there's nothing wrong with the calculations that you've presented there. It's just about -- and what have I spent my life doing, trying to mitigate these streams of those. This is one of those years where it was so fast that we couldn't mitigate it the way we would like, but most years we would say, we -- that's part of what we do.

Your next question comes from Josh Kannourakis with Barrenjoey.

Just further to Jon's question before around that. So just to sort of break it down, and I know we've laboring on it a lot. But if we sort of look at stable -- so assume milk prices do remain stable, does the price rises in OpEx -- as you sit here today, does that offset the potential commodity drag given the branded sort of offset like? What's the sort of end result and sensitivity around that?

Sorry, Josh, could you go again?

Yes, sure. No, that's okay. So just assuming -- I guess, just trying to think of a few sensitivities into '24, Barry. So if we do assume just today that commodity prices are where they are and they hold at the current level, milk prices don't change, which obviously everyone hopes is the case. Does next year look, I guess, worse than this year or the price rises and OpEx reductions still offset that in terms of that move?

So I think our exposure was far more to getting those price rises soon to the domestic market than it was commodity. So I think it is a scenario we're watching a mix that we need to work out. But the truth is, we will still be better off even if we've got a reducing commodity market and a stable farm gate milk price. We have got those substantial increases through that Pete talked about that improve our EBITDA. It's rare that you get perfect on both sides of the business. But ideally, you would like to see a combination of both where you see the farm gate milk price will reflect more closely that commodity decline or not the entirety of it, but some of it. But the fact is that the biggest pain point for our business this year, and indeed, the fact that they're through and reflect those higher farm gate prices, we'll see our performance improve even in light of maybe not a full reflection of the commodities line.

No, that's great. And then just with regard to I guess the operating leverage that can come through as the farm gate prices do drop, whether it be next year, the year after at some point in time. Within the white -- the drinking milk sort of segment, like what's the incentive by anyone to sort of, I guess, reduce the retail pricing across the board or whether it be private label pricing? And I guess, how much -- what do you think the operating leverage can look like in a -- obviously in a falling environment?

Look, I think, Josh, we would say, I think the industry would say, there would be industry leaders that would say part of the decline in the Australian dairy industry where it hasn't got where we've seen farmers lead in the industry was because we didn't have a fresh white milk price that reflected what was required to keep people growing and in the industry. And I think that is reasonably well accepted. And therefore, these price changes are -- you could argue they lagged price changes. They needed to happen. And I think we got to a point interestingly driven by commodities, but we got to the point where we finally -- where a pent-up need for a better return to farmers producing everyday fresh product had to happen. And I don't think there's any great wish, again, well demonstrated by the fact that Kohl's will come out with a longer term stable price in that area. I don't think there's a great wish to see that price go back to levels where I would see us actually not -- or we see farmers saying this is the only the industry that I want to be involved in because it's too tough at retail level. I think the reverse is actually now that is the case.

And then just final one just around the debt positioning. Can you just give us maybe a bit more context of -- based on the guidance, how you see that ending up towards the end of the year and also the CapEx profile, if that's okay? And apologies if I missed it earlier.

No, that's all right. I might go to Pete and Gunther for that.

So debt profile, I mean, as I said, I think the key in the second half is you're going to see that leverage ratio decline as we sort of sell through some of the inventories. And as we enter FY '24, you do get that inventory build as you approach the seasonal milk peak, but there will be 2 things that are different. So one is that the pricing fully rolls through an annualize AUD 260 million that Pete talked about in terms of pricing. And then if you got some sort of stability, as Barry alluded to, in farm gate milk, we can fully take advantage of that and optimize our stream returns. What are we making as a cream cheeses? Is it butters? Is it branded goods? So that's how we'll leverage the milk we do take in the first half of F '24. So I do expect at the end of this year, we'll see a meaningful decline in leverage ratios. And then the final thing I'd say is, as we look at the footprint, Canberra being a small example, but other ones coming, that's the other way, of course, to make a meaningful intervention over the next 2 to 3 years in our deck.

And so just in terms of like this year and last year, like should it sort of drop down to the sort of mid-200s, 250 to 260 by the end of the year or...

Yes, we won't call exact figures. I mean, I think the other thing that I'll say is on the CapEx side, we will have -- if you look at the second half, we'll decline our investment a little in areas like marketing because we went above the odds in the first half, but you will see even stronger levels of CapEx investments in the second half of the year. So I would expect to see that. But leverage ratios, I mean, I won't call it exact range on that, but better at year end versus now.

And certainly, Josh, we've talked about FY '24. We think the earnings profile of the business will rebound and that will also have a significant impact on the leverage ratio.

Your next question comes from Kim Berry with Food & Drink Business.

I've just got a question for you regarding Vitasoy. Can you provide a bit more detail about what the company is going to do in terms of the loss of its alternative milk market share with the sale of the taken away mesh of Vitasoy? Are you going to be looking at other alternative milks or will it be looking into other areas like plant-based products like cheeses and yogurts or is that something?

So we already actually do a plant-based cheese. And I think what we would say is that we want to have a profile that is similar to the profile that we had as we were distributing that Vitasoy product. And I think we will -- we obviously can't say too much, but we would expect to have an exposure in plant-based milk and we're very actively pursuing that. I'm really pleased with the progress we're making there. So we would say that interestingly, we are probably -- we've probably got a broader range of activities that we can now think about in plant-based milk, which I think is part of your question. Given that we are now -- have a greater freedom to operate for the one of the better way of putting it. And therefore, we will see that as an important component of what we do and we'll unfold plans around that and they're unfolding fairly rapidly.

The Vitasoy was quite restrictive around what we can do in plant-based. So we see plant-based as a growing trend. We want to be highly exposed to it. I think we've finally got some good news about plant-based cheese coming up. I can't really talk about it at the moment, but we've got some exciting stuff there. And we now have the ability to look at yogurt, flavored milk, all sorts of things, which we couldn't do previously. So we'll look at all of those extension in other product ranges and we'll also look to partner with some other plant-based brands.

Is there any sort of timeframe for you sort of very quickly and see...

I think look, to be transparent, we obviously will remember -- while we're a part of that JV, we could not look at external opportunities. So the JV is obviously only handed literally officially over a matter of days and weeks. So that's why I would say -- so we are very pleased with the inquiries and responses that we've had around plant-based, but we've got nothing to announce or talk about just yet. But it would be fair to us. It's about 2 weeks. Obviously, we're very keen to abide by that agreement. So we're extremely keen to get exposure and [indiscernible] as we speak.

And I think the other thing I'd point out is that our quite significant cold chain network, 40,000 liters a week, over 20,000 customers, that's a great tool to have as we consider plant-based options.

There are no further questions at this time. I'll now hand back to Mr. Irvin for closing remarks.

Well, thank you, everyone, and particularly thank those that stayed on to the question that end up being quite a long conference call, but we're really pleased to be able to provide that detail. And I think, as I said in the body of the presentation, we still remain very confident regarding the strategy of the business and the opportunities in front of us. So thank you for taking the call and your interest and look forward to chatting again in the future. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.