Synlait Milk Limited (SML) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Synlait Full Year 2020 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Leon Clement, CEO. Please go ahead.

Well, a very good morning to everybody, and welcome to the Synlait Milk Full Year Investor Call for the months -- 12 months ended 31st of July 2020. I'm joined here today by our relatively new Chief Financial Officer, Angela Dixon; and our Head of Corporate Affairs and Investor Relations, Hannah Lynch. Great to connect with you all again. I know many of you are dialing in from across the Tasman and Australia as well as around New Zealand, so thanks to everybody for joining the call today. Just in terms of flow, I'm going to provide a high-level update on level result and the achievements to date. I'll then hand over to Angela, who will step us through the financials in more detail, and then I'll come back with a summary of our achievements and the outlook statement. We should leave some time for Q&A. I understand many of you may want to get on the call in about an hour's time with regards to announcement from a2. So we will make sure that we finish on time for that -- to allow that to happen. Right. So today, Synlait is announcing a solid and highly profitable result, given the surrounding uncertainty and instability from COVID-19. Our revenue was up 27% to $1.3 billion. EBITDA has also grown 13%, reflective of the strong consumer packaged infant formula sales growing 15% to around 49,000 metric tonnes. We've also had a very strong contribution from our lactoferrin business with sales there growing 46% to 30 metric tonnes. Our NPAT has reduced this year to $75.2 million, down 9% from FY '20 -- FY '19, sorry. And this reflects some of the additional investments that we've made into new facilities and acquisitions over the past 2 years to create new opportunities for growth. I think it's really important that investors and the market understand this dynamic. As we started to create and diversify new opportunities for the organization, we've invested in setting up new capacity and capability to create those opportunities. And what we're carrying this year is the impacts of additional depreciation, additional borrowing and operating costs. And whilst that's hard to specifically quantify, we do estimate that the impacts versus last year is around $20 million to $30 million -- $20 million to $25 million at an NPAT level in this year's result. So I hope that provides some context for why both EBITDA is growing but NPAT is showing a decline. Also very proud of the contribution that we're making from a people and planet perspective. It's really important to Synlait that we continue to do enough differently for a healthier world and balance people and planet with profit, especially when we're facing them through some of these uncertain times with COVID-19. So without further ado, I'll hand over to Angela. Angela has been with us for just on 3 months now. She's brought a lot of great energy to the organization. She was joking before the call that she's a simple country girl from down south, but she's definitely much more than that. She comes off a stellar career with Auckland Airport, IAG and, most recently, Public Trust. So I'll hand over to Angela, who's, in a very quick time, going to go around these numbers. So Angela, over to you.

Thanks, Leon. Good morning, everyone. This is my first results announcement for Synlait. And Leon just -- as Leon just mentioned, I've just passed my 3-month mark. But I did manage to get a good look at this result as I was here for the last 6 weeks of it. So on to the numbers. So Slide 4, the results at a glance. As a result of a strong second half, EBITDA is up 13% to $171 million. And you can see from the graph at the top right that the momentum has been growing over the last 5 years, particularly in the last 3. Total revenue was up 27% to $1.3 billion, and I'll speak to this more on the next slide. And as Leon mentioned, the impact is $75.2 million, which is down 9%, driven by the depreciation and finance costs. Depreciation year-on-year had increased from $27 million to $48 million as the build progressed, and finance has increased $127 million from $9 million to $21 million as this interest was capitalized this year compared to previous years, and more debt was used to complete out our build program. The last graph on this page details our investment journey and shows a significant uplift in the year of net assets to $409 million. This is a significant investment for the company. And as a result, we expected a lower return on capital employed as we are at the conclusion of the investment phase with the earnings phase ahead of us. Now turning to the next page on Page 5, revenue momentum. As the gross revenue momentum continues, the graph on the right-hand top right shows that it has been building year-on-year with powder demand. This growth has been further uplifted this year with Dairyworks and Talbot Forest Cheese and a full year of our new liquid milk revenue. Most encouraging, lactoferrin has increased 46% to 30 metric tonnes. Infant volumes continue to grow up 15% or approximately 6,000 metric tonnes from last year. And this has helped improve our mix in our business towards a higher-value product set. And recently, we saw a big increase in liquid milk and cream sales during COVID lockdown this year. For FY '21 and beyond, revenue is expected to grow further through the acquisitions of Talbot Forest and Dairyworks' revenues, adding approximately another $250 million revenue. But Synlait continues to build sustainable and reoccurring revenues. Now moving to Page 6. So here, I'm just going to talk a little bit more about growing into our capacity. Total powder production was up 8% year-on-year, and our consumer-packaged infant formula was up 18%. And with lactoferrin, we're now coming into full capacity, and the focus will be on optimization. The graph to the right shows that the key build phases in FY '11, FY '16 and how the capacity was filled up in the years following. We have now almost completed our investment phase for FY '20, and the revenues will grow as the customers are added through our diversification strategy in the next coming years. Page 7. No good presentation is complete without a cost slide, so I'll just take you through our cost increases for the year because there had been some. Our SG&A costs were up in the year for a number of reasons. Firstly, our depreciation increased, reflecting the completion of the reset of the Dunsandel and Christchurch offices and the cafe. $46 million was absorbed from the new acquisition of Dairyworks and Talbot Forest Cheese. This leaves us with a 16% increase, which is driven by our new employees to run this new capacity as it comes online and resourcing our ERP project, SAP, which is now in full gear. General operating costs will reflect higher IT costs due to a greater investment in cyber controls and higher software costs to ensure the connectivity that we needed to be successful during lockdown and office upgrades, including our new China office. One-off distribution costs of $1.4 million reflect optimizing the Pokeno asset as it came online. COVID has impacted us slightly. Annual leave increased as staff focused on servicing our customers and also savings were enjoyed around travel, training and conferences. We did, however, have more costs relating to cleaning and warehousing to support the export effort. Looking forward, our cost base is stable. The graph on the bottom right shows that the SG&A costs as a percentage of revenue have been flat year-on-year, and we will continue to focus on this, ensuring we get the process and system improvements we need as we mature our business. Page 8, inventory. Probably a really relevant story this year. Our inventory has increased significantly at 63%, but there's some really good reasons for this. Dairyworks and Talbot Forest inventory came on to our balance sheet and that reflects $53 million. Production of instant formula powder was made to meet demand -- gross demand that we saw through the year, and that added a further $27.5 million. And you can see this growth on the bottom graph on the right-hand side and how inventories have always tracked growth. Measure to understand whether that growth is appropriate as our total revenue -- inventory to revenue ratio, and that's showing that it's slightly higher than this growth. And this can be explained with the $14.5 million of extra infant formula that we -- base formula that we are holding related to COVID. At the start of the year, we had strong signals of demand, but this was later revised in Q3 and 4 as the demand was more uncertain. This has left us holding extra, all right, infant base formula than what we would have if, perhaps, COVID had not happened. Lastly, we are always maximizing our milk curve, and we produce infant formula on the shoulders of the season to allow us to fully optimize the higher milk peak in FY '21 when we make the most of our ingredients. Page 9. Operating cash flow remains strong. Underlying cash flow is $127 million, excluding our new acquisitions, Dairyworks and Talbot Forest. Our operating cash flow was further impacted by the $14.5 million of additional COVID stocks that we have been holding, so the underlying is stronger than that. In contrast, our investment cash flows are now significantly declining now that we are at the ease of the investment cycle. And the investment cash flows will reduce to previous maintenance levels going forward that you can see on the graph on the bottom right after we've absorbed the last of our growth CapEx for farm, Dry Store 4 and our SAP project in early -- in the first half of FY '21. And lastly, our balance sheet and investing for the future. Pokeno, a liquid plant, Dairyworks, Talbot Forest are now all in the fleet of assets to help diversify our risks and revenues. We have further diversified our fleet to help accommodate this growth. As you all know, we released a retail bond of $180 million pre-Christmas and 2 ESG-linked loans, which are delivering cost-effective margins, thanks to a strong sustainability performance. Total debt has increased to $193 million. In contrast, interest and bank fees only rose from $18 million to $23 million in the year, reflecting lower base interest costs. The outcome of this is that our leverage ratio is now at 3.1x. That is under our 4x covenant cap, and all our covenants have been met in the year. Our banking syndicate continue to strongly support Synlait with our recent facilities provide to roll over our working capital facility of $250 million for another year and advance a further $100 million, reducing to $70 million in January 2001, maturing in May to help with our seasonal cash flow in the first half outlook on customer demand. Our business plan for the year ahead is fully funded. But given COVID and worldwide impact, it is feasible to continually review our capital management and balance sheet. And in the short term, we will manage and focus carefully on cash and maintenance and ensuring maintenance CapEx is minimized. Thank you, everyone. That's it for me, and I will pass back to Leon.

Thanks, Angela. I'm picking up at Page 12 for those of you following on the presentation, and there's just a summary of the achievements in a glance that I'll walk you through in more detail from here. But really, no summary presentation is complete without some commentary on our core infant business, and that's really performed well this year for us. Many of you know, our investment in Pokeno to support additional capacity and capability is a large part of our strategic growth program. That's in its establishment phase as we move, so starting to transition into higher product mix and driving returns for the organization. We've got a new multinational customer opportunity that's being finalized. I'm really proud with some of the manufacturing excellence programs that have contributed to our result this year, and that continues to drive value for our organization. I'll also give some commentary to Dairyworks and Talbot Forest. Those acquisitions have come through a settlement and establishment phase, and they're well placed to deliver on our expectations moving into this year and beyond. And then a summary of some of the mix of qualitative and other key improvements that we've made in achievements across people, planet and those areas that continue to be important for us as we phase into the higher levels of uncertainty, agility and resiliency required from our people through COVID-19. So let's pick up on Slide 13. Our Infant Nutrition continues to perform really well, and that's supported by the cornerstone customer and shareholder that we have with our strategic partnership with a2. Our consumer packaged infant formula sales were up 15% to close to 40 -- just over 49,000 tonnes this year. And look, I think a real achievement for us is our ability for the organization to navigate through a large amount of the disruption that occurred in the second half of this year through COVID-19. Our supply chain teams and our people demonstrated some extreme resilience and agility, kept supply chains open, kept our product procurement available, and we're really pleased with how we were able to come through this period. It's also strong evidence of the partnership that we have with a2, that is a large part of underpinning our growth. But it's really important also that people understand what we enable for the a2 Milk Company. We're home to New Zealand's largest a1 protein-free milk pool, which we provide for them. We operate a highly integrated Infant Nutrition manufacturing network now with facilities established both in the South Island and the North Island. We hold the SAMR license, which ensures open market access into China for the brand. And we continue to support that with the stability and confidence we have in our supply agreements with a2, that the product development and innovation we provide and the account management support that is sitting behind that. So a really strong endorsement for both Synlait in terms of the result we achieved navigating through COVID-19 and the strong, strategic partnership we continue to have with a2. Moving on to Slide 14. I thought it was worthwhile just highlighting how Synlait is helping support our customers navigate through a really dynamic environment in the space at the moment. We're seeing real shifting curves in the space around market dynamics, not just with COVID-19 but the premiumization, declining birth rates, shifts from the channel dynamics with CBEC and Daigou, and we've also seen recent studies that show greater trust and domestic players coming out of China for Infant Nutrition. But on the right-hand side of that slide, we're also seeing shifts in the regulatory environment around the geopolitical nature of how governments are responding, in particular, with the bilateral relationships between New Zealand and China; what GB standards will be released around the standards required to meet China requirements for market access; SAMR registration and the process and the uncertainty that continues to play for our industry as part of that. We acknowledge there's risk here, but we think that we're well placed to help navigate through that with the effort that we've put on to our regulatory teams. And for both companies, the importance of renewing our registration in September 2022 is really important, and we continue to work really closely with a2 on this project. Now there's been a lot of interest in Synlait Pokeno, how it's being commissioned and what sorts of new business we are developing to go against that new investment. It's a significant investment for us. And I just wanted to talk through on Page 15 how we're looking at that. For last year and for this year, Synlait Pokeno still remains in an establishment phase. This year, we're really pleased to have genuinely created an integrated processing capability with our Synlait Auckland canning site. So we're now able to take fresh milk from the milk pool in the Waikato, process it at Pokeno and bring it to our Richard Pearse Drive site in Auckland and end-to-end create a genuine different option in terms of North Island Infant Nutrition manufacturing. Obviously, we're waiting for Supreme Court outcome on Synlait, which would allow us to continue to proceed there. We've got a strong milk pool established and a great partner base. We commissioned this facility on time. And this year, since processing first milk in September 2019, that facility has produced around 15,000 tonnes of ingredient and the base powders. So we're really starting to see it come online as we've established it with a strong, highly engaged and capable team that we've got in place. Looking to the future and what we call the transition phase, and Angela talked a little bit about how we invest and start to build into our capacity that we've created. We will then turn our attention to focus on transitioning to a higher-margin product mix. We are finalizing a long-term supply agreement with a new multinational customer for packaged products, which we expect will have a positive impact on earnings from FY '23. And that will start to improve Synlait Pokeno's utilization and leverage the existing operational expertise we have there. So that really is the situation around Pokeno, moving from establishment to transition and making a significant contribution to the organization in the outturn years. So very strong evidence on Slide 16 of the great progress our manufacturing teams continue to make. They are showing strong improvement in conversion costs, drying milk faster, reducing downtimes materially, working with how we manage change over times and powder. And really, when you look at these set of metrics, they add up to deferring necessary investment in new capacity, particularly around the third blending and canning line, which we're really proud of. On Page 17, just moving to how we're looking about Dairyworks and Talbot Forest this year. I suppose this FY '20 has been a year where we've consolidated those assets, and we've started to set ourselves up for success. This year represents the full 12 months of owning Talbot Forest Cheese and 4 months of owning Dairyworks. Our focus on FY '21 is around realizing the business and supply chain synergies that we see there and some great opportunities to take costs out of the supply chain and improve our competitiveness by building an end-to-end cheese value chain. And then we look at the market and category expansion opportunities to establish a sustainable earnings stream. And so our focus for this year is starting to look at removing some of the duplication that we have across those 2 assets. We've already moved and migrated some of the secondary processing that's cutting and grating capability that sat at Talbot Forest Cheese that sits better with Dairyworks. So we see operational opportunities to improve there. We will be investing in small automation and line upgrade projects that improve line speeds and enhance capability. And also, there's opportunity this year to start to leverage the scale of being part of Synlait's network and the strong relationships we have with other suppliers. So that's a large part of the focus going into this next 12-month phase. And we're also really excited about some of the marketing category expansion opportunities. We see great opportunities to grow into Australia and China with our strong relationship with Woolworths in Australia. We see opportunities to grow specialty cheese, and a couple of pictures on Page 17 shows some of the fantastic innovation that's coming out of the team. Encourage you to get out and try our finishing butters. My particular favorite is the Chipotle & Seasalt. And in coming months, you'll see a high-protein on-the-go yogurt that we think is going to hit the spot with consumers who are busy and wanting to get to work and get a healthy breakfast down. So net-net, the underlying view on potential that we see around Talbot Forest Dairy and Dairyworks is unchanged. We're forecasting and remain on track to deliver a sustainable earnings stream of approximately $15 million to $20 million at an EBITDA level emerging in the next 2 years as we start to realize some of these synergies and move them to the growth momentum that we're seeing. On Page 18, some really good progress on safety, engagement, diversity and inclusion and our Whakapuawai program, which is about planting trees. We've got 12,000 trees in the ground and are targeting 80,000 this year. Some really important parts of our organization, and our focus on these areas just continues to drive the journey for us to build a healthier Synlait and strengthen our company as we go forward. Likewise, I'm really proud on Page 19 of our B Corp certification this year. We did this really because we really believe, fundamentally, that a lot of the work that we do in the environmental and sustainability space goes unnoticed. There's a lot of work that sits behind this. And B Corp gives us the opportunity to sign up and be accountable to the program that we've put in place but also to join a community of organizations that share our view to use business as a force for good. And the achievement of the certification at the end, just the start of starting to build a network with other like-minded companies. We've had some strong reach out from other New Zealand and global entities already who are keen to support us on our journey to continue to contribute to people and planet alongside profit in our organization. Moving now to risks. We often talk about the risk that we carry, and I think Synlait has historically carried a large portion of strategic risk, which we are on to addressing. The first one that's front of mind is naturally COVID-19 and how we respond to that. I'm really pleased with what we've proved to date and the resiliency and agility of our organization. The next 3 lines, they are really about the concentration risk that they're carrying. I hope that many of you that have been following us have seen that we've moved from some 12 to 18 months of -- months ago of being focused on a single-category customer and site to really genuinely and authentically addressing those risks around sites, around categories through the acquisitions that we've made and around customers. So still a work in progress, but we're really starting to move forward on that. And whilst it's come at a cost with the investment profile that we've had, I'm really optimistic around the opportunities that we're creating to be a more diversified and resilient organization facing into some of the global uncertainty that is looming. We're watching very closely the Chinese regulatory changes on and off farm environmental impacts we're well placed for with our Lead With Pride programs. We remain comfortable with our legal position on the Supreme Court. And as Angela addressed, looking at our balance sheet in terms of making sure that we're running it appropriately as a leverage going forward. A quick slide on Page 20 -- on Page 22. Again, I'm really proud of the efforts that our team put on through COVID-19. I think many of New Zealand and New Zealand companies have had to face into this. I do also believe that we're well placed to tap a wider nutritional opportunity for New Zealand in high provenance and quality food that Synlait is well placed to take advantage of. I really do believe that this also validates our strategy to get on and diversify our organization and make sure that we are able to make sure we're not exposed to single buckets of business so that we can be more resilient and when we're facing into high levels of volatility. And I'm really proud of the team and the effort that they put in to make sure that we're well placed for this. So we're up for what's ahead and I think well placed as we go into the future. Moving to Slide 24 as part of our outlook section. This year, we've agreed as a team that we must focus on making sure that we set ourselves up for the next phase of earnings growth, given the investment phase that we've just come through. Really, simple 3 focuses for us this year: embedding new and existing customer partnerships; making sure we focus on optimizing assets and creating value off the recent investments that we've made; and simplifying and standardizing our structures and systems. We're a maturing organization. We've grown really rapidly over the last few years, and it's important we continue to invest in the core parts that set our business up for success. So those are the things for us for this financial year. On Page 25, I know many of you have seen this slide before. It's a really important one for us and for everybody to understand, a material jump-up over the last 2 years from roughly $0.5 billion of net assets to just over $1 billion today. That's creating somewhat of a drag on our balance sheet as well as our NPAT number, but it's also creating fantastic opportunities for us. We're now really well placed with our liquids plant, moving to a commissioning phase. Pokeno is an outstanding facility for us, and the ability to diversify our customer base as well as leverage new markets and categories with our Dairyworks acquisition puts us in a good position to face into the uncertainty ahead. So moving to our guidance slide, Page 26. I must say there's more words on this page than usual, and I think that's a function of the uncertainty that's out there. And so, look, I think that that's the first point there is that we do continue to see significant global uncertainty. It's very difficult for any company to predict what their results are going to be 12 months out at the moment because there is a lot of volatility out there. But we have shown a good amount of ability to maintain operational continuity over recent months. And in terms of the demand for our products, here's what we're expecting. Around consumer packaged infant formula volumes, we're expecting those to be similar year-on-year. We are forecasting lower demand in the first half as we work through some higher-than-normal stock levels in the supply chain with our customers, but we do expect to return to growth in the second half of FY '21 once we work through those stocks. We do expect strong underlying EBITDA and cash flows to continue, in particular, a contribution from Dairyworks and Talbot Forest Cheese as we realize the synergies that have been and move forward. And we don't expect disruption to manufacturing or demand for our ingredient and lactoferrin businesses. Of course, these demand outlooks are subject to the unpredictable effects of COVID-19. We've seen lots of shifts in consumer behavior, channel dynamics are moving around and supply chain disruptions are not out of context and could still occur. So watching those areas with interest as we move forward. Overall, this is offset by the carrying cost of investment in Pokeno and in our advanced liquid dairy plant. Earnings from these investments will be expected to deliver from FY '22 and beyond as we start to get our programs and move those facilities from establishment phases into transition phases. And as disclosed today, we're finalizing a new long-term supply agreement with a multinational customer for packaged products, and we expect that to have a positive impact on earnings from FY '23. Against this, we're targeting a similar or slight improvement on our FY '20 NPAT result in terms of our overall guidance this year. And obviously, we'll provide an update to the market at half year, and we expect to be a little further into this year and perhaps can manage some of that uncertainty that prevails. So really, what are the takeaways for today? I think we're in good shape. We've come through COVID-19 well. Really proud of the response from the organizations, and we're in a good category and a good industry to continue to tap high-quality nutrition as a net exporter of food to the world that will continue to demand there. Our financial result is strong. I'm very pleased with the revenue growth that we've got, and the EBITDA result continues to point to the strong underlying growth of our core business. Our net profit result is carrying -- showing the result of carrying the cost to create those opportunities for future investment, which are coming through. We are coming to the end of that investment phase, and we're really well placed to drive earnings growth in future years. So that concludes the main body of my presentation. There's a series of appendix slides that we can continue to talk to as part of our catch-ups with each of you as we go forward. I'd like to now open the line for questions, and we'll use this time effectively. So let's go to the first set of questions, please.

[Operator Instructions] Your first question comes from Chelsea Leadbetter from Forsyth Barr.

I guess if I start with my first question around just thinking about Pokeno. And can you give us a little bit more color in terms of the utilization path? I guess, thinking about the next couple of years, what type of products we should be thinking about. And then you obviously called out the new customer that you're expecting to finalize in due course, but I'm just trying to understand how material that is in terms of taking up capacity and, I guess, how you shift and move in accordance with keeping available capacity with that coming on stream in due course.

Yes. Thanks, Chelsea. Great question. And I think as we've signaled, that's really an establishment phase still this year, and we start to move to starting to move towards a higher-margin product mix for us. Remembering that margin comes through both overhead recoveries in terms of the complexity of products as well as the margin we're able to achieve from our customers. So a lot of the establishment phase for this year in particular for Pokeno before new customer opportunities come on is looking at how we optimize our asset base and our network. You'll see buried in our report somewhere that we have recruited 80 million liters of additional milk in the South Island this year, and that allows us to push more IFB production up to the North Island, and therefore, get better recoveries on the cost structure that we've just recently put in place on Pokeno. So that's an example of the kind of things that we can do against our existing volume and product mix portfolio that allow us to start to transition this. FY '20 was very much around just getting Pokeno running, making sure that we have the team in place, the quality procedures in place, we were getting our registrations. We didn't make our first IFB until the new calendar year this year. So we've been migrating up that path. We now have a really strong, established facility, and we can start to optimize against that. So having more milk recruited down in the South Island allows us to process commodity products down with the network that we have there and optimize effectively, push more infant base powder up to the North Island and use that network more effectively. That brings a better return for the base products that we have there and then in the outturn year starting to look at additional volumes that may come from the new multinational customers.

Okay. And in terms of my second question, maybe prioritizing here. But in terms of, I guess, outlook, are you prepared to give us any sort of context on how we should think about your CapEx for the year ahead and maybe even the debt levels? I mean you made the commentary on about thinking about appropriate levels of leverage. What is that in your view? And kind of how should we be thinking about that gearing path?

Okay, Chelsea. I'll take that one. It's Angela here. In terms of our CapEx for the year ahead, we're continuing to just focus on completing out the build phase. So Dry Store 4 will be completed this year and will be up and running with significant benefits coming through by January and February under our current plan. We're also going to complete our ERP project, which is effectively putting SAP into our organization so that we can give a lot more efficient in productivity benefit flowing through in the years to come. There was -- there's some small expenditures still required on -- in terms of cash flow payments that we deferred from FY '20 on Pokeno and the milk plant, but they were de minimis. They are very small amounts. And then we're moving into a phase of just normal maintenance CapEx. And we're really asking the business to be really wise about how they're spending their money at the moment. We've got a lot of new assets. We had a few overdrives that do need to have -- make sure that they can run optimally over particularly the milk peak. But our CapEx expenditure into the business is now closing out, and a lot of those costs that I talked to in terms of the growth phase have already been incurred. And the last one that happened was we made the final payment for the farms, which came through in August. So a lot of the costs that have been incurred -- a lot of the big spend for CapEx has been done in FY '21 because it happened in the first couple of months of the year. And then we're going right back to that maintenance level. And then addressing your second question relating to the leverage. I mean we're just -- I'm just taking -- I'm new, and I've been here like 3 months, and I'm really just trying to get my head across our different strategies and our balance sheet and understand what would be appropriate and understanding how we naturally deleverage now that our investment costs are falling away, and our operational cash flow remains strong. And I just want to get that balance right, and I'm just taking my time to work that through.

Your next question comes from Adrian Albon from Jarden.

Just the first question, just around -- I guess it's sort of related to Chelsea's question around the CapEx. Right, to get the synergies and the cheese stream between Dairyworks and Talbot, is there any further sort of investment required over the next 3 years of size to sort of be able to execute that stream? And related to that -- sorry, and then sort of related to that, should we think about -- like if you are successful on that, in terms of the return on the milk, would it be similar to sort of IFB powder in terms of overall return?

Okay. The first question is easier. I'll come back to the second one. Look, no material, additional investment into Talbot Forest, Dairyworks. And a large part -- we've done a large part of the capital investment that we needed to in Talbot Forest a little bit earlier than we originally forecast. You would have remembered that we bought Talbot Forest before we had Dairyworks, and we had a plan to potentially scale up production there earlier. Rather than running that production, we've invested in making sure that it's ready to support and feed Dairyworks. A large part of that is done. We also had that unfortunate product recall that had an impact this year. There are some small tweaks to investment in line automation that we see good opportunity for. We have already moved secondary processing for specialty cheese and some great lines from Talbot Forest to Dairyworks that has been completed this year, again, at the cost of some of the optimization of production and overhead recoveries. But that is now largely in place, and we see ourselves well set up for that. As far as comparing returns to our milk solids basis for IFB, I must admit I haven't done a comparison on that basis. But we are comfortable that the returns that we expect to see in the next 2 years and the potential we see for this organization in the outturn is consistent with the hurdle rates that we have for our investment.

Okay. And maybe second question. Obviously, you've been careful sort of not to sort of confound any sort of response on the Mataura Valley and what a2 has done there. But just in terms of -- I mean and obviously, the multinational customer that you've got some sort of medium-term sort of diversification to that in any respect. But like is there -- can you -- is there any ability to -- well, in the current agreement, is there any ability to differentially price the China label from the English label as it currently sit in that relationship?

As you know, Adrian, we don't comment on that in sort of commercial terms that are sort of behind that relationship. So we'll probably stay behind that. And as we've commented before, I think a2 have signaled really clearly in the past, their intention to participate in manufacturing. We understand their decision and diversification of their supplier base is not new to a2, and we'll continue to move forward with our diversification strategy as well. I will stress, this is as an and not an or approach here. We continue to have a strong long-term and strategic partnership with a2. It's a core focus and priority for us. And we continue to see the opportunity for both companies to continue to create value together, and we'll continue to do so.

Your next question comes from Stephen Ridgewell from Craigs.

Just wondering, should investors still be expecting a similar to kind of lift ROCE to 20% plus in the medium term? I just didn't see that being called out.

We're not being explicit on our ROCE returns in terms of the outturn. But look, we do, as a management team and [indiscernible] eyeball those sorts of returns as hurdle rates for new investment. So I think it's fair to say, when all of our investments start coming together, and should they do that, then those sorts of return on capital employed rates are possible. I think we'll certainly see a lift, but we've also got a much larger asset base to do that. We've got execution risk in terms of putting together a much more diverse organization. And frankly, whilst I think we continue to -- and should have high hurdle rates for us to work through investment decisions, I think, certainly, as management and as a Board, we would be comfortable with a slight softening of delivery against that in exchange for a more diversified and sustainable company.

That's helpful. And then just following on from that. I mean, strategically, what's the company's chief way to diversify its customer base going forward? Is it organic customer wins and to note your comments on the new customer from FY '23, potentially? Or is it acquisitions? Or do you see a combination of both and sort of some kind of balance?

Look, I think the best way to answer that is we have a multi-pronged approach through diversification because we've had concentration risk at a range of different levels. So we've had it around production sites, around categories, around customers and markets. So we'll continue to seek opportunities to do that in whatever way we feel is most appropriate. We've built category and geographic diversification through acquisition of Dairyworks, and I think that, that's well set up now to progress. Customer diversification is perhaps something that we will look to do within existing categories where we see complementary capability and capacity that's available. So yes, look, we'll continue to see a mix of strategies. I do think that we are well set up to continue to diversify without significant investment coming to the end of an investment cycle. The opportunities are now there. We've largely addressed the site diversification risk that we needed to and category customer and market for that to evolve want to leverage the investments and get returns on the decisions that we've made.

Our next question comes from Marcus Curley from UBS.

I just wanted to start with the guidance, Leon. I just, I suppose when I read through, it sounds like you're referring to quite a big step-up in EBITDA from Everyday Dairy this year coming and flat infant formula volume. So what's the negative delta that keeps the profit flat in the year coming?

Look, I think what we're signaling, Marcus, is that we see Talbot Forest Dairy was contributing circa $15 million to $20 million of EBITDA. By the time you pay the borrowing costs and depreciation on the net assets contribution to NPAT has delved down somewhat. I'll let you do the math on that. The offset is against flat and from formula volumes and a fair amount of unpredictability out there. So yes, that's broadly how we see things evolving.

Is part of the issue, the amount of milk that you're taking in? So this year was up 20%, production was only up 8%. You've got another big increase next year. It sounds like you're going to pump that into commodity-grade ingredients. So is the milk going to be part of a drag on profits this year coming?

Not necessarily. I think the milk doesn't tend to contribute to losses that more gives us opportunity to optimize assets. So we've recruited more milk to step up into our cheese value chain. And similarly, as indicated with Chelsea's question, to optimize our Dunsandel efforts and push a bit more IFB up to Pokeno. So no, it's not a contributor to that drag.

[Operator Instructions] Your next question comes from Tim Hunter from NVR.

Just following up on the debt position. I noticed that you've refinanced some data, and you got quite a bit maturing over the next sort of 12 months or so. Can you give us some guidance on whether you are aiming to just refinance that debt or raise capital?

It's Angela here. Good question. We are looking at a number of different options, and refinancing the debt is certainly one of them. We do have one of our revolver, Revolver A rolling off 1st of October. But we will continue to look at all the options that make sense to look at all the options. And I think we'll make some decisions in due course.

Right. Second question, just around Pokeno. You talked a little bit about the capacity, but can you tell us what the capacity usage of the Pokeno plant was in FY '20 and what it will be when the new customer comes online?

Thanks, Tim. We're obviously not disclosing too much around the customer details at this stage until we finalize that agreement. But look, roughly, you can think about Pokeno as we made about 15,000 tonnes of mix of ingredient and Infant Nutrition this year. If it was running fully Infant Nutrition, it would be about a 35,000-tonne dryer. When you make Infant Nutrition, it's a little bit slower than commodity. So we could probably lift output there if we had a higher mix of just processing milk. But that should give you some indication of the 15,000-metric-tonne and cancel the capacity of that driver this year.

Your next question comes from Kurt Gelsomino from Morgans.

Can you just talk through the second half performance of the liquid milk facility? It looks like it might have swung to -- from a modest first half gross profit to a second half loss. Can you just talk about some of the dynamics going on there and maybe the outlook for the new customer opportunity for that facility also, please?

Yes, sure. Look, we're still commissioning the UHT line there and getting validation of shelf life studies. So as indicated in terms of the contribution of that asset, FY '22 and beyond, where we really start to ramp up production and output of the UHT long life line. The fresh milk line continues to make a good solid contribution to the cost base that sits around that. Obviously, when it's running at those sensitive levels without the support of the overhead recoveries from the UHT line, that's a little more sensitive. So it will move from rough contribution to breakeven. And there are sometimes some movements around how we manage and account for cream, and that can be seasonal. So we'll do a bit more digging on that for you and perhaps look back in the one-on-ones.

Awesome. And maybe just a quick final one. Have you quantified at all your external infant formula base powder sales in FY '20 at all?

What do you mean? Could have -- have we quantified. What does quantify mean?

How much in your powders and creams sales volumes this year, how much powder relates to third-party IFB sales?

No, we typically don't quantify the mix within that element for commercial reasons.

Yes. I think in the past, you've only shared that information, but that's okay.

We'll go back and check. I think if you're asking for a split and where we put powders and creams of how much of that is IFB, we don't disclose that for commercial reasons.

Your next question comes from Nick Mar from Macquarie.

Just on the SAMR registrations. You didn't really kind of mention too much about the other Chinese brands. Are you guys still progressing with those? Or have they kind of called it off given the complexity of getting people down this part of the world?

No, they're still in the mix, Nick. They are awaiting a formal side out of SAMR. So we've got much more we can do. They've had approval from a desk-based review by SAMR, and they're subject to a side audit. So yes, just not a lot to do, but sitting and waiting as we start to see how that part of the SAMR license and process may evolve.

Right. And then just in terms of the kind of multinational customer and how we think about that, is it kind of -- is the FY '23 number in terms of when the volumes will start? Or would it start likely earlier on a kind of list and kind of breakeven or breakeven basis, so not financially contributing? And is it kind of safe to assume that down that pathway, you would have kind of gone for maybe volume over margin to get utilization up?

I think it's too early to speculate, Nick, until we finalize the agreement. We're just saying that it will make a positive contribution to earnings in FY '23 and beyond.

Your next question is a follow-up from Marcus Curley from UBS.

Leon, I know the comments you made around a2, but I just wondered if you would offer up what proportion of the business is not exposed to the exclusive manufacturing arrangement. So what -- how much revenue is free to move or not bound to that agreement?

So are you asking how much -- can you just clarify the question again, Marcus?

So my understanding is that under the a2 arrangement, there's an exclusive arrangement over, I think, stage 1 to 3 into Australia and into China, but you do other products for a2. I just wanted to know what proportion of the group sales is not bound to that exclusive component of the a2 agreement.

Your understanding of the exclusivity, as you described it, is correct.

Okay. But is there a material amount of sales that you do, which are not stage 1 to 3 at the moment and into Australia and into China? So what proportion wouldn't be there?

I think it's fair to say that there's not material volumes there. We focus on the underlying exclusive clauses within our contracts. And -- but we don't objectively or explicitly split that out for obvious reasons.

Your next question is a follow-up from Stephen Ridgewell from Craigs.

Just 2 quick ones. First of all, can you give us a bit more color as to what's assumed in terms of lactoferrin pricing in the guidance that you provided?

Yes, sure. We're really pleased that, that business unit has made a strong contribution this year. We've got now about 2/3 of our capacity underwritten with longer-term agreements. It's disclosed in the past that we've got a longer-term agreement for about half of it, but that's now moved a little bit higher as we started to lock in some longer-term agreements of high pricing. So that's giving us a little bit more stability and confidence around the capacity there against quite a bit of volatility. There's been obviously strong demand, particularly out of China for lactoferrin and high-quality lactoferrin, which we produce. So we're still really confident around that. And I think that we can expect that prices will remain relatively robust over the next 12 to 18 months, but we have seen some recent announcements from the industry of additional capacity coming online. So it'll be interesting to see what impact that has in the outturn.

Great. And can you just remind us kind of the timing of the Pokeno court case?

We should expect a decision before Christmas.

There are no further questions at this time. I will now hand back to Mr. Clement for closing remarks.

Great. Well, thanks, everybody, for your questions. I know we'll pick up with many of you in one-on-ones and other group sessions. Very happy for subsequent calls by Hannah if you did want to clarify anything. There's a lot on our result this year. But thank you very much for your time and look forward to catching up in the next few days. Thank you.

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