Noumi Limited (NOU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Freedom Foods Recapitalization Announcement Conference Call. [Operator Instructions] There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Genevieve Gregor, Chair of Freedom Foods Board. Please go ahead.

Thank you, operator, and thank you, everyone, for your patience, and also apologies for the late hour of this call on a Friday evening. I wanted to explain that right upfront. The reason why we're having the call after close of trading on a Friday is that the ASX required us to recommence trading immediately on release of this information. But we wanted to give everybody, who has their working been suspended for some time, the opportunity to actually review the materials that we have published this afternoon. And we felt that the best way to do that was to at least give everybody the weekend to read through the materials and to hopefully absorb them and give them some time to understand the materials that we published. So again, thank you for your patience, and thank you for your time on a Friday. I also wanted to introduce on the call with me is Michael Perich, the CEO of Freedom Foods; and Josee Lemoine, who is our Chief Financial Officer. Also joining on the line is Jane McKellar, the Independent Non-Executive Director and Chair of People and Culture. We also have the full Board in listen mode as well. So thank you, everybody, for joining again. And what I'd like to do is just kick off into the recapitalization, and then I will hand to Michael to talk about some of the business highlights. So the company, we're seeking capital raising to raise up to $265 million by way of an issuance of unlisted, subordinated, secured and convertible notes. That, combined with the restructure of existing senior debt facilities which is provided by HSBC and NAB, we are calling the recapitalization. We -- to raise capital has been offered to eligible wholesale investors only, that is sophisticated wholesale investors. And that is being offered the ability to participate in the convertible notes for up to $130 million. Whilst we're doing that, we've actually got a placement from Arrovest, the majority shareholder of the company, for a placement for up to $200 million. Now the way it's working with Arrovest is basically that they would prefer to have the same -- predominantly the same shareholding as they have in the notes as they have in the underlying shareholding. And so they're really wanting to look for the ability to scale back their commitment to $135 million. So that what gives us the ability to offer $130 million notes. Arrovest has provided the binding commitment to subscribe for $200 million of notes. And also, what we're doing is we have a best-effort structure in place to look for the other $65 million. So with that money that we get and hopefully raise, so if we raise $200 million, we will be repaying approximately $183 million of senior facilities and subordinated facility. If we get $265 million, then we pay $233 million of the company's existing debt. The logic for why we're doing the structure that we are is that we're looking to have very flexible capital that will help us facilitate the ongoing financial and operational turnaround of the company. It also provides us with incremental capital to support the company's working capital needs and general corporate purposes. So why have we chosen to do the notes? Well, we didn't run an extensive process. We took advice, and essentially, we've determined that this is the best option for raising capital for the company that is on acceptable terms to the company. As I have intimated, it provides additional flexibility and to investors to participate in any future upside particularly when the convertible notes is converting to ordinary shares. But I must note that the conversion aspect of the notes is subject to shareholder approval, which will be put to the shareholders at a later date through an Extraordinary General Meeting around in May. That will be -- that Notice of Meeting materials will be accompanied by an independent expert's report. The notes provide downside protection for incoming capital. It gives that incoming capital security in the form of subordinated security to the same lenders. Then it also is important because it shows that the company, while it's undertaking its turnaround, can defend itself from the material legal disputes and class actions that this company is facing. Again, one of the things that you'll recall when we first started out with some working out more capital source to go after, we wanted to actually make the offering available to as wider base of shareholders as possible. We did look at trying to get a listed convertible notes up and running. But unfortunately, we could not get a note trustee that would actually look after retail orders. So with that in mind, what we have sought to do is, in acknowledgment that our all shareholders will fit the category of eligible wholesale investors, we are offering to those shareholders who cannot participate, in fact, we're offering it to all shareholders other than Arrovest, an ability to participate in the wholesale investor note on a pro-rata basis with a option structure. And that option structure is basically raising up to less than $40 million. And that's -- the ratio there is about 3.2 shares to 1 option. The way those options work is that they will be issued after a shareholder approval. And they will not be funded on day 1, but they'll only be funded when they're exercised. They'll only be exercisable after the material litigation has been resolved. Once they're exercised, that's when they're paid for. And that's the way that we've actually tried to make this offering able to be participated by not only wholesale investors but also retail investors. So one of the things that you'll see as you go through the presentation, that the recapitalization does not delever the company's balance sheet until such time as the notes convert. Like I said before, it does allow the company more flexible capital to work through the turnaround in the period. In the future, like in the first 2 years, the senior facilities have been offered to us on a covenant -- financial covenant-free basis. And actually, we do not have any financial covenants in the convertible note over the full 6-year period. Later in the presentation, there is indicative time lines being put there. The wholesale investor offer will open in the 29th of March. And it's not until around mid -- early to mid-May that you will be required to actually put it into the book. And so you have a significant time to get across this, understand the issuance and understand how the issuance works. And we encourage you to read the prospectus that has come out onto the ASX website today as well. So if I could ask you to turn now to Page 6, we do talk about the key benefits of the recapitalization. The #1 benefit is that it gives the company funding certainty, and it substantially repays our existing senior lenders. As you know, we've been in standstill with the senior lenders. And this is part and parcel of the negotiations that we've had with the senior lenders is to provide that company certainty for the go-forward. I've mentioned already that we do not have any financial covenants in the bank facilities for the first 2 years. There is a 1-year extension option on the senior facility. If that extension option is granted, it would -- it is likely that that there will be financial covenants in that 1-year extension. But certainly one of the features that the convertible note has, it has given the company the ability to peak or pay if you can the interest. So one of the things that we wanted to achieve with this capital raising is to reduce the cash interest payments that the company has associated with this indebtedness. Also one of the pictures the convertible note does for investors and also the company is to raise the capital, we think, at a valuation which reflects a likely premium to other alternatives given where we are with our earnings and our operational uncertainties. Obviously, the way that the market will come onto a view on valuation will be up to the market to form that view. I think the other point to point out here is that it allows the company to raise the capital notwithstanding what has been a very challenging backdrop for the company. It provides eligible shareholders with the opportunity to participate in the notes and also all shareholders other than Arrovest to participate in the ASX-listed options that I discussed before. One of the things that hopefully you'll get to understand a little bit more is that the recapitalization has been accompanied by improved governance, new management appointments. And also, the first half fiscal '21 results do show an improvement in the financial and operating performance. And I hope we get time to read that over the weekend. On Page 7 of the presentation, we take you through a little bit more of the detail. But the first thing I wanted to point out to everybody on the call is that the recapitalization provides eligible investors and new investors an opportunity to participate in the future of the company alongside and, importantly, on the same terms as the majority shareholder, Arrovest. Let me repeat that this is exactly the same terms that Arrovest has. So again, we're looking forward to raise up to $130 million from the wholesale investor offer. And what is the wholesale investor? That is someone who is sophisticated and professional investor. And so these notes are complicated, and we would encourage you to seek your own advice on whether that is suitable for you. And please do try to read some of the risks that are associated with the notes in the prospectus in detail. The note issue price is $1, but the conversion price by the price, i.e. the price that the notes would convert into ordinary equity, is $0.70. And they are subject to normal adjustments that will occur over the life of the note. They do include what we call a make-whole. Now the make-whole is meant to illustrate or give those note holders effectively the return associated with the risk. The details of those make-whole and how that is calculated is well detailed in the appendix in this presentation and in different spots throughout the prospectus. But I would say that once you do own the notes, the notes can convert into shares at any time at the note holder's election. And the notes can be mandatorily converted where 75% or more of the note holders have elected to convert. So there's a little bit more detail around that in the prospectus, but I just wanted to highlight those things at the moment. We do -- we will be going for a shareholder approval on several things and partly to do with having the conversion rights on the notes. But I do want to point out that to avoid any, I guess, potential for failure on shareholder vote, we do have the ability to issue a cash at all the notes. And that gives us a lot of confidence that either/or, we will be able to get the money that we need to keep the business going forward. And that's the feature of the note that has the either/or option in it. The coupon or the interest rate for the first 30 months of the convertible notes is set at a 7% cash rate. Or if it is peak, by paying if you can, then it's at 8.5%. So what that means is that coupon will capitalize and does not have to be paid, and that is not an event of default under the facility offer under convertible notes. After that 30 months, the coupon gets down, the cash to pay is 7%. Or if it's cash and half peak, it's broken up to 5% and 3.5% pay if you can. The maturity of the note is 6 years. And I just wanted to make sure everybody understands, the notes are not listed, and they will -- but they can be transferable on an off-market, over-the-counter fashion. I just wanted to quickly take everybody through, again, the high points on the option. So subject to shareholder approval, and that shareholder approval will be mid-May, and the detail is in the indicative time line. We would like to issue to those shareholders who are present or registered at the time of the vote approximately 40.8 million of options proportionally on the holdings of those shareholders at that time. And it's roughly equivalent to every 3.2 shares, you will get 1 option. And just again to point out, it will exclude Arrovest. So those -- the exercise price on those options is $0.98. The tenor on the maturity of those options is 6 years. There will be a separate prospectus on the options. And again, on the exercise, that is when you have to pay for it. But they will not be able to be exercised until after the material legal disputes have been resolved. Those options will trade on the ASX. And again, full payment is only made on the exercise of the options. Further detail on the options prospectus will come out in due course. We have not published the prospectus for the options at this point. They will be published once they have been approved by the shareholders. If I could ask you all to turn to Page 8. Really what this page is meant to illustrate is the key benefits of the recapitalization and if I can just take you through those high points because I think it's important for everybody to understand those. First and foremost, what we have been able to do is extend the maturity of our indebtedness to 2 years for senior, on the restructured senior, and 6 years on the convertible notes. Our current facilities are in standstill, and that standstill is expiring at 28th of May. The standstill will give us sufficient time to have the recapitalizing completed and funded. Current interest costs and the cash spend over a year will cost the company somewhere between $15 million and $17 million on a cash-paid interest. Obviously, depending on the floating rate of interest, we can't give you the exact number, but it's approximately 15% to 17% (sic) [ $15 million to $17 million ]. What the recapitalization will allow us to do is to cash pay on the senior note between -- somewhere between $5 million and $7.5 million depending on the exact volume of capital that we raise. So if we raise $265 million, $50 million -- we'll retire a further $50 million of the term loan. So that's why the interest range is there. The notes will capitalize interest in the first 30 months potentially at 8.5%. And we are not required to cash pay. So that would give us more breathing room to turn the operation around and improve the financial performance of the company. Currently, we are not meeting our financial covenants. That's why we're in a standstill with our senior lenders. Once we have the recapitalization funded, there will be no financial covenants, as I mentioned, on the senior debt, but there will be limits on how much debt we can incur above the convertible notes. Like I said before, leverage is really not decreasing in this situation. But it's worth pointing out that when the restructuring and recapitalization occurs, $200 million to $265 million of that debt, which will be classed as noncurrent liabilities on the balance sheet, is convertible into equity once those events that we've discussed have occurred. The make-whole, that is the amount to be paid to note holders on redemption by the company at maturity or default, it is not payable on converting into equity. So when the notes are issued, and you can see the difference make-whole calculations in the appendix and depending on which point in time you calculate the make-whole, if it was redeemable forecast, the different amounts that, that convertible note is worth is calculated based on the make-whole. So if it was redeemed at the end of year 3 after applying 1.85x make-whole, the amount of debt, if you had a $265 million convertible note issued day 1, would be $490 million. I would also like to draw your retention to the equity ownership post conversion. So currently, the ownership of the company is really ordinary equity. But post the recapitalization, you will have -- if it was fully converted as of year 3, then the notes will control approximately 60% of the company of ordinary equity. And the share -- current shareholders, including all options being exercised, would be approximately in control of 40%. So the notes do have a dilutionary impact on shareholders, and that should be noted. I just want to finish up by just reiterating again that there is an indicative time line in the presentation that we provided. It's on Page 9. You can see the days there. They're obviously subject to change. But the key thing that I did want to point out is that trading of Freedom shares will recommence on Monday, the 22nd of March, i.e. this coming Monday. And again, the reason that we are providing you this detail at this late hour is because of the ASX requirement to recommence trading once we have released the information. Now it's my pleasure to hand over to Michael to talk to you in more detail about the business. And once Michael has finished his section, I will also conclude, and then we'll open up for questions.

Thank you, Genevieve. Welcome, everyone, and thank you for joining us today. It's my pleasure to take on the role of permanent CEO of Freedom Foods as of today, and I appreciate the support of the Board in offering myself this role. As we've spoken about previously, this business has great assets and great brands. With our vision of creating sustainable growth through innovative brands and products for the nourishment and benefits of our stakeholders and that we'll focus on the value of high performance, a high integrity culture, customer and consumer-centric with integrity and respect and the collaboration around the business, we really feel that the strategic focus on the segments with the greatest opportunity for future growth. We really want to focus on key brands within our business, such as MILKLAB, Australia's Own, PUREnFERRIN and Vital Strength, a strong customer focus with the employee culture for high performance and integrity for valuing quality, honesty, trust and innovation. As we've mentioned before, on operational level, we really want to reduce the unnecessary complexity across the business and manage our waste and risks. Fewer product lines and better production planning across the business has started to take effect. And with the half 1 results, we're able to see some of those impacts. We're optimizing utilization and yield efficiency. We have to shut down and reform the organizational structure. And as you'll see through the presentation, we've had further key recruits within the business and the key to the turnaround strategy and the transformational program that we're looking to do at Freedom Foods. Improving the business performance, we'll take the reporting processes in place to ensure that we've got the right, correct and accurate data going back to the business owners to ensure that we can actually deliver the results. Strategic new product development is also important across the business. Disciplined capital allocation, flexibility to improve the plant-based UHT across our beverage businesses is also very important. Realizing operational improvements and benefits to commercial margin is also very important. The company is in the process of creating more homes through sustainability and reporting framework across the business. Turnaround status, what have we achieved so far? As mentioned before, the half 1 results showed a strong recovery in the financial and operational performance of the business. We saw a significant change compared to the previous corresponding period where we had an EBITDA pre-AASB 16 for the first half of $21.7 million compared to $26.5 million restated in half 1 FY '20. We've worked on a detailed business plan to drive the financial performance and operating decisions across the business. As mentioned before, we've started the transformation program, and we've worked with Pollen Consulting to assist around that turnaround strategy and launching the initiatives across the business from operations, finance, commercial, marketing, to ensure we have the dedicated and also rigor around those parts of the business. The sale of Cereals and Snacks was implemented, and we're closing that on the 29th of March. That has reduced the complexity significantly across the business as we're able to focus more on the UHT beverages. The company is close to completing its talent renewal strategy. We have a new Board that will have a new Independent Chair, Genevieve Gregor. The Board is now made of majority independent directors. We have a new Independent Chair of Audit, which is Stuart Black, who commences as of next week after this release. As I mentioned, we've talked about the renewal of the leadership team, myself taking the role of CEO, Josee Lemoine as CFO. The new COO was announced to start mid-April, Stuart Muir, who has large experience in FMCG across dairy and other sectors across the business. And he's very practiced around turnaround strategies. We have several new and replacement roles in the operational and the finance part of business as well. And that's important to changing the culture. New incentive program has been designed and tied to financial and operational strategy, aligned with the shareholder value. Also, a new risk management framework and policies are under development, and implementation of this is in progress. Just I'll give you a reason overview around the different segments in the business. In half 1, we saw strong growth in MILKLAB sales supported by new distribution channels, including partnership with McCafé. The capacity at Ingleburn is at 120 million liters with potential to increase the scale of its operations to 260 million liters with CapEx. The 120 million liters is all designed around shift and also product mix as we bring in new products and new shift capacity. It varies how much we can produce. We're also developing oat, which should be launched in calendar '21. And it's been a very exciting initiative launched by our team, where we're actually being able to deliver a product that delivers the stretch and also the performance in the coffee channel. So we actually -- that is something the team has been working on quite heavily over the last few months. And there's been blind taste tests that have been performed this week. It actually is showing this product is performing quite well. Corporate strategy of the business is extremely important. And as we work through joint business plans with our customers to enable strategic opportunities, we're also focused on the strategic and new product development, bringing on a field force to drive further penetration in the out-of-home channel, marketing of key brands across the portfolio and working through an ESG reporting program, which will be coming out around our AGM. Within the business segments, there's a focus around reducing wastage, implementing operational efficiencies and optimizing production. We want to minimize currency risk and work with our customers in the import market around converting them into Australian dollars. We want to develop market-leading brand in UHT milk, where NPD, new product development, at the forefront of the market. We want to continue to optimize our milk supply to ensure that meets our sales demand. In the plant-based beverages, we want to capitalize on a significant market share awareness of MILKLAB and ensure that we can continue to grow that with our new product with oat and also new formulation for soy that the team is also working on. I'll hand over to Gen now, and she'll talk to another part of the presentation.

Yes. Thank you, Michael. I just wanted to give everybody an update around some of the things we've been focused on in governance and, in particular, the Board renewal. So on Page 23, you will read and there was a separate release on the appointments that we have announced today. So joining us on the Board is a gentleman called Stuart Black. And Stuart is actually -- he'll become the new Chair of the Audit and Finance Committee effective Monday. And he will also be a member of the Risk and Compliance Committee. Stuart's full resume is detailed in the prospectus, but he is currently a Non-Executive Director on the Boards of Australian Agricultural Company and Palla Pharma. Stuart is also a member of the Order of Australia. He's a Chartered Accountant and has extensive experience in chairing audit committees on public companies. We're absolutely delighted to have Stuart join us, and we think that, that will be a good complement to the Board of Freedom. So now that will give a majority of independent directors on the Board, comprised of myself, Jane and Stuart. And Jane, who joined the Board in May last year, will chair the People and Culture Committee. Stuart with the Audit and Finance Committee. And Tim Bryan will chair the Risk and Compliance Committee. And of course, Tony Perich will be our Deputy Chair and continue on the Board capacity in support of the company. We have been obviously doing a lot of work at the committees, in particular around governance. And there are some things that we have been focused on, but we have listed those in the presentation. But just to touch on a few, we have launched in immense detail, we're setting a number of policies in the Finance and Audit Committee. With People and Culture, we're obviously driving new challenges, improving the rem structure and really putting forward the behavior that we want in the business going forward, which is behavior of strong accountability, collaboration and coordination across the business. On the Risk and Compliance Committee, we have established a risks register, and we developed a road map. We've developed a whole risk management and compliance framework. And we've updated management policies. And we commenced the risk appetite statement work, and we're absolutely implementing a number of policies there. So I just want to assure everybody that there's been a lot of work going on, on the G as the ESG component. But there's more work to do on the ESG, and we will develop the sensible reporting around that in the future and reporting that back to the market at the right time. It also gives me pleasure today, and it has been put out in the announcement, that Michael has joined us as the permanent CEO effective today of Freedom Foods Group. And I must say that Michael has been, since August last year, doing a fantastic job of repositioning the business, focusing on the right things in the operation and improving the financial performance of the business. But more importantly, what Michael has really brought to the business is a real focus on culture and reshaping the culture of the business, that the Board is delighted with his focus on that. We're joined also by Josee Lemoine. And Josee, it has been announced to the market before that Josee has made several impacts. And she's joined the company, and we're delighted with how that's working out for us with her joining the Executive team. We also have Justin Coss, who is our new Group General Counsel and Company Secretary. He joined in November 2020. And again, the focus there has been exactly what the business needs. Today, we did announce that Stuart Muir, who is formerly a leader in the business Lion Dairy and Drinks, he was the Director of Supply Chain, Quality and Research and Development that has, in the past, run a number of new manufacturing sites at Lion. He'll be joining us as of April as our Chief Operating Officer. We also have been fortunate enough to attract the talent of David Kenworthy as Head of Treasury; Tim Phoon as our General Manager Internal Audit. And we do have some other key positions that we're looking to fill in due course. But that is a very important step in repositioning the business. And the goal for the business is to get the right talent on the field. And the Board is delighted we have that into progression. So those are the things that I wanted to take everyone through today. And I think then we could move now, operator, to questions, and happy to take them now [indiscernible]

[Operator Instructions] Your first question comes from James Tracey from Veritas Securities.

I'll just go one at a time. Do you have an estimate of the potential liability or range of potential liabilities on the class actions, the Blue Diamond litigation and the ASIC investigation?

Yes. This page -- James, by the way, thank you for your question. Really, to give a dollar estimate known, what we have done though is we've given a good description of all those matters in the prospectus. So you can avail yourself over that. But we haven't got a dollar amount mainly because [indiscernible] nature at this point in time.

Okay. And just a quick question around the capital structure. It looks like post deal, the pro forma total income statement interest charge will be around $40 million annually. So if you look at Page 39, it's $20 million in the first half. So that's 7% of revenues. The EBIT margin was 5% of revenues. And Bega has an EBIT margin of 4%. So can you commit to a group EBIT margin in excess of 7% going forward?

So when you -- the way that we need to account for the convertible note interest, even if it is not paid in cash, is it needed to be accounted for in the manner that we've shown on Page 39 on a pro forma half year. So really, the cash component there is obviously something different and that was disclosed in the cash flow pro forma on Page 41.

Wondering as to whether it's paid in cash or whether it's paid in shares, it still have to be paid, which is the point of accrual accounting. So it's still $40 million in economic terms.

So just -- so where is your $40 million, James?

That's annualizing the $20 million sort of the first half on Page 39, which is the finance leases, the convertible note, coupon and the other interest.

Yes. Okay. Now I understand where you're coming from. Yes, so we're not going to commit to a margin, sorry, James, on this call. So thanks for the questions, but no.

And at the last call, you said you'll be providing earnings guidance. It doesn't look like there's any there. But if you look at Page 36, it seems as though there is probably more red arrows than green arrows in terms of the second half of the year. So is it fair to think that profits are going to be lower in the second half than the first half?

So we have -- you're right, we haven't got -- we're not providing financial guidance for the second half of FY '21. But what we have tried to do for everybody on Page 35, 36 and 37 of the presentation is [indiscernible] of the drivers of the financial performance. And you're right, what we wanted to make sure that we could inform the market about it. We didn't want people take the first half and then just multiplying it by 2, James. So we wanted to give you indications of what the things that were driving the business. But certainly, the second half of the fiscal year on average is a lower half than the first half of the fiscal year in this business. And many of the reasons we've described here as to why that drives it. But as you know, a lot of companies are not providing guidance because of COVID and, of course, the volatility in the market. So we are not alone in that. And certainly, what we have tried to do is give an indication of which way we think it will impact us in the second half so that people can form their own views.

[Operator Instructions] Your next question comes from Danny Goldberg from Select.

Danny, are you there?

Sorry, I was just on mute. Can you hear me now?

Yes, we can. Thank you, Danny. Please go ahead.

Just a brief question with regards to the timing of the call. Could there be another circumstance where rather than a 3 p.m., there's a 2-hour delay, maybe 5 p.m. or 5:15 call possibly eventuated? Could you have issued the prospectus earlier in the week and then come on to the market on Monday?

It's a really great question. And we did some detailed discussions with the ASX, but we had to follow what the ASX prescribed for us. And unfortunately, the way that we've tried to juggle giving everybody enough time was to -- we wanted -- we requested 48 hours before we commence trading. But that request was denied. And so this is the best way that we could get this information to you without it being commencing trading immediately. So I do apologize, Danny. And I know that the timing of all that is inconvenient on a Friday afternoon, but that was the best that we could do with the negotiation we had...

It's not that it's very inconvenient for me, but for many others that might take for Q&A time at 6 p.m. on a Friday. I doubt there's hardly anyone listening on this call, but I've made my point. Second, with regards to improved corporate governance, I just had a question with regards to how retail holders, small investors are being treated through this process. If they can't participate in what is a very large and dilutionary or potentially dilutionary capital raise here, are they benefiting from these options? How are they being, I suppose, rewarded or looked after?

Yes. Thank you for your question. And the way we have sought to address that concern is by the options. So the options will be pro rata allocated to all the existing shareholders that are on the register at the time of the shareholder vote. So if you are a retail investor, i.e., you're not classified as a wholesale investor, then you will be proportionally awarded your share of those options at that point in time. You're not being asked to pay for them. And you will only ask to take them after the material disputes has been resolved. And that way, you would be able to exercise them. So that's how we're looking to address that, Danny.

Understood. Hats off to the Perich family because they've done a good job in stumping up this commitment for $200 million. And also I feel that the company is lucky to have them, otherwise, it would be disaster. I think that the current scenario that's being presented is, in my opinion, a possible way forward for the company. And obviously, shareholders would make their own decision as to whether they elect to participate in this capital raise after they read the prospectus. But I just -- as the gentleman from [indiscernible] pointed out, the significant cost and the significant interest in cost to the company leverage, as you said, has not necessarily been reduced through this process. It's really been financing interest in senior debt and unsecured subordinated debt at a significant expense or higher coupons. And as the gentleman from [indiscernible] has also suggested a significant cost has got to be paid for, whether it's through equity issues or cash generation. And historically, the company, even with China being a great trading partner and Australia in normal circumstances and also some creative accounting from previous executives, hasn't been able to really generate great returns on capital invested. How can we be confident that necessarily MILKLAB, McDonald's is going to be a way to create bigger margins in the business and be confident?

Okay. So Danny, there's a number of points that you've made there. I will try to address your question as best we can. And I know there's a few other questions queued up. But my answer to you on the structure of the note, there is a reasonable industrial logic to it. And let me talk you through it. So we have attempted to design an instrument that protects the incoming money and also give that incoming money the commensurate return for the risk that they are taking. But we did run an extensive process. We have very confident advisers helping us to find the best solution to the current situation the company is facing. And so the deal that we have got is really the best deal that we could get from the market on the terms that we have been able to achieve. The industrial logic of why it is secured, and just point that our secured convertible note, is to protect those incoming investors. But it also gives the company the following ability to have a deep discussion with those material legal disputes that we have. And the way it works is that if we come to a settlement of the company on those material disputes and it costs the company money to settle them, we can put that vote to the ship to the noteholders. The noteholders then can determine whether they want those proceeds to be used to settle those disputes. If that amount is too ridiculous or too large, then the noteholders can say, "That is not something we're prepared to support," and that would trigger an event to default. And so really, what it gives the company is this note speaks to more than just the shareholders. It speaks to those people who may put really crazy claims in. So what we're doing is really allowing the company to have an ability that if those times do come in, was to eventuate in the event of default and an Armageddon scenario, those claims would be unsecured. And therefore, they'll rank well below where the noteholders rank. So I know that's tricky and it's complex. But the reason we're doing it is to give the company the best chance to navigate through what is a very complex legal situation that faces us. And I hope that you appreciate what we're really trying to do is obviously have the company ultimately survive at the end of the day. But really, if the noteholders aren't in agreement with any of those settlements, then that is the right way forward for the situation. Now as to the second part of your question, Danny, which is, is the business able to be turned around, I think, is what you're saying, and can it make a decent margin and can have a future to fight on? Well, certainly, I'd point you to the first half results. With the right management team, the right focus on the business, particularly the right focus on the right SKUs, et cetera, it did show a significant turnaround into business. And using pre-AASB 16, old school EBITDA, it showed a $48 million turnaround period-on-period. And I think that speaks for itself that we firmly believe that there is a bright future for Freedom if run well and with a good focus. And I might just say, Danny, thank you for your question, but I think there are...

Your next question comes from Sophie Carran from Goldman Sachs.

Maybe just sort of thinking about the business going forward, can you talk about how you're seeing the business? You've gotten rid of this year, the snacks. The seafood is under consideration. But can you just talk about how you see the opportunity within the remaining dairy, nutritional and plant-based beverages division, please?

Sure. I might -- Sophie, thanks for the question. I might ask Michael to address that question.

Thank you, Sophie. As we mentioned before, we've got some great brands and some great assets in this business. And I think around the efficiencies that we've got around the side, we have contracted volume coming in around milk, especially the Dairy Nutritionals plant. And there is a lot of operational turnaround initiatives that we're looking at across the site. And that's where we feel this business is some of the state-of-the-art equipment that we can deliver better profit back into the business and just having more consistent focus. There's a branding opportunity around there as well, and especially into export markets around China and Southeast Asia and working with key customers. [indiscernible] is also an opportunity we have with our farmers. I think it's been the key that we can actually look back around the issues that have occurred over this period of time compared to past industry issues. Our farmer base has been very supportive across the business as we continue to deliver on our promise around how do we treat them. So I think it's really important that we've been able to maintain that strong relationship with our farmers. So I see great opportunities around growing that dairy business around how do we manage to become a food ingredient supplier with our Dairy Nutritionals business. Now that we've been able to understand each SKU better, also understand how they all deliver profit or how we can make them perform better across the business, we can make more important decisions on how that performs. There's a large focus around that. And then if we look around the branding opportunity and how do we deliver, we've got our field force coming online. But how do they get out there with our customers, talk to our baristas, talk to our distributors as to how do they deliver our product and then get -- and manage to protect our brand and protect our [indiscernible] we've got. So I think that is really we can see for the future growth.

And just one -- a couple then on the first half results really, and apologies that this was in the presentation you released today. But can you just talk about the incremental costs that are sort of coming into the business in the second half and how we should be thinking about the cost base sort of going forward and relative to what was reported in that first half results?

So in terms of that cost base into the second half and the future, there is some increase in top line spending around marketing and branding. [indiscernible] business focused more on trade spending in store. We, through the process in the first half, we had reduced a lot of that trade spend. And now as we look forward into the second half, bringing the field force, which is approximately 25 new staff coming online for that, a key focus around MILKLAB, Vital Strength, PUREnFERRIN and Australia's Own. And that's going to drive long-term growth in the business. But we are also working through the particular gates around when we're spending that money around marketing, how do we ensure that we're tracking to see positive impact around those initiatives. Seasonality around the current pricing, especially on Dairy Nutritionals, we always see an increase in raw material pricing due to the seasonality around fat and protein in the second half of the year. And also, if we look at the plant-based beverages in first half of this financial year, we saw [indiscernible] around COVID, which impacted this half. And also we had a [indiscernible] in November. Through that, we had a promotion of buy 5, get 1 free. And then what we saw was a large uptake through our distributor network ordering the increase of MILKLAB sales. And then you added impact of COVID come through to the Northern Beaches [indiscernible] later in December, which impacted the customers that were drawing off that stock. So that impacted high level. We're seeing steady growth. And as we manage the processing factories to ensure continuous supply [indiscernible] to manage our working capital and our sales into the [indiscernible] forecast.

And then just one more. Just on the lactoferrin wastage you mentioned, what volumes are you producing this year? And how much of that has been either sold or contracted? And then just in terms of the pricing on that sort of -- is that consistent with what you've previously been saying? Or is there any change in the pricing that you're getting for that?

So in terms of lactoferrin, in the presentation, we're reducing 28 tonnes of lactoferrin. The operational of the plant is approximately -- has the capacity to grow at 33 tonnes. But that's all to do with seasonal curds of lactoferrin. Certain parts of the year, there's a low concentration of lactoferrin in the milk. So through the spring period, [indiscernible] we have the capacity to draw -- to extract more out [indiscernible]. But over the year, there is 28 tonnes manufactured this year. We have about half of that volume contracted at this stage through the lactoferrin. And some of that has -- we had pricing formulations in there around what that [indiscernible] into the future. We haven't reach yet [indiscernible] there's been a contracted reduction in [indiscernible] starting calendar this year, January, that's going through a longer-term contract. And we have some other swap contracts that we're running through. They're on 3- to 6-month terms.

Your next question comes from Glen Hoffman from Renaissance Asset Management.

Yes. Can you hear us?

Yes, Glen. Please go ahead.

Yes. Sophie has actually sort of touched on the questions I was asking. It's around lactoferrin and the increase in volume versus revenue in the first half. And then the -- just like Michael was just touching on in terms of a reset in price, and if you can give us clarification, just, I mean, in terms of the stock's going to list on Monday in terms of some of these items in the second half. And in particular, just trying to understand the step-down in pricing that has happened in lactoferrin and just maybe any more details on some of these impacts in the second half in terms of where we are with that outlook.

Sure. So I might take it first, Glen, and then also hand it back to Michael. So I understand your point around lactoferrin. So we definitely have increased volume. But that's really because the plant is running quite well now and obviously different grades of lactoferrin that can be produced at the plant. And so you can't really [indiscernible] the volume should be in direct sort of linked to the way the sales numbers by the dollars work to the different pricing, different product specs of lactoferrin. Objective is obviously to get the product specification of lactoferrin as high as possible. And we do have contracts with very good offtake for high-quality lactoferrin. And there's a variety for other qualities of lactoferrin. As we improve our performance of the quality, then that will obviously improve the revenue from lactoferrin. So that's a little bit of the reason why those numbers may look a little off there, where volumes are jumping up so much, but revenue is not a direct follower of that.

Sorry, is yield way below what it was expected? Can you give us some clarification on just what's happening there?

Now I think if you look at the announcement that we had for in November, yield hasn't moved considerably from where we originally announced, 33 tonnes a day. I think that's when [indiscernible] back to November, it was sitting around 31 tonnes and that was through work through the season. So yield is performing consistent, well within what we expect around the asset there. In terms of the contract, there was [indiscernible] within that contract through timing over the term of the contract. So that's why there's been no change. The contract has obviously -- this half or this calendar year in January, so that was a contracted change.

Okay. Great. Can I get some feel for the scope of some of these changes? I mean you're going to relist on Monday morning and you're going to have a first half number, which is it is what it is. But as the first quarter sort of highlighted, there's a fair bit of downward pressure as indicated by these arrows. Is there any scope to sort of give a feel for the impact on some of these items?

Yes. I think through that period of time, I mean, it's a seasonal challenge that we always face, especially within the Dairy Nutritionals business going through this second half of the fiscal year, where we will see that change back up again into the next financial year. So there's also as we work through working capital increases across the business, as we grow into other markets and especially in the Southeast Asia and export markets. So when we look at that, we're also working through changing some of our export markets into Australian dollars, which was actually -- been able to enhance some of those changes across the business that some of that won't come into effect until the middle of the second half. And then some are coming through into later through the period as we renegotiate. So we're seeing some of those changes come through. So the main point we wanted to get across was the first half was a good half, especially in Dairy Nutritionals. And we're just looking at '21, giving an idea across the business, that the second half is softer. But when we roll through into the future, we see the [indiscernible] some of the initiatives to seize future growth.

I think one of the things I'd like to add, if I may, is the first quarter of the calendar or the third quarter of the fiscal calendar, in particular in Dairy Nutritionals is a tougher quarter, primarily because it's the -- [indiscernible] in dairy, so the milk price has an impact on what -- where we're buying that because not all of our milk is contracted. And so we are, in some of those contracts, open to higher pricing. You also have -- there's a couple of things that impact that first quarter. One is the Chinese New Year. So more profitable export channel is [indiscernible] because Chinese New Year is just not a high volume. We're also -- unfortunately, we're still showing some restructuring costs until we get the recap done. And that's what we are flagging will bring earnings down net-net second -- first quarter calendar but third quarter fiscal. And you'll see that we are publishing quarterly activity and cash flow statements. That's a requirement of ASX. We've done our first one for the December quarter. We'll do our second one for the March quarter at the end of April, which will give you a good indication of how we're performing. But you should expect that first -- sorry, the March quarter results in the quarterly publication should be lower than it is in the deck because of those seasonal [indiscernible].

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

Okay. Thank you, Marni. Thank you, everyone, for attending today. We understand that we have delivered a lot of information this afternoon. And please feel free to contact the company to obviously ask any questions. And I think we've got the contact details on the releases there. We're open to doing more one-on-one presentations with those investors who would like that opportunity. So I'm sorry to call -- to have the call late on a Friday. But again, we appreciate your patience, and thank you for joining the call. [indiscernible]

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