Bega Cheese Limited (BGA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Bega Group trading update. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Barry Irvin, Executive Chairman. Please go ahead.

Hi, everyone, and thank you for taking the time to join us. We thought that it was appropriate to hold an investor call following the announcement we made this morning. I will fairly quickly hand over to Pete Findlay, [indiscernible] to discuss the details of the announcement. But in broad terms, really, the announcement is, I guess, reflective of the 2 segments of our business with, obviously, a strong cash inflow coming from the sale of our Port Melbourne side, allowing us to restructure and focus more on the branded side of the business and the branded segment of the business, which we've obviously been very pleased with the performance of that, particularly since the acquisition of Lion Dairy & Drinks. And indeed, that restructure also allows us to address costs in the bulk area of our business, which, as outlined by the announcement, is obviously dealing with a large drop in global commodity prices, which is not then being reflected in what we expect new season pricing to be in the Australian farm gate. I'll talk a little bit about milk procurement a little later on. In fact, coming to you from Gippsland, where I am out with the field service team talking to farmers and endeavoring to make sure that we hold and recruit milk, but I'll talk to you about that a little later. I might hand to Pete, who will talk to you about the Port Melbourne side and, indeed, the organizational restructuring business simplification that we announced this morning. So Pete, I'll hand it to you.

Thanks for that, Barry. So I'll address the sale and leaseback at the Port Melbourne site first of all. So we have had that site or that asset held for sale since late last calendar year, and that was in our accounts, our half-year accounts, and we're really pleased to say that we've got the transaction away for just under $115 million. We've had a couple of starts at that, but we're very pleased that we've done the deal with Charter Hall. That will be for a period of 15 years. So it does reinforce our commitment to that site. We've got the optionality of another 10 years beyond that. That's a really important side. It's a mature site for us. It executes very well on reducing spreads, which were obviously a strong margin and very much part of our branded strategy moving forward. We will potentially look after that period to relocate the site, but that will see out the life of those assets. and ensure that we optimize the cost of those assets across the useful life. So we think it just fits really nicely with where we're heading. It also frees up our balance sheet and puts us in a strong position, with gearing estimated to be around 2x or a little bit below 2x at year-end, and Glint has been working very hard on that. So we feel that we're just in a strong position, and it also potentially gives us the opportunity to start to allocate capital now into other areas in our brand business where we can seek improvement. I'll now talk about the organizational restructure. So we've had 3 sorts of business units sitting within our branded segment since we bought the Lion Dairy & Drinks business. And what we're doing now is merging those into 2, and they'll focus on different channels. So there will be a focus on our non-grocery channel where we think there's a real opportunity to grow through food service and use our distribution network to grow sort of in our unstructured part of the business and also to go forward with the full offering of Bega products, which is something that we haven't been doing. And therefore -- and then also have a focus on our grocery side, which we're traditionally very strong in it will be coming from very much a channel perspective and not across 3 different businesses. What that does is for you [indiscernible] so consolidate our sales functions, our marketing functions, customer service, R&D, et cetera, and means that [indiscernible]. A lot of that really stems from the fee created ultimately with the Lion Dairy & Drinks acquisition. To support that, we've invested in technology. So we'll be bringing together our front-end ERP. So we won't be doing a full consolidation of our ERP system, but the front end that enables us to have one view of the customer and deal with the customer directly. We've also, as I alluded to, in our half-year accounts, invested in our digital facing, which means we'll now be able to put all of our business on that digital portal and sell all of our products through the one platform. So that will mean that we'll be looking to take out about $20 million of cost savings across our nonmanufacturing overheads. It will be a similar cost to that to initiate that, which we'll put into our 2023 accounts. It will create about a $12 million benefit next year. We'll also look to make some savings around our bulk commodity business. So I'll let Barry talk to what's been happening with milk prices, but we do need to respond to that, and we'll be looking to make some consolidations in our operations around our Lagoon Street side. We will change our ship structure and potentially at the Tatura site, where we've got various drivers and assets that will look to compress their operations, which will also create some people savings. So we actually think that this helps give us a more focused view of our branded business. It helps create -- simplify our business and free up resources for growth, but it also gives us a better cost-benefit moving forward. Barry, I'll throw you back on milk procurement and the ramifications of that as we're seeing it.

Thanks, Pete. Yes. So as I mentioned earlier, we are currently in the time of the year where we are recruiting milk for the coming year. And it is fair to say that we've got almost the opposite circumstances that we had last year, where if we look at farm gate milk pricing, it generally mirrors global commodity pricing for dairy commodities, generally a little better over the long term, but mirrors those inevitable fluctuations in global commodity trading. The circumstances last year was that we were seeing a very rapid rise in global commodity pricing, which was mirrored by a very rapid rise in farm-gate milk pricing. And as we've spoken about a number of times, see the delay in -- saw a delay in passing on of those prices in the Australian domestic market, in our branded business, but we were always confident that we would get that pricing through in the Australian domestic market. The second thing we see this year is that global commodity prices have come off a lot. The set of milk and the competition from milk has not seen farm gate milk pricing ease or only ease very slightly despite the fact that we've seen in recent months, quite large drops in global commodity pricing. So the circumstances of last year where we said there may be a timing challenge here are a little different this year because obviously, the influence that we have over global commodity pricing is very, very little. So that means that as we look at our commodity infrastructure, whilst it is a very good quality and whilst there are streams within that infrastructure that will continue to make an important contribution to the business, there are some global commodity prices at the current farm gate prices does that mean that an impairment is necessary. It is fair to say that we would expect it, as it always does, this commodity market will move around. But given that we are now, I guess, in discontinuing the scarcity of milk environment, we see that that disconnection to particularly the international market may be with us for some time, and therefore, it's appropriate to make some structural changes, as Pete mentioned, and also have a look at the carrying value of those assets. We would expect that this circumstance will change as the international supply and demand changes. But as I said, it's appropriate in this environment. I think while we look at the scarcity of milk and not only a minimal rationalization of the infrastructure, the competition will remain very strong and may create these disconnections more regularly than it has in the past. So while we may expect that there will be some changes in the international market and some changes in the competitive circumstance, when those occur is a little unpredictable, so as I said, appropriate that we flag to the market, although our milk procurement strategy is incomplete. So at the moment, we are still in the midst of pricing milk and competitively pricing milk and also understanding what volumes have been successful in recruiting. But even though we are incomplete, we felt that it was appropriate to update the market because we know that the current pricing will impact FY '24 and trigger a need to look at the carrying value of those assets, which has caused us to give the range around in and go through my hand to you to perhaps talk about the approach that we're taking around the impairment of those assets.

Fantastic, thank you very much, Barry. And as Barry mentioned, there is that disconnect caused by the scarcity of milk between the milk cost and commodity prices. So what we're doing is we look at great facilities like Koroit and Tatura. Within those, we have some very high-margin businesses, high-end bio-nutrient powders, for example, bulk cheeses that we export that continue to do very well in all environments. But it's fair to say that at the current milk prices, things like skin milk powder, bulk butter, they're all underwater right now. And so what we're doing with both the organizational restructuring that Pete mentioned as well as the impairment that Barry mentioned, is we're looking through those units and saying, are there operations within facilities like Koroit and Tatura that we won't need over the next while or we can switch on and off as commodities move and we're addressing and simplifying those sites. And that's a real opportunity for us. And what we'll end up with at the end of this impairment, we've looked at that sort of milk versus commodities price. What we'll end up with is the ability that in years where commodities are high as they were in the first half of this year, we can make good money on the commodity business. But when we see the opposite situation that we're seeing now, that milk is very high relative to low commodities, we've rightsized and focused those operations. And so the impairment is modeled on that. It enables us to continue supporting the best units within our Bega Nutritionals business but also rightsize the asset base. And that's the approach that we've taken. The final thing I'll mention is that we're also taking the opportunity to move into a consolidated tax group. And in this announcement, we called out $10 million to $15 million of cost. And again, to Pete's message of focus, simplicity, achieving that consolidated tax group ensures that we're able to do that on an ongoing basis and to become more efficient. Back to you, Pete.

Yes. Thanks, Gunther. So if I just look at our -- a bit of a trading update, we -- whilst the commodity business is undergoing pressure with [indiscernible] milk price going into FY '24, we're still very, very happy with our branded business. We've had to take significant prices during this year to counter large cost increases, not just across milk, but across all inputs, and it would be fair to say that whilst that's been happening, we've been very, very happy with our volume uplift and our market share. So we're very pleased with the way our brands have stood up in that very difficult training situation. We also think that over the next sort of 12 to 18 months, we can continue to refine and improve our branded business. We still think there's lots of opportunity to leverage our market position, lots of opportunity to leverage our footprint, our supply chain footprint, and our distribution network to continue to not only make efficiency benefits and step changes within our branded business but also to keep growing that volume and taking market share. However, just with this year's result, we called out that we're still comfortable that we will make the low end of our normalized EBITDA guidance of between $160 million to $190 million. And obviously, the sale of the Port Melbourne property puts our balance sheet in a strong position. So with that concluded, I'd like to open up to questions.

[Operator Instructions] Your first question comes from Phil Kimber from E&P Capital.

Just a question. I don't know how many I can ask, but my first one will be just on the outlook in FY '24. Given farm gate milk prices and the relativity to commodity prices, should we assume broadly that at your latest milk price, I think it's $9.20 for the Southern region, that will help your domestic business because it's at the moment anyway, a little bit less than what you've been paying in the FY '23 season. But on the flip side, your export business, you're going to be wearing prices that are probably higher than they really should be based on commodity prices. So do the 2 of them basically offset one another? Or should we think about it that actually any benefit you get from lower milk prices in your domestic business more than that is going to be offset in the commodity business?

So Phil, I might give an overview and then let the number crunchers do their stuff. But I think the bottom line here, and this is always when we talk about our farm gate milk price, we do talk about, as you say, that southern region price of $9.20, which is largely the manufacturing hub of the business if you like, it's where the biggest volume of milk is that is actually manufacturing investment for international markets or longer shelf lifestyle products. But the truth is across the country, when we think about our brand business. Obviously, those prices vary enormously as you move up the coast and into Queensland and across the South Australia, et cetera. And so most of the milk destined for our branded market outside the state of Victoria is either stable or has actually even gone up a little. So therefore, the market, the branded market, is appropriately reflecting the milk costs because it's been relatively stable or only moved up a little. In Victoria itself, it tends to be a little mix because, of course, we do look to secure our volume in milk and make sure we can supply those brands that need that everyday supply, and that can be priced a little differently, whether that's because it's more of a flat curve of milk supply or volume. So that's a long way of going. The branded business will perform and be stable and there may be a small benefit around the Victorian -- around the slightly lower Victorian farm gate milk price, which, by the way, is still not yet finished. So we're not sure where that finishes. But it will not offset the impact of bulk commodities in an even way. It will offset a little bit, but it's certainly not an even game for or a better way of pointing it, but Pete might want to add a little bit more color to that, but that's a broad picture, if you like.

Yes. So Phil, we've got some -- what we have done with -- remember, we talked about the price realization that we took 3 or 4 months to get through the market last year. So that's all worked nicely. And so we'll have a full year of that benefit. We were hurt pretty badly in the branded side of that business as we -- with the rapid acceleration of milk at the back end of last year and the start of this year because milk prices were still going up in July. We've been able to push all that price through successfully. We've been able to actually increase volume and in some places, take market share doing that. So that hit that we took during the first quarter of this financial year is normalized out next year. We do have to -- that $9.20 is a minimum price. Sometimes we do -- as Barry said, we have to secure our flat milk to go into that branded business. So Barry is right, there will be some small upside look, you'll get a natural lift in our branded business because of the timing, and then there'll be some small upside. But with commodity prices being down to up to 30% in the back half of this financial year or over the last 3 or 4 months. They are miles of being equal with a $9.20 minimum price at the moment in Victoria.

Just also to remind myself, by the end of early July, you'll have locked in that price for the farm gate, which as you say, varies by region. But then for the rest of the year, it can only go up 99% of cases. So what's the sort of timing risk around global commodity prices because they don't stay still for a year before the next round of farm gate milk prices are set? So is it -- I don't know if you take some hedging or are you at risk sort of for 6 months or for the whole 12 months, either up or down, depending on what commodity prices do in Aussie dollars?

So we tend to -- you tend to sell out about 3 months. if you sell out longer than 3 months, you tend to lose too much value. So we tend to be locked in for about 3 months. What we're finding is that demand is all over the shop, particularly in Asia. So China has been slow to crank up again after COVID. Japan economically is a little bit shaky, like, we're just doing to see recovery in Japan. But volumes, it's really hard to get any volume into your forward book at the moment because the whole world is sort of waking. I mean, Barry might want to talk about what's been happening with global supply and demand to drop commodities so rapidly. But certainly, where we can, where we don't lose too much value will take about 3 months of cover. But at the moment, demand is just all over the shop. Barry, I don't know if you want to add more.

Sure. So I guess, Phil, what I'd say is that in terms of why that came down so quickly, what we saw throughout the last financial year is very high prices on farm gates around the world because of those high commodity prices. So we increased production out of Europe, particularly out of Ireland, so increased production out of the U.S. Obviously, not out of Australia, restating New Zealand. So overall, increased supply on to the international markets. And even in places like China and Japan, a little bit of increased supply. And we saw a suppressed demand. And we certainly saw it through the lockdowns in China, and we saw it even in Asia around price points getting too high for the consumers in some markets. So in short, we all know how commodities work. A little -- it doesn't take much to tweak that curve. So a little bit of increased supply, a little of suppression of demand, and we've seen that rapid fall in global commodity. From my perspective, so we're seeing China open up. We're seeing this is interesting, but around the world at the moment, we're seeing a lot of complaints from a lot of farms, particularly in places like Ireland because their pricing have already begun to drop because they are a regulated milk pricing system that just reflects the market. So I would be expecting that ironic enough, we'll see the inevitable change that comes from changes in pricing, and you'll see some of those supply increases that we saw last year seize, and we would probably expect depending on a lot of economic factors that demand will either return or stabilize. And I think one of the challenges that I've been around a long time in these markets, obviously, in a dropping market, the buyers keep a pretty short book because they want to see if they can pick the bottom. And as soon as that starts to improve enough, I then want to talk to you about going long. So I think we will see the inevitable change in recovery. The timing is the key. But I guess that's why we thought that we should make this announcement to date to point out what we're managing. We've been relatively conservative in the way in which we thought that market might improve in the second half and beyond, which is normally typical that the global commodity market tends to operate more on a calendar year than a financial year. So we've been conservative, but I think appropriately so, given that there is -- as Pete said, at the moment, it's fairly lumpy, but all the signals are that you'll see the supplier response around the world demand is stabilized, and you see that commodity cycle do what's been almost always does.

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

I've got a couple, but a quick one. Is bulk profitable at the moment?

So the bulk business obviously had a very strong first half, and the second half is not strong. And I think we have a combination of soft demand and soft pricing. And so what we're really forecasting as we enter FY '24 is that the size of the sort of skin milk powder and bulk better businesses, they're underwater, and they make up a reasonably high percentage of sales. So I wouldn't expect a ton of profit at all from commodities at current prices and at current milk prices for F 24. But as Barry said, you never know what happens in the second half of next year. Yes. It will be -- we haven't finished milk prices yet, David, and commodities swing around, but let's call it at best breakeven at the moment.

Yes. So where we're standing today, Pete, is what you're highlighting is branded is going okay. You got your prices back. So you've had a pretty satisfactory 23 in branded. But as we go forward, branded is stabilizing at those good levels, but there's going to be a whole punch through in bulk unless commodity prices improve or something happens, but you're going to have a huge hole punch in. And so you have to really do some heavy lifting here and cutting costs pretty dramatically, otherwise your earnings are going to fall away pretty dramatically. That's pretty much the message to take away from today. Is it -- not putting words into your mouth, but that's the message taken.

As usual, you're very, very, very close at all earnings, I don't think will fall away because I think the branded business will outrun the impact on the bulk business in the short term. It's going well. But yes, we're not -- we wouldn't have got the uplift that we would have got it bulk was where it has been this year at this.

Yes. Barry, this might be a question for you. This might sound like a really dumb question. I apologize upfront if it is, but it just seems the situation in Australia where we're short milk long processing. We're waiting for rationalization and processing to happen, but it's not a [indiscernible]. Have you thought about as a business becoming more vertically integrated? I mean, we're seeing the major retailers investing in downstream assets. Have you thought about doing this that could alleviate this risk that you're exposed heavily? Or is that just off the plantation at the moment?

We think about it constantly, David. I think at the end of the day, you've got to accept that we're in an ever-evolving and changing sort of industry environment if you like. And I guess the 2 ways we think about this is that we need to just add to what Pete was saying there earlier. In our bold facilities, we need to make them more flexible, more able to be term, wound up, and wound down, and not leave us with the exposure when the market is as it is today, but be able to take advantage on the upside. In terms of -- the reason why we've actually not looked to be more vertically integrated and owned farms is because, of course, that represents a huge capital allocation. And we've literally always traditionally said our farmers are good at farming, and we should be good at processing and brand marketing, et cetera. But I would increasingly say that I think where the model will start to emerge for us is that we may well be happy to join a funder, for example, that's making some equity investment, and we're a partner in that with an offtake agreement that gives security to that investment, which would not see allocating enormous amounts of capital, but would see us derisking and there are -- I think that's an opportunity that we will increase and look to pursue as we look to shore up supply, given that we're not seeing a change in the trend in Australia despite the fact in terms of milk supply despite the fact that we've seen very good pricing and very good and pretty good seasons. And I think if I was to add to that a little bit, seeing I am on the road, it's interesting talking to farmers and even our big farmers, sometimes prices that are high and in the competitive environment we're working at the moment. The number of farmers that are sort of saying to me, look, I used to look 700 cows. I've decided to do 500 because I'm finding it so difficult to find labor, and I can actually do quite well on the current pricing. So the funding is the high pricing doesn't always encourage a lift in the volume of milk. But if I was to report on what I'm hearing most, it's actually surprised me a little how farmers talking about the scarcity of labor and how that's impacting your ability to grow or decisions to actually even decline a little is one of the factors that may well address itself, but I think we need to probably think of a multipronged strategy around how we secure milk in the longer term.

Yes. And just a very quick follow-up, Pete, can you just give in a snapshot, a 30-second snapshot, the $12 million cost savings, and the $21 million cost savings, what buckets they're in? If you could just give us a bit of an overview of where the cost savings are coming from. That would be great if you could categorize.

So it will be $20 million annualized, $12 million next year by the time we implement. So we've made the announcement today following the ASX release, and we've got that structure in place. So we start -- that we structured today with various people. It will be probably 70% of it will be across the branded business, where we bought the 2 branded businesses or the 3 branded businesses together, business segments together, and sort of the final sort of synergistic play between the Mondelez business, the Lion business, and the original Bega branded business. And then the other sort of 30% will be 20%, 30% will be across the bulk business.

Yes. And that's mainly people taking out, et cetera, more efficiently.

Yes.

Your next question comes from Mark Topy from Select Equities.

Just first question, just on the scope for optimization of the milk, given the backdrop to the export, just what scope have you got to move perhaps more milk into the retail environment where the margins might be better?

Yes. So that's -- thanks, Mark. Good to hear from you. We are -- we've actually seen pretty good volume growth in our retail business over the last 12 months. And we're continuing to see good growth as we transition into the next financial year. So we've picked up some good contracts just recently. And so we are actually seeing some genuine growth here and some shift there. I haven't got the exact numbers on me now. But as that sort of solidifies, there's no doubt that we'll continue to push that. So we've just won a contract for 30 million liters of milk yesterday that will transition out of our bulk business, out of our bulk pool into our retail pool. So it's something we're always looking to do. And we are excited about that volume growth. We're getting volume growth across white milk, flavored milk, yogurt culinary crane. So we are genuinely pleased with that. And as the milk pool shrinks, we will continue to push milk into that higher stream business. In fact, it's something we look at every month.

And then obviously, the Koroit mentioned is a plant where you probably will be doing less volume or indeed maybe shut the plant down at various times. And I'm just wondering just to.

It's certainly not. I don't think we shut the plant down, Mark. So we still -- we want to sort of send the message to our Western Victorian supply. But we see that as a key area for full milk. We would certainly look to change the way we use that facility, but I just want to reiterate that we've committed to the West of Victoria, which is a very strong Koroit region.

And so what I'm wondering is in terms of the cost overhead, how much of that is impacting the results and how do we think about that? And obviously, with perhaps lower milk going through there, how does that impact lactoferrin, which is the big production lectern down at Koroit?

Yes, absolutely. So Mark, we have a number of tolling arrangements, we do quite a bit of work through there. So we'll look to make some immediate savings, but it's probably a slightly longer-term plan when you look at the cost structures of a big plant like for road and something we'll look at over the next 6 months.

So you can -- sorry, you're saying you can maintain elector volumes or...

Yes, certainly for the next 6 to 12 months, we can, and then we'll just assess it. But we might decide to use -- and that's the beauty of having sort of a multi-pronged sort of sites at your disposal markets, we might decide to use toward as a collection facility and still pump milk through there for lactoferrin, but then we can use it either into our parts of our retail branded network or Tatura, we have the ability to still use that milk reseal and lactoferrin facility. It's whether we will then use it for further processing is sort of the optionality we have, and we'll look at that.

Okay, great. And then just lastly, as we look across the ditch to New Zealand in terms of the farm gate, I'm just wondering -- and obviously, their pricing of commodity products gives them more competitive power from that point of view. But is there any benefits that you can see in terms of sourcing products in New Zealand? Or how do you see the competition now between Australia and New Zealand, given the differences in farm gate?

Yes. So we're seeing a lot of -- we do you see foreign imported product increase in coming into Australia. So where a lot of our branded business sits is in what I would call very fresh products. So flavored milk, white milk, yogurt, culinary cream, which sort of has to come from Australia, where we're seeing a step-up in imports is around barter and cheese, which obviously has a longer shortlist. We obviously have -- we manufacture cheese here in Australia and have a long history of doing that. But certainly, we would potentially look at options for importing foreign solids where it makes sense. I guess the beauty of our business is we do have a really strong and effective distribution network and processing capability that would mean that that's an alternative for us. And probably whilst there's an arbitrage in price is a very viable option for us. So we will be looking at that very closely. Barry, I'm not sure if you have anything there?

Yes. I think the only thing I'd add, Mark, is that it is a question of agility. So we have got the capacity around -- so I guess there's 2 sides to this clean. There's what we think will happen in the retail market, if you like, against an Australian-manufactured product versus an important one, if that disparity remained for a longer period of time. And that's obviously something that we watch carefully. But as Pete said, most of our brands and products are actually in more of the fresh category. In terms of what we do around cheese manufacturing and packing and processing for others, we do have a global sourcing capability that we always are using to make sure that we are sourcing solids from both Australia and around the world according to what's happening in those commodity markets. But the reason why I say that we need to be agile is that interestingly enough. If we looked at solid that in New Zealand 4 months ago, we would be saying they're too expensive. And so it is very much later to that commodity market, and it's about us having the capability to do that. And we've had that -- and we do have that capability. And obviously, you can always be refined and managed, but it is part of what we do as is the fact that we've got plans working every day within our business in Australia, working out what the best return for products are where the flexibility to send milk to various other products.

Sure. And does that take a little pressure off maybe chasing milk in Australia excessive prices if you love?

It can. But I think what we're really flagging today is what we're thinking about for FY '24. And then as we think beyond that, it is about some of that infrastructure utilization options being explored where you can wind it up and down as we've explained, it will take a little longer than just a few months to get that designed properly. That in itself will take some pressure off and solid procurement can take some additional pressure off as well.

Your next question comes from Evan Karatzas from UBS.

The leverage of 2x or gearing of 2 times you talked about, can you just confirm, does that include the Port Melbourne sale?

Yes. And we're sort of figuring it will be a range of somewhere between 1.8 and 2.1, yes, that would include the Port Melbourne sale.

Okay. So I mean that sort of assumes around using that $160 million of EBITDA, sort of around the $300, I don't know, $320 million net debt, which is sort of where it was at the half. But I thought there was sort of an expectation that, like, maybe that working capital build would unwind, or at least debt or leverage would be lower. Can you just maybe help me connect the dots to what I'm -- I guess I'm missing regarding the cash collection or why the rate net debt ex the Port Melbourne sale was increased.

I think it's fair to say, Evan, One of the things that Barry and Pete mentioned earlier is I would say that the inventories in the commodity business are probably a little higher than we thought they might be in February. And that's just a combination of soft demand in some of the powders and some of the bulk butters. And so inventory is a little bit longer, but Port Melbourne brings us sort of at or below that 2x leverage, which we think is pretty good. Remember, the cost to the inventory this year, it's not so much about quantities being one higher. It's about the fact that the cost of milk is 30% higher this year. So that's obviously fed through to our inventories as well.

Okay. And sorry, and then maybe just a quick, are you like writing that inventory off?

No, no. I mean every month, of course, we review our inventory values against market prices and adjust anything that we need to. But this isn't about an inventory write-off. What I think it is about is that there is some softness in some mode areas in terms of demand. You see that coming through the GDT reports as well. So of course, our planning systems adjust on a regular basis in terms of what they intake, and then we offset any softness there. But I think that theme of reallocating milk into branded where the demand is more robust. That's the important theme that Pete talked about.

Yes. Okay. Okay. That makes sense. And maybe just a final one. I sort of asked this a bit more directly, but just assuming no change in your farm get milk price you're offering. Are we expecting EBITDA growth in FY '24 on the $160 million? I know you've sort of given a range of use just a bit more directly. Is that -- is there an expectation for growth in '24 at the EBITDA level?

Evan, I think it's too early to say because we haven't finished acquiring [indiscernible] and I said we'd sort of like to give guidance at this stage until we finalize those sorts of numbers because I just -- I'd be misleading you. But that picture will start to come together over the next month or so. As I said, we're really pleased with the uplift we think we'll get next year in our branded business, which will be quite significant. Obviously, the drag is the commodity business, which I'd be loath to give you a number just yet because we're right in the middle of trying to acquire milk. But I don't know if Pete or Barry have got anything further to say.

Look, I think the only thing I'd say, Evan, is that it's not -- it's pricing volume in terms of that commodity game. And I think while the guys hesitate, it's not -- do we think the price has got much more to run -- I probably think that everybody is pushed very, very hard. But the issue then is what volume do you recruit because that obviously has an impact for us as well. So it just gets difficult. As Pete said, we'll be really happy that that branded business will grow because it's got the full 12 months of benefit of those price increases, and it's got some volume and value growth as well. So we always like to be conservative and accurate, and it's not just price. It's also volume.

Your next question comes from Richard Amland from CLSA.

A couple of quick questions. In reference to the impairment charge, can you break out what -- how that falls against plant and equipment versus goodwill?

Yes. And I think I won't -- well, I won't give exact numbers because Richard, we've given a range, the goodwill that we've got in our accounts, and we show that in our external accounts at year-end, that's a little over $100 million. And then the range is really a review of our operations in Koroit, 2 of these other sites going where -- which assets will continue to be sustainably profitable and which ones do we need to switch on and off. So a little over $100 million of goodwill. The range is about the fixed assets and the plant assets and which of those we choose to continue operating consistently and which of those we choose to switch on and off as needed.

Okay. So between $80 million and $180 million on the asset side -- on the plant and equipment side is the range?

Yes, that's right.

Okay. Can I ask, based upon what has -- the farm gate price discussion to date, have you had any feeling back from the supermarkets in terms of what they're thinking about on the retail side of pricing?

I'd be low to speak for the supermarkets. They probably don't need me as a supplier speaking for them. I think though, there will be continued pressure on pricing. So Coles are out in the market, been public about that. They've been quite milk. So in fact, they made more for look, I think they were last year, and they're signing up 3-year contracts. So my view would be that the value of the dairy cabinet continues to remain strong. I think we've left [indiscernible] per liter milk days a long, long way behind us, which I think is very, very good for the industry and ultimately provides people with good, branded product, the opportunity to extract a reasonable value forward.

Yes. Look, I think all I would add is that -- and Pete touched on it any answer. They are in the same procurement market as we are in. So we don't have to spend too much time describing to the retailers what's happening in milk procurement because they're very aware of it themselves, which obviously, to a certain extent, makes those conversations more straightforward and transparent.

Okay. And I've not been involved with the company as long as some of the other charts on the call. But can you please remind me, I think last year, there were references in the presentation is around $40 million of cost-outs from the acquisitions or something to that extent. Can you just talk us through what those were again and sort of how those are fleshed out?

Yes. So there was just over $40 million of benefits, which were achieved post-acquisition, and half of that was synergies around people. And then there was another component of milk sales optimization and then general procurement. I guess, when we made it public in our half-year result, whilst we took $40 million of cost out, we had about a $400 million increase in inputs in about 2 or 3 months last year. So a lot of that benefit sort of got, I guess, we certainly banked it, but it certainly got dwarfed by the large input increase. We've successfully passed that on in cost, a lot of that on in cost over this year, which is why we're feeling comfortable about our branded business moving forward. Just back to the summary though there's now significant dislocation between commodity prices and the farmgate price but certainly our branded business, which absorbed a large amount of that $100 million cost worth of cost increase and successfully passed that on and maintain volume growth at the same time.

Your next question comes from Glenn Wissam, Private Investor.

Gentlemen, on a completely different subject, my question relates around what's happening in the soymeal field since we've been forced to exit that earlier this year?

Thanks, Glenn. So we reached an arrangement with Vitasoy where they bought us out of the joint venture, which was their right to do. I'm pleased to say that we've just announced a distribution partnership with Noumi, who owns the MILKLAB brand, and that we've just started distributing that. So they have a soy, almond, and oat milk offering. They are the biggest plant-based Australian milk company. And so that's going very well. And we continue to look at other opportunities in that space. You might have noted that we've launched a Bega plant-based cheese, which is doing well. But look, we see cloud-based milk as a good opportunity moving forward, particularly with our distribution capability and sales capability. And so we'll continue to look at opportunities as they arise.

Your next question comes from Jonathan Snape from Bell Porter.

Quick one. Can you step me through the balance sheet? I'm a little confused here. Your first-half net debt was $320 million. The old Vitasoy, which was why I can't remember the number was $40 million, $50 million is going to come in. You've got $115 million coming in from the Port Melbourne sale and net debt is still going to be $320 million. How do you consume $150 million to $160 million of cash flow and what's meant to be seasonally the weaker half-milk collections? Or is there something in there? Have you got the leases included in the total number or something?

And sorry, I think the one thing I want to correct, I don't expect net debt to remain all the way up to $320. We do expect it to come down into 2-something range, right? And so that benefit of the Vegemite Way sale is going to be there and Vitasoy and that will bring us down, whether it's 220 to 250, and that will result in a leverage that's closer to that $1.8 billion to $2.1 range that we called. So you will see a reduction in net debt from where we were at the half year, and it will be enabled by those asset sales. But what we did acknowledge earlier in the call is due to the softness of demand in commodities, inventory is running a little longer than it normally seasonally would in the second half.

Yes. But your guidance is $160 million EBITDA, right? So $160 million, if you're talking 220 divide it by 10, that's more at 1.4, is that?

Well, so let's say, high one is where we're sort of guiding here.

Okay, because I thought you were talking 1.8 to 2.1 in a second ago.

I'm probably underpromising and tend to overdeliver a bit, but that kind of high 1s range is to be about where we're at. And so I think the other thing that I'll do around that, Jonathan, is June was a big month for us. And we have a good month and we had a very good month in the branded business in June, your receivables are high, right? They'll get paid back in July, August. But I'd say inventory higher receivables a little higher, and that's the 2 factors that sort of caused that sort of in kind of indication.

Okay. And Barry, I mean, you've been going around talking to the farmers. I mean, I guess a little confused. When we make 7 billion liters of milk, maybe $1 billion of it ends up in the bottle. And the rest of it either ends up in a self-stable commodity or end-up in a commodity that's going overseas. I was to say milk sold in New Zealand is 20% cheaper than it is here. Milk sold in the U.S. is 30% cheaper than it is here, and milk sold in Europe is between 20% and 30% cheaper than it is here. I mean how do we not just see a fairly material inflow of products like cheese, mozzarella that finds its way into food service channel finds its way into retail channels, or just undercut probably one of the few profitable arms for these processes outside of fresh milk? And if the farmers kind of understand that that's what would happen if they continue to be this arbitrated.

Yes. So I think your last thing is probably the thing -- it's how long this arbitrage is this for because what's really happened, as you say, is that elsewhere this rapid drop is being reflected in farm gate milk pricing, and it's not being reflected here. How long it takes for that to correct? So there is a more parallel sort of sole cost, I guess, is the question. I think from my perspective, the farmers understand it. We are seeing -- I think, Jonathan, the thing that I am trying to get my mind around even though I've been doing this for a very long time is so my supplier meetings this time around are a bit unique because normally, I go to supplier meetings and the farmers say, you have to pay me more, and that's the first subject matter. And there's always that push and pull between what the farmer might expect and on what we require. They're very calm meeting because the farmers do, in fact, realize that their price is very good. And as I mentioned earlier, one of the ironies of that good price is that it's not necessarily stimulating growth in supply in Australia because the farmer finding that they can be quite comfortable at a lower volume of production. I -- quite frankly, the farmers do realize that we are out of step and they are very aware of it. So that, I think, is why they're not arguing about price. I think the only additional commentary I would make is that it's notable when I look at those areas that you've mentioned, you've got farmers there actually protesting and complaining about their price and they're actually complaining that they can't produce or at that price, et cetera, et cetera. I would be more concerned if I wasn't seeing that because what you will see is that inevitable adjustment in the price -- in the global commodities and I think unlike what used to be the traditional approach in the milk procurement game, which was you had a base price and then you series of step-ups throughout the year. I think the farms in Australia recognize that commodity market does improve, it's already been given to them here. Okay.

And maybe just one last one. I know you call yourself Gray Australian food company, but do you think there's a point where you're kind of if you're going to start continuing to invest in dairy, the returns here are so skinny now when we look at the return on invested capital. Do you need to look at alternative procurement like maybe owning processing capacity in New Zealand or somewhere else that allows you to arbitrage what's now becoming fairly common, these global differences in farm gate growth?

Yes. Potentially, Jonathan would be the answer, it's not something that we would take off the table. And I think what -- as we think about what that might be and how that might look, obviously, we've -- it's across the ditch but it also can be across the Pacific to use the numbers that you talked about. But we just need to be comfortable that they do rapidly change those solids and just need to be -- we need to be very certain that -- I think the first thing is what I mentioned earlier, we need to be very, very agile about how we recognize and procure ingredients and have strategic partnerships with processes in other regions. I think that's the real first step in that. And then I think you would see how that would unfold, which would ultimately see investment. But I think we start with just making sure that we've got the partnerships that allow us that flexibility.

Your next question comes from Taylor Guyot from Barrenjoey.

I'm just wondering that the ongoing lease costs for Vegemite, could you just talk about the amount and the duration of these, please?

Yes. So I mean, obviously, what we've got here is we had this year a forecast that we shared at the half year that our depreciation and amortization will be a little over $100 million. I think we said $104 million for the full year. What you can expect now, obviously, is that there's another several million of depreciation and amortization costs that come with the 15-year leaseback. And so you're going to have some number that's in that sort of $110 million to $113 million range is what you should be modeling for the upcoming year.

Okay. Great. And just on that $114 million cash from the Vegemite way, is that pre-prostate? And can you just talk about what you're planning on doing with it and the capital allocation of that? And then just to maybe quantify the impact to P&L balance sheet and cash flow for FY '23, please?

Yes. And I mean, obviously, you get a pretty large impact. We received the cash. So in the balance sheet, you're obviously going to see a decrease in our facilities as a result have even received the cash. What we're going to do with the funds is the important discussion. And really, there's 2 things. There is going to be some capital gains tax, and you're probably in just, let's call it, for a nice round number, $20 million there. But more importantly, Pete talked about the restructuring plan. And we've got $21 million cost of that restructuring plan. And as Pete said earlier, we get $12 million of in-year benefit from that plan next year, and then it accumulates or annualizes to $21 million of annualized benefits by the following year. So it's basically a 1-year payback. So $20 million capital gains, $21 million being invested in organizational restructuring. And then the remainder is going, obviously, into improving our balance sheet and our leverage ratios.

Okay. Perfect. And then just my last question, please. Just -- I guess, just a couple of questions -- what's the cost to debt? And actually, I'll just ask that one.

Sorry, what was that? Could you please repeat that again?

Just what's the cost of debt? And can we just quantify -- we talked a bit, but just to be clear, what we should be thinking for net debt at the end of FY '23 and FY '24, please?

Yes. So we had -- we came about at the half year. This year, we had about $10 million of interest costs at the half year, and we saw the forecast we shared with the market when we come out with our H1 results is that for this year's full year, they could roughly double that. So we were talking about an interest cost of a little over $20 million. Now rates have sort of been going up in steps throughout the course of this year. So the good thing is that the sale and leaseback of Vegemite Way means that we won't see the same kind of percentage rise in our interest cost next year as we saw this year. It was a very big step up this year to reach $20 million, but you might model something in the range of $23 million to $25 million of interest cost next year would be a good assumption.

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

Just 2 follow-ups. One, just so on the 114-odd million acquisition -- sorry, disposal of sale and leaseback, you really are going to keep sort of like $90 million after tax, just to confirm that. And then I'm just sort of thinking, you just said the lease cost is 10%. So basically, you're going to spend from a P&L perspective, and I know that's not the only rate.

No, I just said several million that we said there.

Yes. Sorry, several million for the lease?

Yes, something like $8 million a year in the depreciation and amortization line. Yes.

Right. Okay. And that is slightly less than the interest -- or slightly more than the interest saving, but we're sort of talking rating in terms of numbers now.

Yes.

Okay. Got it. Sorry. That clarifies that. And then I was just a little bit confused with the result, and I just want to make sure I've got this right in my mind, that there's $21 million cash cost that relates to these restructuring, which, as you say, it's effectively a 1-year payback on an annualized way of looking at it. But is that -- those -- is there a P&L cost? And does that come through in '24? Or does it sort of take a provision in '23?

We're going yes because we've announced it publicly and to the employees this morning. We'll recognize in fact, everything that we've talked about, whether it's the impairment of bulk assets, it's the $21 million of restructuring. We're going to recognize all of these things in the F23 accounts because they're all publicly known now and the expectation has been set. So you'll see the final numbers on those once we have the audited accounts at the end of August, but we'll recognize everything in this year's accounts.

Right. And then that shift, that's that $21 million, which I assume is a pretax number is separate to I think the $10 million to $15 million, which will be taken as a one-off this year after tax, and that relates to this tax consolidation. So there are 2 separate things or the reason I was confusing is because 21x on modest attach rate isn't far off the other numbers. So are we talking about one and the same thing? Or are they 2 different items?

Yes, you're completely right. They're different. And I think we've been one of -- probably one of the last remaining unconsolidated tax groups in the country. So the fact that we'll move to a consolidated tax group just makes us much more efficient, much more simplified internally. So there is a one-time cost to do that, but it makes an absolute to do that right now. So that's a separate item. And that $10 million to $15 million, you see that in the income tax breakouts were given our end-of-year statements.

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

Well, thank you, everyone, and thanks for the detailed questions and response to the announcement. Obviously, our objectives in terms of making the announcement and update in the market is really to demonstrate a response to the market circumstances, both the opportunities and the challenges and indeed many of the decisions we've made today are positioning the company very well for the future. And that's obviously our objective to respond to the changes in markets and the opportunities that we've identified in the business and indeed, rightsizing the business for those opportunities. So thank you all for your attendance and attention and look forward to speaking to you at full-year results. Thank you.

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