Skellerup Holdings Limited (SKL) Earnings Call Transcript & Summary

Okay. Good morning, everyone. As usual, I have Graham Leaming assisting me with the presentation of the FY '22 results. So we'll get into it. I hope everyone can see the screen. We'd like to start by just taking a longer-term view of the results. Then we'll get into the specific FY '22 results.

Could everyone just please check that they have their microphones on mute. We're trying to mute everyone, but there's a little bit of feedback. So everyone, could you please check your microphones are on mute. And then as I noted in the chat, if people have got questions at the end of the presentation, they could either raise their hand or send a note via the chat, and we'll take them in sequence and unmute you at that time.

Okay. So thank you, Graham. So first of all, of course, it's fantastic to have another record result. So if we go to the first slide, which shows a seven-year view and, of course, many of you will know CAGR, but just in case, CAGR means compound annual growth rate, and a simple rule, which I'll come back to maybe is the rule of 72. So if you have an interest rate of 12%, you divide 12s into 72, and it's 6, and that means how long it takes to double the thing you're measuring. So for example, if you have an EBITDA of 12% compounding your growth rate, then in 6 years, you'll double your EBIT. So anyway, it's just a useful method of kind of averaging your growth rates. So again, the 7-year view, we thought carefully about this in terms of helping people understand. There's not a one-off result. Last year was a record result. This year was a record result. But actually, a lot of hard work has gone in over the last 5 to 7 years. And so it's not lack is probably the easy way to say. So anyway, it's pleasing to see revenue up, so that CAGR for the year is 6%, EBITDA is 12% and NPAT is 13%. And of course, it would help if we could get revenue up even further. And when we do our business planning, we plan on a 2- to 3-year horizon. And from my point of view and Graham's point of view, we work hard to ensure that we maintain that kind of growth rate. So I'll come back to specifics later. But we've been very focused on our gross margin because, of course, there's input cost. Sorry, can everyone please mute their microphone? Thank you. So we focus very much gross margin. That's very much the difference between, obviously, the price volume, so your revenue equation compared to your book costs. We're getting feedback. Can everyone, please, mute their microphone. Thank you. Okay. So obviously, our indirect cost as a percentage of sales have gone down steadily and our EBIT percentages climbed. Some of you have been around long enough to remember my view on businesses is that you need to get your EBITDA up to more than 20%. A really great business is 25% in order that you can invest in the future of the business. So anyway, I just think it's important to take that sort of 7-year view. Now if we go to the key points of the current results, FY '22 result, A great result impaired of $47.8 million and compared to last prior comparative period, up 19%. And you know that the CAGR for the impact was 13%. So you can see that it's more than doubled. The Industrial Division EBIT was $39.1 million. The pleasing thing is it was broad-based sales growth and it includes higher margin from new products. So clearly, when we introduce new products, we want to launch those products at a margin better than the average. Otherwise, you're going backwards, if you're not careful. We've had very good growth in potable water, wastewater and marine was particularly strong. So it's really a unique product. We focused also on consolidation of sites. So we've successfully consolidated a couple of businesses or several businesses on to a site in Otahuhu, and that's set up as a more highly functioning distribution business, and we're getting good results from that. So that's been a very good move for us. And of course, we acquired Talbot last year, and that's contributed and it's performing to expectations. So that's gone very well for us. So the Agri Division, and we'll get into more detail on this, the Agri Division EBIT is $33.6 million. We had good growth in sales of dairy rubberwear to international customers. We had good sales growth on footwear, and I'm sure the rain is helping our sales today and the last couple of days and then the next couple of days. And fortunately, compared to previous years, we have inventory. So that's all good. And we continue to get some operational improvements at Wigram. And in fact, we're getting excited about some of the other changes that we can do there. So that's all good. Operating cash flow was down, and we'll come back and explain that in a bit more detail, but that was a deliberate investment, mainly in inventory. There were some other things affecting it, of course. But I'll go through maybe an explanation near the end of some of the changes in inventory. But another pleasing thing for shareholders, of course, is the final dividend payout as declared by the directors at $0.13 per share, which brings the full year payout to $0.205, which is up 21% on the prior comparative period. And we still have a strong balance sheet. So it remains robust. Net debt has increased mainly due to the Talbot acquisition and investment in technical investment and inventory, but it still represents only 7% of total assets. So we are in a strong position. So thanks, Graham. We have the financial highlights. Again, we've taken a 7-year view. So you can see revenue growth, EBITDA, $80.6 million. EBITDA, $10.4 million and 18% on the prior corresponding -- prior comparative period, sorry. And you can read through the rest of it. Just on the operating cash flow to dwell on that for a second, $43.3 million, it's down on the prior comparative period, mainly due to investment in working capital. As I said, I'll go through that. We had -- you'll notice that the CapEx is up slightly. We've been investing quite a bit more into Wigram. That won't continue with that rate, but we believe we've had very good results from that investment. And of course, we funded dividends. So -- and the total net debt is $25.2 million, 7% of total assets, as I said a minute ago, funded by Talbot acquisition just over $10 million and lease repayments of $5.5 million. So we have a waterfall. We did this last year as well, just to explain the changes. So the first 2, in particular, are really around the every division, dairy and footwear. So you can see dairy sales growth and good footwear sales growth. We've had very good growth in potable and wastewater, roofing and construction, the Talbot acquisition, of course, contributed, and that's been a 3-month contribution to FY '22 results. Sports & Marine is up. And there are a few other minor things going across. But in sense, that explains the change in earnings growth. So let's dig into the 2 divisions in a bit more detail. So I think again, we haven't done the 7-year numbers here in terms of the table, but just the interesting part is the revenue is up 16% and EBIT is up 20% on the prior comparative period. It's the second consecutive record result. And a lot of the growth is in potable water and wastewater. We see increased sales of gaskets, seals and vacuum systems and the potable water and wastewater applications and most of that is in the U.S. We've had growth from high-performance foam applications, mainly the U-Dek product, but some others, and that's a fantastic product. It's going really well. We acquired Talbot Advanced Technologies, and the contribution has been good. That's been in line with the expectations and just another very good aligned acquisition. We've had very good growth from DEKS roofing and sealing products. And some of the disruption caused in the Ukraine has hurt our competitors, which has given us some opportunities there, so that's been good. And of course, there's been -- the lower New Zealand dollar has impacted the translation of offshore earnings and an impact on inventory as well. So just on the Industrial Division, I'll just sort of reflect a little bit. So if you go back over 7 years or even more than 7 years, we had an industrial business that had poor financial returns. We didn't have a focused technical capability. I don't think we fully understood the value that we were creating for customers, and we certainly weren't extracting that value. We had a number of legacy ERP systems. So you will see in the annual report, we refer to it again, but we have been doing a tidy up of a number of older systems, and that information flow is helping us to make better decisions. So that takes time, obviously, and we do it in a cost-effective way. But -- so where we are now, we have a clearly articulated business plan about how we win business, and we have a very bespoke or tailored technical sales approach to large OEM customers that is winning good business at good margins. So I often think about it. Their customers often say they need something. And one way to think about that is if a customer states something openly, that's actually a want. And what our technical teams are doing is getting to the underlying need in solving that need. And so we've done a very good job with Moen, for example, in the U.S., we've done a very good job with a number of existing customers. But using that same approach, we're starting to get access to new customers, and that's exciting, giving us a confidence in the future, certainly over the next 2 or 3 years. I think compared to 7 years ago, our leaders have developed, a number of our leaders have developed, and they're doing a really, really good job. So we have a number of young leaders coming through, and they've stepped up. Certainly over the last 2 years, it's been tough on all leaders and they've stepped up and delivered. So I'm really proud of what they've achieved. And I'm very pleased with their ongoing programs to continue to improve the process. And of course, one of the big things on the big panel, the standardization. So we've been standardizing processes. We've been standardizing products and things where it makes sense. And of course, offering a differentiated product and service to our customers, and moving up the differentiated signs of the product and service to individual customers and working really hard to make sure they understand the value there. In other words, in many cases, putting the prices up to reflect their value. And getting acceptance from customers, obviously. So that's been great. But the standardization of our information flows is giving us a better insight into the business and how we can speed that whole process up. So that's really where we win with the business. And what's exciting is we can see if we continue to do those things, we'll continue to improve the industrial division. So if we go to the Agri Division next. So again, we have a sort of a table of the numbers and things like that. But just quickly, the revenue is up 8%, EBITDA is up 10% on a previous record prior comparative period, obviously. So international dairy sales, there's been good opportunities in the market. Of course, some of that has been driven by changes in the markets. We have, for example, DeLaval acquired Avon Milkrite, one of our largest competitors for food-grade rubber products in the dairy area. But our ability to supply to the U.S. market through difficult times and things like that has helped. So we've also had significant operational gains in the last 2 years at the Wigram site, and we've invested some capital over the last year, and we expect to see further gains going forward. So that's been very good, not ignoring the fact and it's in the release that we had very good operational gains in China. And I'm really proud of the team in China who have continued and probably very difficult times even now to deliver. And I often joke, the leader there does a very good job. I won't mention them because some other company will try to venture. And we've had very good demand in full year sales. We had issues previously with somebody getting enough footwear into New Zealand. And one of the challenges in China is getting -- just like every year, there's a labor shortage especially doing what we do. But I am proud of the progress and productivity gains that we've seen out of the China factory, which is mainly producing Red Band and technical gumboots and also Red Band pumps for mainly the U.S. market. So maybe reflecting a little bit on the Agri Division, and I was mentioning earlier there, of course, there's a big fire on the old site, which has now been a car wrecking kind of site. So that's the [indiscernible] site, no longer associated with Skellerup to be clear. But after the earthquakes, we had our Project Viking, which was to reestablish on the new site. So what we were, we were a disparate bunch of sort of people and teams in buildings, more than 22 buildings with [ fork trucks ] going left, right and center. And we transitioned, of course, many years ago on to the new site. But we're still getting some clarity around flows, material flows, allocating our people properly and a strong focus on what we do well. We had insufficient discipline around our product development, sharpen that up and we've been hiring quite a few new people into that product development process development area. And I expect to see very good gains from that going forward. The ERP platform that was set up, we get some data structures that weren't helping. So we invested a lot of time and energy more than a year ago, and we're starting to see really good gains in terms of our insight into what's happening in the business there. So now, we remain a world-class development site. But I think, just like on the industrial side, we now recognize where we can add value to our customers, and we are working more closely with them to understand their needs. In the same way, we've injected a lot of new leadership into the team, particularly in Christchurch, but also internationally. And so we're seeing the benefit of that investment in people. So as much as worrying about attracting, I mean, I find it interesting the comments around attracting talent. The most important thing is to review, on a merit-based approach, your existing people and then focus on developing them before you worry too much about attracting new people. There is a battlefield of talent, but actually, if you have a winning team and you have a winning company in that sense, you do attract the right kind of people. So I'm not saying it's easy or anything like that, but I am saying I'm pleased with the performance of the new people that have joined, particularly at Wigram, but also in other parts of our business. So really, that's the Agri Division. And moving on, I guess, the -- a clear focus and some of this is driven, obviously, by legislation. We've focused very hard on ESG. We've always had a strong focus on the social side, so perhaps I'll start there, just to change the sequence. We've had a very strong focus on health and safety, and that relies on everyone in the organization being unafraid to put their hand up when they see something that is not acceptable. We regularly have reviews, independent reviews from other parts of the business of our sites. And the consolidation of sites, I mentioned the consolidation at Otahuhu, 3 sites effectively into 1. And at the same time, that has other benefits. So that's another way we've been considering it. We're moving our DEKS business in Melbourne by the end of October on to a new site that is a functionally far better site. We're always reviewing sites from a health and safety point of view. But at the end of the day, it requires strong leadership and engagement from employees. So I'm really pleased with how we've gone there. Obviously, I've mentioned the leadership. And the other thing I'm very pleased about is we've been investing in training and effectively paying people more. And this is not just in New Zealand. This is worldwide. We are paying people at the bottom end well. And I'm very confident that -- there are, of course, some exceptions, but in general, we've been moving hard on that, not just for 1 year or 2 years. We've been doing this for more than 3 years. It has nothing to do with COVID, but it is about doing the right thing for those people. I mean if you take New Zealand, how can a family live on a single income of $50,000, which is more than either the minimum wage or the living wage. You couldn't do it right after tax. So the reality is, these are the people that make our quality product, they work very hard, they have a good attitude towards the company and they deserve to be rewarded. So I'm very proud of that. Coming back to the practical ESG. So there's the environmental things, which are really around decarbonization. And so there's a number of sort of bullet points there, and we can come back to the ESG world. So that's a way where particularly the fund managers and that can get access to information in a way that sort of enables them to assess what Skellerup is doing. It's important that as a Board, a sustainability committee has been formed. We focused on Scope 1, Scope 2. We -- of course, we have to assess Scope 3, and for us, very much that's around shipping but there are other things as well, supply chain issues. And we understand, of course, there's a mandatory climate-related disclosure in FY '24. I think the thing I'd focus on is we hit our mandatory things. But something I'm also very keen in Skellerup, we focus on other areas, for example, I mean, a logical one is fresh water. So water usage is a big one, which is not decarbonization. And also, we look at the materials we use. So you can see in the second line there, we focused hard on water consumption at our 2 largest facilities and reducing that and also reducing VOCs, so volatile organic compounds. And these are nasties in the air, if you like. And so we work very hard because we do use solvents to produce some of our products. And we -- so one simple example is that we have moved from a solvent-based paint for our [indiscernible] pumps in China to a water-based paint. And that's been a good move. So I think it's obvious that in many cases, doing the right thing is actually good businesses, and we're very proud of doing that. But I want to emphasize that for us, this environmental means more than just decarbonization. In some ways, we use electricity. We want to ensure there's no waste. That's just good businesses. But at the same time, we're looking at other things that harm people and ensuring that we're not contributing to that. And so we spent a lot of time on that. Another thing is we tend to take big leaps. So when we moved to the site at Wigram, and it's in previous annual reports, we tried very hard to get a fully recycled water process. We're very close to that. So the idea is that, each year, we can save 5% or something like that, it's not how we look at it. In fact, our next stage is to look at can we fully make that a closed-loop cycle. In other words, we don't need any water to come in, and we don't need any water to go out effectively. We did the same when invested in gas-fired boiler at our site in China is before we needed to really -- and we eliminated a coal-fired boiler, and of course, that was difficult. But at the time, it was difficult to get natural gas, but it's paying dividends now. Of course, the last point on ESG is G, and I'm really pleased with the quality of the directors we have and their experience, their tenure, because Skellerup is not necessarily an easy business. It's an international business. It takes a while to get around it, but it's -- I don't think it's that difficult to be honest. But we do have diversity of skills on thought. We have really interesting discussions and debates, and they make an effort to get engaged in the businesses so regularly. And it's been a bit difficult with COVID, but we visit sites and individual directors visit sites when they're overseas for other business reasons. So there is a really strong engagement from the directors, but also I can say clearly that from our staff, they enjoy meeting our directors and feeling part of the same family. And the word family is used a lot in Skellerup. We've been around more than 110 years. Of course, it's not the same company. It's not the same people. But at the same time, the word family is used a lot. And that's another part of the blue that means that we have a loyalty and a trust with our employees and our employees have a loyalty and a trust to the company but also to senior management and by business on the directors. So I'm very proud of how we've progressed there. And then a couple of other slides just to finish off, and then we'll welcome questions. So we've explained this before. And I should say, please refer to the annual report. There are some very interesting case studies. And I think the case studies give a deeper insight in areas into what we are doing. But of course, like the [ ore blacks ], when it comes to game time, you play to your strengths. These are our strengths. We have a proven track record of earnings and cash flow growth. We have a track record of getting better for rapid -- mainly development -- customer-focused development, but we are beginning work on fundamental research. And to do that, of course, we have to align with, for example, Lincoln University for agri or even [ messy ] and Pumps on North, but even catching up on some of the research done in places like Ireland. So it's essential that we do that for the Agri Division, and the same way, it's essential that we keep up the speed on changes to standards for water. And we spent a lot of time eliminating a particular compound in the Australian market for potable water. It does cause us an issue. We went out to sell our products. For a period of time, we overcame that, and now that's put us in a very good position going forward. So I think our track record for rapid development, and we're now doing some research is good. The focus on key products, key customers, the key markets and things like that continues to deliver. We don't see any real need to change our business strategy, but certainly, we're working to refine it. We have a highly experienced technical team. Our global team is now -- you can see the number, 869 people across 6 countries. The customer relationship is strong, so we have an enduring, and they pay on time, strong relationships with customers, particularly OEMs, very interesting to see that we don't, in general, lose customers. It is hard to acquire them at times because they have existing suppliers. So we have to innovate and offer something that their existing suppliers can't and that takes time. It's not always easy. It will certainly help now that the world is opening up. And we have strong relationships across global markets. So we have a good insight into what's happening, and they can help us in other markets. So for example, we can see some of the changes happening in Europe, and we know, ultimately, that will affect Australia and New Zealand. So overall, those are the streams of Skellerup, and I think certainly over the last 7 years, we've continued to improve. And then finally, there's a slide -- this has been in the annual report, but just to remind people what we focus on and what we do, because I'm always amused not even in just a New Zealand, but Skellerup makes Red Band gumboots, and of course, that's an iconic brand and a very important product to us. But in the scheme of things, people just do not seem to understand the depth and breadth of what we do. And so we group it together and explain this not only externally, but even internally to our staff. So I'll leave you to dwell on that and reviewing your report where's the segmental results, the reconciliation of EBIT and our standard disclaimer. So without further ado, welcome questions.

Okay. So first question from Josh Dale. So Josh, you can go in.

Just a few questions from me. First one, you've had a very good year. Congratulations on that. You're obviously growing very strongly. To continue to do that, the demand obviously needs to be from your customers. What are you actually seeing out there? Is demand pent up beyond your ability to supply? Or is it about even? Or what's your sense in that respect?

I'd love to be able to answer that accurately, Josh. Look, the bottom line is with central banks almost worldwide other than Japan maybe putting interest rates up. We're trying to get on top of inflation, as you all know, by putting interest rates up and killing off that excessive demand that seemed to roll through the COVID period. What we are doing practically is we're working to understand our customers in metric because the first thing to be careful about is where customers have been overordering or potentially overordering. We weren't, in general, in that position because we certainly couldn't supply. So in that sense, I don't think we have as many issues as maybe some other companies do. But inevitably, there will be areas where we will have issues. So probably the way to say it is, I've always been careful to ensure that we are constantly working to understand our customers' real demand, not just our demand, but our customers' demand, and often their customers' demand. And we've made a lot of progress in understanding that, but we desperately need to move forward more. Other than that, we can look at the back one. So I mentioned Agri Division, pick on something else. We know that in these situations, normally, governments will spend on infrastructure. And again, I've said this before, we're still waiting on the money to flow into the fixing of potable water distribution in the U.S. market. We have had strong sales of gaskets for the infrastructure pipe racks. And we are struggling to keep up there. So I'm just picking on a couple of examples to show you. It really depends on the customer and the kind of industry that they're in. But one good thing, if you have trust with customers, they're more willing to share the fundamental information. So you need the inventory on hand in these sales, and you can work out what your demand should be. You have to be careful just looking at the orders they place on you. So I know that's a sort of a roundabout way of answering specifically your question. My pick is, of course, I've always seen us as leaders. We should have a competitive strategy. So when the market slows down or demand slows down, we should gain market share because we -- so it's not entirely lift to the market swings and roundabouts of that [ vaccine ]. So in a couple of areas, so one area in particular is reflashings. If you look at Australia, I was in Melbourne just the other week and having a chat to the senior team in Melbourne, so really the reflashing products. And the stats would say, we're going to have a real problem in Australia for the next 2 years, yet the leader there, and why would I question? He's delivered very good results for 3 years, he believes he can improve on what he's done over the last 3 years. Now some of that is a combination of price. Some of that is a combination of better delivery and service and those kind of things. And some of it is about launching new products at better margins. So he believes he can go counter to the actual market demand. And I'm not brave enough to bid against them doing that. So as I said, that's kind of anecdotal. I understand that it's hard because we are in so many areas of business. But fundamentally, I think what we need to focus on is the U.S. market. It has the biggest opportunity to give us the kind of step change in growth, maybe another vertical in an area that we are not so heavily involved in now. No, I don't want to get any more into automotive or airplanes or things like that. But seriously, there are some opportunities that are opening up, and we need to think hard about how we service that. And I think aligned to that is the need to manufacture in market. I don't think we can continue to do everything currently we do. So I mean, we manufacture a lot of product at Wigram. That's our biggest site, China and Vietnam. That's where a lot of our model, but a lot of our manufacturing efforts. If you just look at geopolitically what's happening, I don't think that's just going to carry on for the next few years. I think there's going to be -- so we actively need to review and decide what we're going to do. So it's a long-winded answer, but it -- so specifically, I don't see why we can't improve the business going forward. Year-to-date, it's only 6 weeks in, we're in line with the expectations. Save time, we will give an update, as we usually do, at the shareholders' meeting because we'll have had several months, the first quarter of results, and we'll be in a far better position to have a stab at how we'll go on the 30th of June next year.

That's helpful, David. Second question, your guidance for FY '22, given that your interim results baked in a bit of caution in the second half around the ability to get product to customers.

Yes.

Look, with the result you've just provided, it suggests you've been able to mitigate that pretty well. Do you have any comment on that?

We've managed to mitigate it well.

Yes. I think 2 things is in the -- as you know, there is some seasonality in our business. And so sometimes they can fall either side of the line. But in general, we were able to overcome the rest of those impacts. And in part, it's the explanation you see with inventory. We put more product in the supply chain, so we're able to maintain delivery to customers. And we did see a little bit of easing, particularly into the U.S. on some of the constraints at the time it was taken to get product to the U.S. border. There was a bit of a slowdown getting it through the domestic network in the U.S., if we think of that as our largest market. And then also getting product into New Zealand, for example. It's a peak season as we're in the winter months because we are -- and again, we're able to get product through.

Just an example because of revenue recognition, it depends on your [indiscernible] but in particular, we ship a lot of product through Philadelphia in the U.S. Shipping freed up when the price of containers has gone down. But guess what, they haven't got enough truck drivers, so it's all clogging up again in Philadelphia. If that happens in June, that affects our results dramatically. So partly because of the agri seasonality, June, July, I've often said, I'm not really in control of that. And fortunately, 3 days before the end of June, I didn't know how we were doing in detail. But the reality is we have a great team. They do what's needed and I rely on them. When I look at the half year result, going back to the half year, and looking forward, I could just see more noise. But it didn't look like the U.S. was solving the issues of our own truck drivers, particularly on the LA side or the West Coast side. But in reality, markets clear, just don't have a feeling to how fast they clear, and so I'm reasonably confident in places like the U.S. that gets sold. Maybe it's better in a totalitarian society like China, where they tend to solve things very quickly. So again, our Chinese team did a fantastic job. So you put all that together, I mean, you people want certainty about -- a better of view of what's happening in the future. I look back over the last 3 years, and we've managed somehow to overcome a lot of the supply chain issues, and I think we're getting better at -- not necessarily better at getting the right price for a container, but understanding the true demand of our customers, as I explained earlier, and then meeting that need, and where we can't, having that honest conversation with customers. So together, we can satisfy their customers, the ultimate customer. So I'm really pleased with the result. It was better than I personally expected. And just before I went to Japan sort of the third week of June, the end result was better than I was expecting.

Great. Just general questions, mostly centering around Agri. On fuel agri revenue generated in New Zealand specifically, how much of that occurs during, say, June, July when farmers are stocking up for the coming season? And how much occurs during the rest of the year? I guess, how weighted is your New Zealand agri revenue to that winter period ahead of spring?

Probably a slightly longer period of time than just June, July.

I was going to say that.

There is a bit of May and a bit of August in there, too. And I think if you took that 4-month period, slightly more than half happens in that 4-month period.

Yes. I'd say 6 months. So Graham is right. And sometimes it depends. Like it used to be -- we got a good read on how the season would go with [ fume ] dates, which, of course, has been a bit difficult recently, but there was always a bellwether for how the season would go. But of course, that season is bigger than the sort of the mini season which happens sort of the same January. But my rough rule of thumb is there's 4 months of sales, but you don't know when it's going to fall...

Within a 3-, 4-month period.

Yes. Within that 4-month period, you get 6 months of sales. But at least -- I don't know if that helps. That's kind of how...

That is helpful. Just last question on the same topic. The milk price has fallen close to 20%. The farm gate milk price is potentially going to be walked down on the back of that and squeezing farmers a little bit. Is there any concern you're in that FY '22 might have been a perhaps a peak year for New Zealand agri revenue specifically, not talking about the entire Agri Division, but just the New Zealand segment?

Remember that -- I appreciate the price and actually discretionary spending does impact on demand. But actually, if the cows are -- they're going to milk them. Can farmers delay that expenditure. Well, for things like liners, no. For tubing a little bit more. We've talked about that in the past. So the simple answer I've got is I think we'll have another good year. It will be more challenging for farmers and things like that. But it's not only in the sales side, it's also on the operational side. I think we can get more gains. But specifically, it's volume. So if milk volumes drop for some reason, then it will affect us negatively, not just price of the milk powder.

Christian Bell?

Again, well done on a great result as well. If I could just kick off with a question around Talbot, in the half. I mean, obviously, sort of got 12 months under the belt now. There would have been a bit of time required for Talbot to sort of integrate into the business. So just trying to get a sense of what's the sort of contribution uplift that's sort of within your expectations going into next year? Do you sort of see Talbot, I don't know, like doubling what it did this year? Or just are you able to sort of give a little bit of color on that?

I think we acquired the business, correct me if I'm wrong...

The beginning of September.

End of August, beginning of September. And unfortunately, we couldn't visit for a period of time. I'm sure you remember, we were in lockdown in that. So the reality is there's still quite a bit of tidy up inside. So it's not an issue, but we needed to get control on inventory. We've aligned some of the processes to customers and things like that. Of course, a key customer is Fisher & Paykel Healthcare. So some of our outcomes for Talbot depends on Fisher & Paykel Healthcare volumes, and those kind of things. We're working hard on developing new customers and things like that. So I don't expect a big -- it certainly might be double. And do we expect Talbot to grow? Of course, we're putting a lot more resources in there. And we have a very good team. We're very excited about the development side of Talbot, and that can help with other parts of our business. So it's not just Talbot in isolation. We acquired Talbot not just to grow that business as an individual business. It fits extremely well with our development done in Auckland, mainly for the U.S. market for our Gulf U.S. business, in particular, the Moen Delta, those kind of key customers. And I believe that we may be able to do some of that work in the right place, maybe at Talbot. It derisks Auckland. So we have a lot of basic machines on one side in Auckland, there's a lot of development being done there. Now we have the opportunity to get the synergy of 2 sites and 2 teams. And we've already been doing that, to be fair, but it's not going to give like a doubling of EBIT or anything like that in the next 12 months. It just hasn't had the attention. It's quite a small business, but it's a very exciting business in terms of its capability.

And again, we're dealing with OEM customers. Development cycle, that takes some time.