Synlait Milk Limited (SML) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Synlait Conference Call. [Operator Instructions] I would now like to hand the conference over to Hannah Lynch. Please go ahead.

Good morning, everyone, and welcome to Synlait's Guidance Update conference call. I'm Hannah, as the operator said. I would like to introduce you today to our new CEO and CFO, John Penno and Rob Stowell. I just ask that you keep your questions to 2 per person. John and Rob will provide a couple of opening remarks, and then we'll hand over to questions. John?

All right. Good morning, everybody. Thanks for making the time available to come online and listen in. What I thought I'd do is, firstly, just introduce myself and my role here, given this period of uncertainty that we're in. Then I'd like to introduce Rob Stowell, who's sitting here with me. Then we'll go to the business of the day, the substance of the announcement. And then we'll make sure that we've got plenty of time to answer your questions. So before I start, hello to all the people who we've talked to and worked with in the past, as probably most of you know, I was here as the inaugural CEO of the company for the first 10 years of operations, and have come back. And I've been on the Board since I stepped down as CEO in 2018, and now working with the Board in the role of Chief Executive Officer again. Look, I see -- I do want to just take that moment to clarify the way the Board and I are seeing my appointment. Number one, this is -- while it's an interim role, we're not waiting for anything. This is not a holding pattern. There's a lot of work to do and we're getting straight on with it. The first step is to fully understand our position and today's announcement is really about that. Over the last 3 weeks I've worked pretty hard with the finance team that's in place. As you know, and we'll talk to in a moment, made a change in Chief Financial Officer. And that's all been about getting towards making sure that we can provide good clarity of where we see this year closing out rather than providing a number and then pointing to a bunch of risks that might be going on. So that's the first thing. Second is we need to deeply understand what's happened. Clearly, this is a very disappointing result after 9 straight years of profitability. Some of it is about factors out of our control. But a bunch of it is factors in our control as well. And that's really where we're putting our emphasis, making sure that we deeply understand the things that we as a company have done and the choices that we've made, so that we can build a robust plan going forward again and get back to solid profitability. And we'll talk to that later in the call. And that leads to the third part, after understanding where we are, understanding the reasons we are where we are. That's the foundation for a good, solid plan that we intend to be able to talk to you when we come back in September, closing out the year and talking about the year heading forward. So we'll be able to talk at a high level about FY '22 and our expectations for that, because we can see really that as we -- as some of the big moving parts sort of normalize at the end of this year, we remain confident of a quick return to profitability, and we'll talk about the principles behind that. But we'll talk about the detail when we see you in September. So I know you have lots of questions. Don't be too surprised if we bat those away when we're talking detail on FY '22. Let me introduce Rob. So Rob, you'll hear from in a few minutes. We'll get Rob to give a quick outline of the changes that have led to us making a different forecast for year-end this year. Rob has been with this business for a very long time. In fact, I think he was about our third or fourth employee into Synlait Milk when we were first starting to plan the business many, many years ago. He's been with us for 14 years. He grew -- he came to us after several senior accounting and finance roles offshore, and various entrepreneurial companies. He then worked with us as we grew up the finance team. He sat as 2IC under Nigel Greenwood for a number of years and what -- until about 2014, I think it was. At that point, we basically faced losing Rob to a CFO role outside of the business, and because Nigel was still firmly in the role, so we took roll and put them into various operational roles in the intervening years. He built our planning system, which is still at work today. Then we expanded his role, probably 4 years ago, into General Manager of Operations where he, as well as continuing to oversee those planning functions, he looked after all the supply chain logistics, warehousing, which is a really important part of this business, and has done a great job of managing that for us. He's just come off leading the build of the rail siding and the new warehousing and that's a project which has gone really well. It's come in on time, on budget and is set to deliver the expected business performance improvements from clarifying our logistics program and getting a whole lot of trucks off the road and using rail heading forward from our Dunsandel site. So he's really well -- he understands the business very well from his background from working at senior levels with its colleagues. He's always been an adviser in the finance function. He has been involved in an advisory context in the last 3 weeks as we've -- as I've tried to work with the team and build a clear understanding of our current position. And so he's in a really good position to talk to the points today. So I'm going to hand him the mic in a moment. Just before I do that, the one overview comment that I would make is that for those of you who are going to try and bridge back -- use our comments and bridge back to the last forecast, it's just not quite as clean as that. This is the view that we're taking over the whole year where we've sort of gone back to looking at everything and making sure we fully understand what's going on and presenting -- and we're presenting the most accurate picture we can. So while the number has deteriorated, we don't see it as a recent deterioration in business performance. It's just a clearer view and if you compare the 2 guidance statements, I'd like you to think -- or I'd like you to note that we put a number out with a bunch of risks facing it. This one is we're really looking at those risks, taking what we believe to be a fair view of the risk of those things materializing and putting it into our expected financial results. So you might see that we're facing a bunch of risks here. We're saying this is where we think it's going to land, and we're going to manage it. We're going to manage it as well as we can to do better than that and then make sure we get focused on delivering a much improved result next year. So with that, I'll hand to Rob, and then I'll summarize again before we open up for questions.

Thanks, John. I just want to begin by saying how excited I am to be supporting John in the CFO role. It could be better circumstances. But having worked with John for 14 years with similar styles and having very much a strong passion for the business, I'm looking forward to just to stepping in. So to get into the detail of the release, the first thing we're going to point to is obviously the guidance is between $20 million and $30 million in loss for the group, and there's 3 key things that are driving that result. First one, there are shipping delays, and the shipping delays have been there for some time. But as we move towards July, we've established that they're actually going to get a little bit worse. And that's not helped by the fact that we had a little bit of bulge of quality hold items towards -- in the last quarter as well. So during -- at the end of July, really, we're going to probably have anywhere up to 10,000 tonnes of ingredient product which is not going to be sitting in inventory and which we would normally have sold by year-end. And so that's a drag on our P&L in FY '21. The second aspect, and we noted this again in the March release, is our ingredients business is not performing quite as well as we've seen it perform in the past. And this is down to a few things. Obviously, we had the flip of milk from a2 product and to the ingredients product, but through that, our sales phasing and the volume shift with the increase in volatility in commodity prices has, we think, erode a little bit of value. The market -- sorry, the butter-AMF differential has absolutely been there and will continue to be there through to year-end as well. So that's another drag on our P&L. And the third thing is, as we've moved towards our year-end and we still have the uncertainty around the a2 demand, our base powder assumptions, what we produce and what we hold in stock at the end of the year is a lot lower than what we've had in the past. That, coupled with some extra stock provisioning, has meant another drag. So the other key aspects, you might ask me, what's weighting over those 3 areas. Look, to be honest, that they're reasonably evenly spread across those 3 areas is probably the best way to explain that.

All right. So look, just by closing out the year, we do make a statement that we've got good, strong support from the banking syndicate. We've got waivers for this year, which we think is the appropriate thing to have in place right at the moment. Working with them constructively to get finance in place for next year. We've got some short-term debt rolling off September, October. That was always part of the plan. We feel confident that we'll get that in place. And again, we'll be able to talk about that at year-end. We are not planning on a capital raise. And I know that that's been a question for a number of you. We see a number of the analysts sort of writing to our adequacy. We would encourage you to look backwards through the history of the business. This is a business that when it's running well has good operational cash flows, and we expect that, that will return going into next year as we balance our base powder production with our sales of canned formula. Even if we sell the same volumes that we've achieved in FY '21, we can see a strong return to profit and a strong return to positive cash flows. And our CapEx program is running out. So our CapEx program will be much lower in the coming years. We have largely new plant and equipment that is fit for purpose. And so this is -- we're entering into a time where it's about setting up the plants, making sure that they are operating close to capacity, and a period where we really focus on walking back up that value sort of path again, Project S coming on for Pokeno. Good progress on selling high-value creams into China. Again, a project that we would like to be able to talk to you about some more come September. And a period when we will be balancing up again our CapEx spend. So we feel reasonably confident that we are going to be able to just work our way through this with prudence and careful management. So I'd like to leave it there and turn the call over to any questions that you might have.

[Operator Instructions] Your first question comes from Adrian Allbon from Jarden.

I was wondering if I could ask 2 questions. Maybe the first one for Rob. Just in terms of, I know you sort of see it's difficult to bridge accurately those 3 factors that are sort of driving the business into a loss. But are you able to give us a sense of like the third one, which is the sort of the inventory reset stuff, is that a cash flow impact? Or can you give us sort of a sense of the cash impact of those 3 things? And maybe where you sort of expect your net debt to land for the year-end based on your planning?

Look, firstly, just to answer the cash piece. It's not so much cash, Adrian, it's more a position that we take. Obviously, the stock provisioning is noncash. The infant base powder production piece is, it's a bit of both. Obviously, if we are making less base powder and we're making more ingredient products, then we should be able to cash those ingredients products up. But it needs to be looked at. And with the shipping delays, so if we still can't ship this product, then obviously they're sitting on our balance sheet as well. And we'll have to cash up those products in the first -- the start of the next financial year.

If you let me jump in there, Adrian. If you look at our balance sheet over the last couple years, we have been accumulating increasing amounts of inventory and we'll be working hard to bring that back into balance. That's a big area that we can release cash by making sure our planning systems are working really well. And it will happen naturally as we return to normality after forecasting considerably higher IFC volumes heading into this period, having a lot of inventory and then just having to work our way through that. Taking a more conservative position about where those IFC volumes end up will release cash from inventory. And the shipping delay thing, it's a balance date issue. So the cash will quickly move through those volumes early in the new financial year, but we're going to be pushing them over balance date. And that pulls the -- obviously, that pulls the earnings out of this year's P&L. It also means that we may -- we won't have the cash on the balance sheet. We'll have stock on the balance sheet at year-end. But it will rectify itself pretty quickly as the year closes out. And they're quite big numbers at high commodity prices. They're higher numbers per tonne than you would see perhaps a year ago when commodity prices were considerably lower.

Just -- I appreciate it. Just, like, I sort of had on the, like, I guess, after March, sort of had around -- the net debt around $450 million. Should we be thinking of the net debt being more like $500 million just to sort of give us a sense of the change here?

Yes. We should think of it definitely having a 5 in front of it, Adrian yes.

Okay. So that...

We'll manage the business from here forward with a pretty clear focus on balance sheet and releasing cash where we can. But that's -- if this all pans out, Rob is right, that's about where it will land.

Okay. So we -- so in resetting our numbers, I guess, academically -- not so much academically but for this year-end, we should have the net debt at least starting with the 5, that's what you're sort of saying?

Correct. There's a lot of -- and there's opportunity for us to work our balance sheet a little bit harder going forward as well, Adrian.

Okay. And then just the second question. Obviously, you've been in sort of like a reasonably intense review over the last couple weeks. And the profit sort of -- I know you're sort of saying look backwards and then sort of look forward again, but the profits sort of come from sort of $75 million positive down to sort of minus $20 million to $30 million. And I appreciate like a lot of the plant is new, but there's no sort of impairment sort of testing. Have you looked and discussed that or we're to assume that your review was also indicating, when you discussed with your funding providers, like a pretty confident return to sort of long run earnings power off that asset base?

Yes. Look, we have turned our mind to whether there's anything that we should be impairing and the view is no at this point. Again, we'll test it at year-end, but we have solid plans in place to return the existing plant, the earnings and making the adjustments we need to get much better utilization out of the new pieces of plant, which, again, we'll see earnings come up on those. So the initial view is that we don't see any need to impair good quality assets, with a plan to see them paying their way in the near future.

Okay. Understood.

And I would like to remind people to look backwards, and we've had a good solid track record of that in the past. We have not -- I think it's just the fact that we haven't delivered well on that in the last year or 2. But the way we've traditionally approached these things, you've always seen us with good plant utilization and we'll pretty quickly get back to that.

Our next question comes from Chelsea Leadbetter from Forsyth Barr.

I guess first question for me. In terms of, I guess, John, your view here around some of the internal initiatives that have been talked about to help drive the business forward. I mean I'm just interested in what's actually changed after your review. Have you accelerated anything? Changed tech in any way? Or I guess, it's still relatively early days, but just interested in what change of direction, if any, or acceleration of direction you put in place at this point?

Yes, that's a good question. And so I think the biggest change has been a much greater focus on the near term, right? So we traditionally have been a business -- I think the strategy of the company remains right. You would expect that, right? I have sitting around the Board table. It's an evolution of the strategy that was in place when I was CEO. So I don't think we've got things wrong strategically but I think that our focus on short-term execution hasn't been strong enough. And so on moving management's attention perhaps away from some of the big long-term things that we -- that are sort of not over the horizon, but 2, 3 years away, and getting us really focused again on making sure we're executing in the short-term so that we earn our right to and our way to those other options that come. So there's -- you will have heard about projects like Coringa, which is an execution strategy that Leon and the team put together. And -- but we're sort of steering that right back into the short term.

Okay. So I guess the way of characterizing some of that is almost a back to basics, getting the operational side of things as strong as it can be before we start to think about anything on the horizon?

Exactly yes.

I guess I'm just interested...

So #1, and I do go back to the statement I made at the start, which is what's the job at hand here. The first is clearly understand where we are, and that's what we're talking about today. Clearly understand why we are where we are, and then build a plan off that to turn it around as quickly as we can. There are 3 steps. And the change in emphasis that's happening internally are aligned with those things. Taking a very good look not so much at the things that have happened to us but how we've responded to it. And the things that we've been doing internally that have been -- that we haven't quite executed on our strategy as quickly and cleanly as we might have. Plants aren't full. And the way to make these big plants work well is to make sure that they're operating at or near capacity and then working your way up the value chain over time.

Okay. No, that's helpful. And then just second question for now. You talked a little bit about inventory levels and obviously trying to focus on cash. What -- is there a view internally on what the appropriate levels of inventory or debt level is for this business at this stage?

Look, we'll give you a better view over FY '22 as we discuss that plan. But clearly, we haven't earned -- we're a long way from our earnings target in the last 12 months. That puts pressure on the balance sheet. But we can see things that we can do on the balance sheet to release cash to help us through this little period. And we -- you will see us managing inventory not just to maximize profitability in the next little while but to manage the volume of ingredients we're buying and the amount that we hold on hand at any given time. And it does run back, as you suggested, to getting the basics right. If the manufacturing process is running really well and we're making -- and products are coming out and they're not -- we don't have quality issues to sort our way through, it's much easier to keep stock turn going quickly and to not need to accumulate the volumes of inventory that we have -- that you have seen accumulating on balance sheet over the last year or 2.

So should we be able to see some of this coming into fruition in 1H '22, FY '22? Is that the right way to think about it?

Yes. Look, it's Rob here. Look, absolutely. I mean, I'll give you an example. We -- obviously at the start of the year, this financial year, we were running at much higher demand volumes for a2, and we had a raw material balance there, which was servicing that production and that demand. When the demand came -- reduced significantly at Christmas time, we were left with whole lot of whey protein powder, for example, and that's quite valuable. And so we need to work our way through those balances, and we need to get down to a really efficient inventory level on that side. And it's the same with the base powder. We need to be very careful that we don't make too much base powder because then we could run into expiry issues. And all that sort of stuff can be run more efficiently through into FY '22. It all comes under this category of getting the basics right. Back to basics, run the business really well. You'll see it coming through in profit, balance sheet, in all the places you would expect to.

Your next question comes from Marcus Curley from UBS.

Just 2 as required. John, could you talk a little bit to whether you think any of these issues are significant for next year. I suppose, in particular, you did mention a bit of pressure on ingredients margins, where these products are being sold into China and potentially where commodity prices are. Yes, just keen on understanding, of these 3, any significant flow over to next year?

Yes. Nice to hear from you, Marcus. Look, most of these issues we see as contained in FY '21. The big external factor in terms of the downswing and our volumes of IFC, which actually happened towards the end of the first half. They have had a knock-on effect, but we see it contained into this year. Where we're -- and so we had a lot of milk got diverted into whole milk powder, skim milk powder. And we were already looking at quite significant increases in that because of the extra milk that had come into the business for this year. So our ingredient business grew. And in a year, I'm not going to say it was volatile, it's just that prices came off a bit at the start and then have gone up very strongly in the second half. And if you don't get your phasing quite right, that's where you really fall out. And so it's not a question of us not achieving the margins on a day-to-day basis. I think the team has done a reasonably good job of it and getting good -- we've got a great group of customers. They are usually premium-end products, which can attract the margin on the day. It's just about getting yourselves phasing right. And as we look back, we haven't always done that. We haven't always sold the product -- we haven't always sold to optimum product mix, and we haven't always got our phasing right. And when you run up your models, you don't have to be very far out for it to make a big dent and it has. But the good news is these are things that we can turn around really quickly.

And then just secondly, John, no mention of infant formula in the list of issues. Obviously, we've seen a2 announce a big stock write-down program and a desire to freshen the product being delivered to customers. Has that caused you any issues with your own sort of whey or other ingredients in terms of carrying costs, or your base powder in terms of carrying costs?

No, it's -- ultimately, it's determined by their ordering and offtake of these IFC products. And actually the estimate that was made right back in December about the year-on-year swing in volume was quite close. And so that's why we're not talking about it, Marcus, because this is not a further degradation of volume. This is just financializing the consequences of what happened. But also I think it's just a reality that when the tide goes out, the rocks start showing through, and we've got a clearer idea of some of the other things that have been happening in the business during this phase when it grew very quickly, where we had very good earnings and very good free cash flow, but too much attention went on to one part of the business and not enough on other parts. And we -- what we're looking at as a year where actually, as well as that movement, we've left a lot on the table. And that's why I returned to the 3-step plan here that's rather my assignment is, one, understand where we're at; two, understand why we're there; and three, get a plan in place to turn it around. And that plan is not waiting around until IFC volumes rebuild. That is executing really well on the new customer that we had coming to Pokeno, which we think is -- which we continue to believe is a really exciting opportunity. That opportunity was one that was built up over many, many years by slowly building the relationship. It's one where actually we are going to see genuine diversification and effectively our pediatrics business, a business that is core to the way we have developed the things that we're really good at. So that will bring balance and de-risk us there and brings a key customer for that Pokeno investment. And then making sure our ingredients business works really well. That is -- it's always been a really important part of the business. At times, we've lost sight of that. It's grown in volume. And it is -- I'm not going to say it's grown in importance. It's been important, but perhaps we haven't focused on it as much as we should. It's core. This business makes money because it has a good, solid ingredients business where we buy farmers milk, we make premium ingredient products, and we have a really good range of customers who we sell that to. And then we march up market with higher-value products, the pediatric products, the formulated products that we manufacture and these days take all the way through to finished consumer products for our customers. That remains core. When we do it well, that's a very good earner. But part of the reason that does well is because it's built on that solid ingredients business. And you'll see us getting back to getting those things working really well again.

Your next question comes from Andrew McLennan from Goldman Sachs.

Just 2 quick questions from me, and it certainly sounds like you're reasonably confident in this regard. But just thinking about covenant management in fiscal '22, how comfortable do you feel based on how the business is likely to be running during that period? Do you think that you'll need to continue to manage the banks during that period? And maybe if you could sort of talk to how you expect that mix change, John, you talk about kind of marching up the value curve. I'm just wondering how dramatic the mix might move in fiscal '22?

Look, what you'll see us doing -- when we start talking to our plan in '22, you won't see us making heroic assumptions about big changes. What you'll see the one-off effects that we see contained to FY '21 coming out of the forward projections, right? So number 1, there's been a lot of talk over the last 3 or 4 months about the impact that the unrecovered fixed costs in our formulated dairy business have had, the impact that that's had. That's really that we carried a lot of base powder inventory in. We haven't needed to manufacture very much. And so we've got a lot of unrecovered fixed costs in the business this year. That will be gone. That we will have worked our way through that. And that's a big number, that will return to -- even if we repeat our sales volumes of IFC for next year, you'll see that come right back into the business. Second piece is this ingredient piece that I've been talking about. We see no reason that we won't be able to return to managing that the way that we normally do in the earnings relative to prevailing market conditions return to normal. Now if those 2 things happen, we're back robustly profitable. And then beyond that into '23, that with these coming on with some other opportunities that we're working up, that's when you'll see perhaps us returning to the sort of mix between ingredient and value-add opportunities that you've -- that we've been used to over recent years.

Okay. So just in terms of how you balance out your strategy versus the interest of your major shareholders? Do you see any potential problems in that regard?

No. So 2 major shareholders, firstly, Bright of China. Look, the amount of business that we do with Bright has always been reasonably small. So that's not a big issue. They are largely a financial investor, want to see us doing a good job running the business. That always comes first and foremost. Look, we do a little bit of business with them. Actually, we're talking about a few opportunities at the moment that if they come to fruition, might -- will be a little bit more business than we've done, but it's all commercial arm's-length stuff. Of course, actually, we have the same relationship with a2, a2 almost 20%, but a really important customer because we manufacture such a high proportion of their IFC business, which is so important to their business. So you'll see us continuing to work really closely with a2. Given the landscape that we've got in front of us in terms of volumes, in terms of the strategic imperatives in their business and ours. And a new CEO in place over there. I think you will see us working constructively with them. They've been quite public about their need to build a clearer view of their supply chain, and that will be really important for us because it allows us to plan better, allows us to make sure that we -- that lets us manage our inventory better. I think that we're 100% aligned on those things. And it actually also allows us to serve them better as they have changes in the requirements in terms of offtake volume. So look, I don't see any challenges in where we're heading and the changes you will see us make. I think it will help overcome some of the things that we've learned in the last couple of years. We've just been sort of growing and focusing on that growth for that customer. You'll see us taking a more balanced view across the business going forward.

Your next question comes from [ Maya Sari ] from Radio NZ.

John and Rob, just wondering if you can give any indication on how things are tracking for your forecast milk price? And also any broader message you might want to give farmer suppliers who are potentially concerned by Synlait's performance at the moment?

Yes. Thanks, [ Maya ]. Look, we have -- ultimately, we're a dairy company. And we need strong support from our farmers. The farmers never like to see the company that they're making struggling, and we have this year. But I mean, again, I'd like to remind everybody that we've had 9 straight years of profitability and some really strong profitability, particularly through the last 3 or 4 years. And we see -- this is a story where we see some short-term issues and we see ourselves returning to that position pretty quickly. There's no great change in strategy, working with our farmers to make sure they are doing all they can to add as much value inside the farm gate. Us rewarding them for that. We've always had a promise to our farmers that we will leave them better off in the long run than their alternatives. That remains absolutely true and dear to our hearts. So we're not at all concerned that this will see us deviate from it. But I mean they -- as they should, they'll wait and see what we do. Doesn't really matter at the point what companies say. It's what that number is at the end, and we fully understand that, and we don't believe they'll be disappointed.

So you can say you're confident you can guarantee a competitive milk price? Or what are you saying?

It's not about that. Like some years we do a little better and other years we don't do quite as well. We have some very big premiums that the vast majority of the farmers are part of now. And if you look back at the average milk price Synlait has paid versus others in the market, by and large our farmers have been well rewarded, and we don't see that changing.

Our next question comes from [ David Oxley from ACC ]

Could I just ask just clarifying the scope for the profit rebound in FY '22? You obviously talk to the fact there will be a reversal of the fixed overhead under recovery issue with regard to IFC as you won't be entering the year with such a large inventory position. I think your predecessor also talked to the fact that if you were able to have better visibility with regard to your ingredient production during the year, things would have been a lot easier. And given that you sort of suggest if we assume IFC volumes are flat, you should have therefore better visibility as to how much ingredients you're going to produce during the year. Could you just give an indication as to whether that second part is likely to be an important driver of a profit rebound? And how that compares to the initial biggie that you mentioned in terms of the fixed overhead recovery issue with regard to the IFC?

Look, again, we'll give further detail when we come together and are able to have a complete view of FY '22 -- sorry, FY '21, and we talk to how we're thinking about FY '22 in September. So we won't -- it's one of those ones that I'll push down the road a little bit. But what we are saying here is that the recovery next year, there's 2 big parts to it. The first is, as you mentioned, the fixed cost recoveries that will get our base powder manufacturing rebalances with -- and forming a canned offtake. And the second is that we see that we'll be able to manage our ingredients business much better. It's probably fair to say that the IFB is more important, but we're seeing some pretty substantial numbers in the ingredients underperformance this year and the magnitude of that rebuild next year. Some of that is things that we've done to ourselves. Some of it is just if you have a big volume that pushes over balance date because of shipping delays, the earnings from that and the cash from that don't come in until -- it might be a matter of weeks after balance date, but that's not there in the year-end accounts.

Your next question comes from Jonathan Snape from Bell Potter.

Just a couple of questions. And if I can do one on '22, and I know you're kind of kicking a lot of these down the road. But I just want to make sure if I've got the main moving parts, right, in terms of the bounce-back. It sounds like a lot of these $20 million to $30 million that you're calling out today is largely one-off or timing issues. So feasibly, you should get that back plus you should be getting a recognition of margin in addition coming into next year's number. I think before, you've spoken about $22 million in cost initiatives, and I'm imagining you're still pretty comfortable with that number that's out there. And if not, love to hear why not. And then as well on the ingredients side of the equation, I think AMF and butter seemed to, in the last couple of trading sessions anyway, gone back to kind of their historical averages, and you would, I suspect, try and hope to get that back in there as well. I mean if all those 3 things kind of unwind, I mean, you start to get those numbers that you're kind of talking about a big bounce-back in profitability on flat volumes for IFC, would that be the, I guess, a ballpark way of thinking about, I guess, moving parts without having to put too much into other bits?

Yes, I think that's a reasonable way of thinking about it, Jon.

Okay. And then following on from that, I know you mentioned covenant waivers for this year. Are you able to say how far they've given you waivers for? I think before you used to talk about 4x total debt-to-EBITDA to a 3x ex the bond. Is that kind of still the thinking of where the business has to get back to, say, in 12 months' time or 18 months' time?

Jon, it's Rob here. Look, yes, we've gained waivers and at the moment we're in a process to really stress-test our P&L -- our full P&L, and balance sheet and discuss that internally and with the bank. So we're working through that. There's a lot of moving parts, as you know. But we'll be wanting to make sure that those forecasts are conservative enough and we've got enough headroom within both our facilities and banking covenants to make through FY '22 comfortably and beyond.

[Operator Instructions] You now have a follow-up question from Adrian Allbon from Jarden.

John and Rob, just wondering, can you just comment on -- obviously this is like as we sort of look forward from here over the sort of next 6 to 12 months, can you just sort of give us an update on what's sort of going on on the regulatory front? Like what sort of renewals you have to get on behalf of a2? Like what other sort of outstandings are on that part of the business?

Yes. Look, nothing's changed there, Adrian. We are continuing to work towards the same dates that we've been talking to. It's a really important project for us, obviously, in terms of making sure that we get those renewals done. We have to be mindful that we're in a COVID environment where travel isn't going on, but there's been good progress in terms of -- between the New Zealand government and China just to make sure that, that is going to be achievable through the regulatory groups working together. We're not -- so I don't think there's any change in the way that we're looking at those risks or the way we're managing them. What is there is that we still have other processes in place, which may open up other areas of business beyond the work that we're doing at the moment, again, going back in history, for those -- for more products, more brand slots. That's actually still in play. But I'm just starting to turn my mind back with our team to how we position well -- position the company properly with those things underneath the all-important of the objective of making sure that we maintain our regulatory approval for the China product for a2. But we don't have anything particularly to point to in terms of additional concern there.

And just for a reminder, what is that sort of milestone date for the China label?

I think it's about 18 months away. But again, just look back to what we said last time because I haven't got that. I'm not across everything after 3 weeks and that's why [indiscernible] is not one of the things.

Adrian, we've loosely signaled mid-2022.

Yes, yes.

Okay.

I do know there's a lot of work going on, and they're not too worried about getting their way to that.

Our next question comes from Nick Mar from Macquarie.

Just on the update today. Any of the stuff that you've done around talking about a more conservative approach to things like year-end inventory, is that at all kind of, I guess, to actively push earnings into '22 to obviously help make those covenants a little bit easier given you've already waived the '21 covenant?

That's a really good question, Nick. No, we're not putting any attention on that. It's really just about making sure that we're being realistic about the volume and value of the inventory. And it's more than -- I mean it's actually about standing back and thinking about our balance sheet, thinking about where we can release cash from, making sure that we're sort of managing through this period sensibly and conservatively. It goes to the overall theme of this call, I hope, which is we're looking at ways to get our sales up, get our cost structure down and make sure that we're not committing more capital than we need to. Some of those basic things that businesses need to do to run well that we've taken our eye off the ball through the years when we were growing fast and earning plenty of money and committing capital.

Okay. Cool. And then obviously, you're kind of back in the old role, and you've been on the Board. Is there anything, from what you've seen, any assets that you would consider selling over the next kind of 12 months?

Look, at these moments, of course, you've got to look across the portfolio of assets that we have. You won't see us selling any strategic assets. But if we're holding assets that we don't need to, of course, we'd have to consider that as a way of making sure that we make that balance sheet work a bit harder. And that's 100% in line with what I've just said, how do we get our sales going well, how do we manage our costs and how do we make sure that we're not committing capital that we don't need to.

So which assets are nonstrategic?

I'm not going to be drawn on that, Nick. Good question though. Look, I mean, there won't be big material assets. They're not big parts of the -- we're not looking at selling off big parts of the business or anything, but pieces of property or land or things like that would have to be -- we would have to -- you'll see us thinking about.

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

All right. Thanks, everybody. Thanks for your thought and comments. And one thing that we will be doing is looking to catch up with a number of you in a couple of weeks' time when Rob and I have sort of got -- Rob's been in the role for a week now. I've been in here for a couple of weeks. Look, we do -- given the number of changes that have gone on with this, we do want to give people the chance to sort of sit down and talk to us further about FY '21 and, as far as we can, FY '22 and then leading into a normal roadshow after we close out the year in September. So I do look forward to catching up with you and getting your ongoing observations of the business. So thank you very much for your time today.

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