Synlait Milk Limited (SML) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Synlait's full year results conference call. We know that many of you will be dialing into this call from your homes, as lockdowns continue in certain parts of New Zealand and Australia. We hope you are keeping safe and well during these times. On our call today, we have Synlait's Chair, Graeme Milne; Synlait's Co-Founder, Director and current CEO, John Penno; and Synlait's CFO, Rob Stowell. John will open the call and then hand to Graeme for an update on Grant Watson's appointment as CEO, and our proposed governance changes announced today. Rob will then cover off our financial performance and hand back to John, for an update on our strategy, operational performance and FY '22 outlook. Graeme, John and Rob will be available for questions at the end of the presentation. [Operator Instructions] Over to you, John.

All right. Good morning, everybody. Good to be on the call. We've got a comprehensive slide deck that we put out this morning, and on this call, we don't intend to cover every point in each slide, but are assuming that you've had a moment to get a look. We'll cover the key points and then move to questions-and-answers ahead of some more calls that we have with some of you in the coming days and weeks. Look, clearly, FY '21 [ would ] be very challenging for Synlait, and after 9 straight years of profit, we really are thoroughly disappointed to post our largest financial loss and the only loss we've ever posted as a listed company. That loss is NZD 28.5 million on an NPAT basis, and is NZD 102.8 million delta from our NPAT last year. It's no secret to anyone, that the shape of the business changed dramatically in December, following a very large forecast reduction from a2, and that means that our inventory levels and demand and our outlook needed to be substantially reset. And then during the final quarter of the year, the Board and management worked together to build a really comprehensive picture, not just in the last 12 months but the last 5 years, how the business has developed. As we look to build a robust plan, a comprehensive plan to move the business from where it has got itself, to back to a position of financial strength and pursuing our strategy. And we do hope that today's plan or this announcement today, will give investors, in particular, and our shareholders and our suppliers, confidence in our path forward. You'll hear 5 parts of that plan. Firstly, we will review the strategy and we remain very confident. But execution clearly needs to improve. We've aligned our structure to our strategy, and then Grant, we have appointed as CEO, who we believe is really well suited, not just to the strategy, but to the way that we have structured the business and is used to working with businesses in this structure, and we think we'll be able to drive the results we're looking for. Early in the process, we had to reset our banking arrangements, and we had a very strong relationship with the bank and a strong plan to get ourselves to where we need to be, and Rob will talk to that. Important to that, is making changes to release cash from our inventory, and improve our working capital management, and we'll talk to those things. But most importantly, we've built a robust plan to return to profitability over the next 2 years. And so with that quick summary, I'm going to hand to Graeme to introduce the new CEO, and also talk about governance changes that we had proposed. So Graeme Milne.

Yes, thanks very much, John. Certainly been a difficult year for us. So turning to today's announcements. Firstly, I'm very pleased to announce our new CEO, who will be Grant Watson. Grant has most recently been the CEO of Miraka Dairy Company, and before that, he was at Fonterra for 10 years. He had various roles there, including heading up the global food service, and he worked in Fonterra brands, and he was at one stage, the Managing Director of Tip Top prior to its sale. Prior to that he worked for McDonald's actually for approximately 15 years, and he became the COO for New Zealand. Grant will start with Synlait early in the new year, and he brings a wealth of dairy sector experience, plus a proven track record of success and materially transforming businesses and achieving sustainable results. So it's a great pleasure to welcome Grant to lead our Synlait team. Secondly, I'd like to turn to our Board and announce some changes designed to refresh and strengthen our governance. As announced in 2018 actually, I will stand down from chairing Synlait after 17 years in the role. So that allows room for new talent. But at the same time, the Board has asked me to stay on as an advisor for a period of about 1 year. I'll step down when Grant starts, and our new Chair will be John Penno. John is ideally placed to be our new Chair, while we go through the recovery phase and to assist directly embedding in the new CEO. So our constitution requires that the Board Chair be independent, which John, by way of being a recent CEO, is not. And therefore, there will need to be a temporary change to the constitution. We do see independence's best practice, and therefore John's appointment will be for a relatively short period, something like 1 to 2 years. And finally, filling my position as a new independent director on the Board, will be Paul McGilvary. Paul also brings strong sector experience to the table. Paul has been -- had an international career in dairy. In fact, he reported to me at one stage in London and -- before we returned to New Zealand, and then he became the CEO of HortResearch, which is now Crop and Food. And then the CEO of Tatua, which is certainly the most successful dairy company in New Zealand, dairy co-op at least in New Zealand. And for the last 6 years in his career, he has been in governance. In summary, during the next period, we will retain the experience of John and myself, whilst bringing on the new skills of Grant and Paul. For those of you that have got the slide in front of you, you'll see how the Board will look next year, with John as the Chair and then 3 very strong independent directors in Simon Robertson, Sam Knowles, and of course, Paul McGilvary. And they're complemented by the bright directors being Rutg Richardson, and the 3 directors from Shanghai. So I'm happy to take any questions at the end, but would like to hand over to Rob Stowell. And please note that Rob is no longer the Interim CFO. Rob stepped up in its short notice to the role in May, and has done a great job in difficult times. So the Board was more than happy to confirm him into the permanent role last Friday. So congratulations Rob, and over to you.

Thanks, Graeme and good morning, everyone. Just on Slide 7, well, firstly, obviously, as John and Graeme have mentioned, it's been a very challenging year for Synlait and you could say that COVID had some delays, and it hit it very bad. The graph to the right, I mean, it shows [ supply chain conflict ], what effect, it is exactly what happened to us as we were moving into FY '21, we expected to have almost double or a big increase in sales to what we had the previous year. And we set ourselves up through buying more materials, manning our plants producing base powder, and through the next few months, our consumer product sales dropped around 35%. So that was a big impact that we saw in FY '21 and most of the reason that our result was down. How we have addressed this, we did do a discovery piece of work in the last quarter and we found that there was other underperformance issues in the company and we will talk to little bit about that in the coming slides. Look, the actions taken in the last quarter will strengthen the fundamentals of the business and we'll set it up for success and the future. So the loss was NZD 28.5 million and that was within the guidance range. Just flip to slide #8. We've got the key metrics there. So revenue up to NZD 1.4 billion, up NZD 65 million, that was mainly due to the 12 months of results from Dairyworks up from 4 months the previous year. The EBITDA was down NZD 132 million to NZD 37.3 million. The operating cash flows were down 85% at just NZD 16 million, and our capital expenditure was NZD 140 million, and that was down from the previous year, as we wind down our capital program. Look, there was some good news in this. Our net debt was down just under NZD 480 million. We had expected to be slightly front of that. So that was a little bit better than we anticipated. And our milk price, the total average milk price of NZD 7.82 is our second highest and our base milk price is our third-highest in history. So some good news within that slide. Moving on to Slide #9; what we tried to do here is demonstrate how the result dropped by NZD 102.8 million from NZD 74 million profit we had last year to NZD 28.5 million. And I won't go through this in [indiscernible] amount of detail, but I want to point out a few key areas here. Our infant formula volumes dropped considerably, 35%, and with that, all the production recoveries from net product and costs, the impact was NZD 75.7 million. We split out the stock rebalancing within the [indiscernible] and what that is in FY '20, we reduced around 60,000 tons of infant base powder, and due to the demand downgrade, we had to unwind that back to 19,000 metric tons. So what you basically see is, we made a little bit too much base powder in FY '20 and we had to account for that in FY '21, that hurt us. So basically, those probably are obviously the big impacts and through rest of the end of bridge there, you can see Lactoferrin is a little bit down. That was due to little bit more volume, but with prices softening -- ingredient volumes was up NZD 8.4 million. Now back when we started making infant base powder in FY '21, that milk was diverted to ingredient products. So that's our whole milk powder, skim powder and AMF products. And so they saw a recovery in our profitability on that side. And then the next, which is our ingredients performance, so that's down NZD 20 million. So this is after tax. So that NZD 20 million is made up of a number of factors, some which external factors, so such is the effect that, we now produce butter. So butter prices were very strong in FY '21. So whether that squeezed our margins against the milk price, but also getting all those ingredients products coming through, we just weren't set up for it. So that affected the sales phasing and mix and ultimately, our delivery at the end of the year is combined with the shipping constraints. We ended up finishing the year with 13,000 metric tons of products, which normally we would have sold through in that year. So moving forward, liquids was a little bit down, that's due to the fact that pantry-stocking of milk products was higher in FY '20 than FY '21 and we also commissioned the UHT cream line in this financial year, so that was a little bit down. We expect that to bounce back next year. Consumer Foods contributed NZD 9.4 million. That's essentially the Dairyworks and Talbot Forest business. That was a little bit down on what we expected, and that was due to butter margins being squeezed, with some new entrants to the market. Also a little bit of profitability drag from Talbot Forest Cheese, and some inventory write-downs. Again, some of those items are one-off. We expect them to not occur again next year. So that essentially takes us through to the NZD 28.5 million impact. Now for FY '22, we do see us getting back to robust profitability and what that means, is it's going to take us a couple of years to get that up to the sorts of profitability that we experienced late in FY '21. And some of the reasons that we feel we're going to bounce back reasonably strongly in FY '22, it's because ingredients margin performance will come back. So some of those issues that we encountered in FY '21, we see as being a one-off, and we'll bounce back on that side. Ingredients volumes, so the 13,000 metric tons of product that was sitting in inventory at the end of FY '21, that will come through in FY '22. Our infant base powder production will increase even on conservative volumes, a2 volumes and infant volumes that will bounce back. We have increased lactoferrin volumes next year as well. We're going to have improved Dairyworks contribution. So that will bounce back reasonably strongly next year, is the expectation there. So net operational cost savings, we have looked hard at both Synlait business and also the Dairyworks business, and there is a range of initiatives in there which are happening. And last one there is our sale and leaseback of our Richard Pearse Drive site in Auckland which is canning and blending site. That was a major release we did a couple of weeks ago that delivers NZD 30 million, which we can place it instead, and also will deliver a one-off gain on sale of approximately NZD 17 million. So that's a very quick flyover of [ bridge ] to last year and also some snippets of why we think FY '22 is going to be a lot because of it. Moving forward into page 10, look this is some production and inventory points. So as noted, our production and consumer packaging in infant reduced in FY '21. There was in fact reversing of trends in prior years, our infant base powder was down, directed to whole milk powder and skim milk powder and AMF, and this resulted in a lot of those unplanned ingredient volumes. So that's all in here. Now the key point from this slide to take, is that our ingredient inventories in FY '21, about 30,000 metric tons of [indiscernible], we expect them to come down quite a bit in FY '22. So at least some guidance here, at least 15,000 tons next year. Moving on to slide 11, we have tried to align our business and our business unit performance reporting to the new matrix structure, which we'll talk through shortly. This is a step toward trying to be more transparent, by fixed [indiscernible] on how business units are performing to get greater clarity. So for each area, you can see we've got revenue and sales volume and gross profit per metric ton, and across nutritionals and ingredients, there will be about -- our gross profit per metric ton has come down quite a bit in FY '21. Slide 12, same thing across; the liquids business unit is running at a loss and also the Consumer Foods which includes Dairyworks and some commentary around what we sort of had in there last year. Slide 13 operating costs. Look, the key point here is, we are actually holding our costs [ stated ] against last year. There is an increase back to essentially Dairyworks' full year effect and the other thing to note here, there is recent news of our reorganizational restructuring, where we expect savings of the NZD 10 million and NZD 12 million per annum. We expect around NZD 7 million in FY '22, that all must lead up against the gross margin line. Slide 14, cash flow and capital spend. Look, so our cash -- operating cash flow was obviously low in FY '21 at NZD 16 million. That was mainly due to less consumer packaged infant formula volumes coming through, and also the fact that we didn't sell down the 13,000 tons of ingredient product. We do expect with the work that we've been doing for cash flows to come back strongly in FY '22, we normally have got around NZD 100 million of operating cash flows per annum. We expect it to be a lot stronger than that this year. So as we see -- we also see our capital spend winding down considerably. We still have spent on projects such as our ERP system project, the multinational customer work that's going on Pokeno and have some other in operational CapEx, but that essentially [indiscernible] phases, is phasing down next year, so that's positive and we will now have to pay down some debt this year. On page 15, comments on net debt and bank financing. This is a big focus for us over the last couple of months. Our net debt was down to NZD 479 million, that's still a lot of debt. We have obviously received the equity raise proceeds across this year. We will receive the NZD 30 million proceeds from the sale of our open premises in October this year. So that will help to reduce debt. A covenant limit of debt-to-EBITDA -- total debt-to-EBITDA level is 4.5 times for FY '22. We expect it to be well below this in FY '22, we're tracking really well on that regard so far. And we expect our balance sheet to return to normal metrics within the next 2 years. We obviously, we did our refinancing, debt refinancing this year in the last few months and it has allowed us to have some really good robust facilities out for the next 2 years, so the working capital on that debt extends to 1 year, and we will renew and then we have got the other facilities, that go out to the 1st of October 2023. That's a really secure platform for the business. It gives us increased certainty, and looks really positive, constructive relationships with the bank -- bank with ANZ and BNZ for a pretty long time now and in those relationships were really important, as we work through that phase and I just want to thank the banks for their support over the last couple of months. And that's me, so I'll hand back over to John to talk around strategy.

All right. Thanks Rob. And again, that's a quick skim through a lot of detailed information. We are trying to make sure that we'll be providing everybody with lots of information about the company, as we build our plan to go forward. About our strategy, one of the key things we've done last quarter, is review again our strategy and making sure it remains fit for where we're hitting. The strategy has matured, and it starts from us having a very clear advantage of being a small part of a big and important industry here in New Zealand, and an even smaller part of a very important global industry. And over the life of the company, we have looked to position ourselves within that, under our purpose of doing milk differently for a healthier world. And I hope that people will see, as we work our way through and get into discussion, the work we've done over a very long period of time, positioning our company with respect to leadership and environmental issues, animal welfare issues, which are at the heart of the production need of dairy industry. We think it has set us up very well for the time that the company finds itself in now, and I'll talk a little bit to how we're looking to take advantage of that positioning that we have built up over a long period of time. We remain a growth company and we remain focused on growing our revenue out to NZD 2 billion, to get the scale that we need, but also because we see each of the growth opportunities as profitable in their own right, albeit that we need to make changes to drive those financial outcomes that we would need to achieve and we will talk to that. You'll hear us increasingly talking about the business in 4 parts, as we grow towards that NZD 2 billion of revenue. Ingredients is a very important part of the business, it's where we started and our early profitability was carved out in the ingredient space. So that's our whole milk powder, skim milk powder and AMF that we manufacture to high specifications to key customers. A very small part of the global industry, but something that we can and should do very well and very efficiently, here at our Dunsandel site and on nutritional drives, when they're not being used for base powder. Our nutritional business is at the heart of our business today, where we've built a world class nutritionals business, with everything from product development, the technical capability to be making world-class products, all the way from ingredient sourcing to delivering final packaged consumer products, and what is the most heavily regulated and sensitive product group globally. And we'll talk about both a2 and customer risk, and in terms of the importance that that will continue to play for a long time going forward. Our liquids business is quite different. That is new. It is a new area of business for us, that strategically, we think is very important to develop, because it is the new opportunities and technologies that are being used and increasingly demanded by the markets that are openly accessible to us, that have developed economically, very quickly in the last 30 years. And so we need to be in consumer packed dairy products and foodservice products, to be in a premium end of dairy in those markets, and so this is something we've invested both in R&D and implants and increasingly in business development opportunities, and we continue to believe this will be a very important part of our future. And then finally moving to brand product, learning to work directly with consumers. First in the New Zealand market, with a very clear eye on international opportunities alongside the other elements of the Synlait business, potentially with some of the customers that we have in our B2B business, but also other opportunities that we see developing over time and that has started with the Dairyworks acquisition, and we are increasingly thinking about how we integrate that into our overall operations. So if we think about the year that's been, page 18 gives a little more detail on some of the numbers behind Rob's earlier explanation of what happened through the business, as we dealt with a very large turndown on the forecast outlook for the a2 business, when we were preparing for growth in that part of the business. And the impact that, that had on the financials of the company in FY '21. But that event caused us to look further. As they say, when the tide goes out, the rocks start showing and we did identify -- we took the opportunity to take a very deep look at the way the company had developed, and we ran what we called the Discovery Project inside, where we looked back across all of the metrics, financial and physical through the company over a 5 year period. And what became clear was, firstly the business had been slow to develop than we had planned. While the year reinforced the importance of diversifying, both within our Nutritionals business and also building high earning categories away from our Nutritionals business for the future. Now, it was clear that we've built on costs faster than we had developed that business. And the third thing that was clear, was the use of capital had become sub-optimal. Now, some of that is sort of the same problem, that our large capital projects were completed, delivering capacity well ahead of their ability to onboard. But we've made some choices, where we held those -- that manufacturing capacity in reserve high value opportunities, when perhaps we could have got the plants up and running with lower value products, and then growing into higher value opportunities over time, which had traditionally been our strategy. Beyond that though, our maintenance CapEx has been too high, for what is essentially a new plant [indiscernible] through the business, our oldest pieces of plant, were 13 years old, and we have many parts of the business that are only 5 years old or less. The second area or -- and the third area that we were using too much capital was simply in our accumulation of stock. And again in Rob's presentation, we talk about -- we gave visibility to the accumulation of stock over some years and our plan to bring that stock back to what we see is much more normal levels, which will release cash, to allow us to finish out our capital projects in the next 12 months and see significant debt repayment well beyond net earnings after tax. So I guess the key question that we grappled with in the last quarter is, why did it take this event to figure all this out? And I think that where we landed, was that our structure had not kept pace with our strategy. And so we've gone through quite a big design exercise, where we are moving to a matrix structure, where we are aligning all elements of the business to the customers that we serve. We have broken that into 4 parts, being nutritionals, ingredients, liquid and then our consumer business, which is Dairyworks and acknowledging that each part of that business needs a strategy of its own, not just for status quo, but to deliver highest and best results. So for example, our ingredients business needs to be efficient, focused on yield, cost, quality, and throughput and must have a simple sales strategy, designed to optimize product mix where we can, optimize plant throughput and keep our cost structures low. Our nutritionals business on the other hand must be very quality focused and will bring a much higher cost structure because of the demanding nature of those products. But it's big enough to stand on its own, and to have a management structure for manufacturing and supply chain all the way through, that is focused on those customers and on that part of the business, to avoid costs moving into -- unnecessarily moving into other parts of the business. And then our liquids business, which is brand new, and is all about R&D and new customer development and business development again needs quite a different approach to make sure, that that reaches its potential. With Grant, we have chosen someone who not only has deep experience in some of the areas that we have underperformed to the greatest level, he is used to working in these structures, he had led end-to-end processes, as he has developed the International Foodservice business of Fonterra, which has really been one of the big business success stories out of New Zealand in recent years. He understands what it is to make different parts of the business, gain the advantages from working as [ part of a whole ]. But with the focus on outcomes that each area needs and that said, we believe we will see significant improvement and performance over time. So if I go to the -- just a quick update on these 4 areas. Firstly, our ingredients business as Rob said, we undersold last year. We had some issues both in price and phasing, as we had some quite large changes to plan, that flowed from a big change in plan mid-year to make much less base powder and therefore we had milk flowing to Ingredients. Our plan is to grow our ingredients business a little bit. We see there are some planned efficiencies we can achieve, and with Pokeno coming onstream and Dunsandel D3, which is our third nutritional drier here, we can retire D2, our second drier to ingredients and save some costs and gain some efficiency and overtime, process raw milk to manufacture more ingredients, and the marginal return or extra product coming through the system are very high. We are also very focused on our Made With Better Milk program. This was launched in the last 12 months, with an explicit aim of helping or developing the opportunity that we have built over many years, working with our farmers to be using leading practice around environmental management, animal welfare, the way they work with the people on farm and of course the quality of the product. And what we see from our large multinational customers, in particular, are some very bold promises that they are making their consumers, in terms of the way they will work in the world and down through supply chains, and we see ourselves as extremely well-positioned to partner with them, in terms of delivering products with known authentic traceability back to farm practice, that is better for people and better for planet. And we see it turning into some quite significant financial opportunities for us. If we go to our nutritionals business, the a2 Milk Company remains our most important customer, and we expect this to be the case for some time. We are continuing to work with them on new product opportunities. But of course, the most important thing, probably in our whole company is making sure that we achieve the regulatory authorities from China to continue building this business in partnership with a2, supporting them, as they build the brand going forward. We're working very closely with a2 on that process. We have provided some visibility to the timelines required to move their way through the regulatory process and I can confirm that we're well prepared and we are confident in achieving a good outcome there, over the next 12 months. If we go to page 24, we want to give just a little bit more visibility to our second major customer for our Nutritionals business. During the last 12 months, we -- in November 2020, we signed an agreement. We can't name this customer for -- they are a listed company. This is some of the confidentiality arrangements we have with them, at this point we are unable to name them. But what we can say, is they are a major international, multinational and a global leader 00 globally, but especially in the Asia-Pacific region. Their product grouping has been growing very quickly in the last few years, and we are working with them on what is -- what we expect to be a very long-term relationship to manufacture a group of consumer packed nutritional products, and that will be centered on the Pokeno plant. We would expect -- we are working -- you will see from the timeline there, that there is quite a lot of work and I would note a slightly higher CapEx requirement than we had earlier indicated, being NZD 85 million, as we reset not only the Pokeno plant, but also our blending and canning operation at RPD, and build a flexible sachet filling line, a high quality sachet filling line, which will be built on the Pokeno site in the next 12 months. And once that all comes on, we would expect to see our consumer packed volumes increase between 35% and 40% at that time. So those are customers that will bring significant volume from startup, and then we see opportunity to continue to grow that business from that point. On page 25, we are making -- what we are seeing is, in the same way that we saw base powder volumes going down, third party base powder, the volumes that had we used to manufacture for our third party customers, particularly multinational slip away and it's being driven by quite a big change in the Chinese domestic market. Over the past 2 years, the top 10 local brands have grown significantly in terms of their market share, and that has been at the expense of the multinationals. What we're seeing is new demand coming from China for base powder manufacture to some of those multinationals, for products that we can see in there under the current set of regulation -- under the current regulatory regime, and we see that as quite promising and we are engaged with some customers, but we would expect to generate some significant volume. On page 26, I talk to our liquid business, this is new, it is a small part of the business that started out with fresh milk supply to Foodstuffs in the South Island. You will see there, we're about to launch what we see is quite an innovative product that we've been working on for some time, there is a Swappa Bottle where we -- which we are trying in the coming weeks with Foodstuffs South Island. We expect to be -- all going to plan, we expect to roll that out. That is a high margin product, as a product that has a very low environmental footprint with a container that has become the benchmark in terms of food quality and stainless steel, and one that we see having a very long shelf life, that's backed by I think social media marketing program, where people can watch the bottle, how many times it has been returned. And we're looking for the change that people have gone through, as we're got used to not carrying plastic bags out to supermarket, but taking our bags back to the supermarket is sort of a major cultural shift. We think we have seen this happening in offshore markets, we think that will happen here. So a very important positioning point for us, certainly going forward. You will also see UHT product, our UHT whipping cream product there, where we are deep in negotiations with a key distributor for the Chinese market, and something that of course that coming CEO will bring huge -- a huge depth of experience in terms of developing that important and high opportunity or a high potential opportunity. Consumer Foods, Dairyworks; Dairyworks has underperformed in the last 12 months for a specific reason, and that is that our Talbot Forest Cheese operation, has not been operating profitably. As it has been operating significantly -- at a significant loss and we have made the choice to close that factory for 2 years, while we go through some changes that we need to make to bring it back in profitably involving recovery of way here at the Dunsandel plant. So we are making a significant cost saving in the next 2 years, and then expect to bring it back to production in a profitable way. I am going to turn now briefly to page 29 and talk to our full year guidance. So we're not putting a number on this, but what we are saying, is that we expect to return to robust profitability in FY '22. And what that's based on is firstly, return to normal trading conditions and tighter management of our ingredients business. As Rob said, we will also expect higher volumes flowing into that business, which is a product that was not sold or shipped in the last 12 months, as we bring down inventory. The second is, we expect improved infant formula base powder volumes and that is even when our key -- if we don't have growth in our IF, in our finished infant formula business, we're still going to see improved base powder volumes, and we do see potential for growth into the Chinese market, and so at this financial year. We see a growing contribution from our Liquids and Consumer Foods business over the next 12 months, and there are significant and targeted cost savings, and these are coming from Synlait Dairyworks and Talbot Forest Cheese. In the media, you will have seen us and the people that are talking about the cost savings that are flowing from Synlait, but we are also seeing cost savings and release of inventory, providing cash from the Dairyworks business and the Talbot Forest Cheese businesses as well. We see that profit continuing to build through FY '23, as we ramp up our new customer at the Pokeno site and ongoing growth, which we expect to see from Liquids and Consumer Foods, and bringing the cheese business back into '24. As Rob explained, and hopefully we've provided sufficient detail that you'll be able to work out how big the numbers are, but we are planning significant reductions in inventory here. Synlait has already started and hence slightly lower net debt than we were projecting back in May at year-end. But that will continue right through the year, and we expect to close at significantly less inventory, both here at Synlait and at Dairyworks at the end of this financial year. That will release cash well in excess of our earnings, and enable us to [indiscernible] CapEx and bring debt down, with a view to bring debt down to ratios that we feel comfortable was, over a 2 year period. So in short, to summarize, we are confident in our immediate outlook. We have reviewed the strategy and I'm very happy to take questions on that, but we've divided up the strategy into its path to improve focus on execution. We have reset the organization with a quite a big change process that we're continuing to work our way through, but the result we confirmed with staff, our plans on Friday. We have appointed a CEO, who we believe, not only is the right CEO to lead the company forward, we believe he is the right person to change the way that we work, with a greater focus on results and to help us run a more complex organization really well into the future. Rob did a great job of getting our banking arrangements reset, and we've got a strong relationship with the bank, we will continue to review our operating performance relative to the expectations. And as Rob said, we started the year reasonably well. We're making changes to release cash and improve our working capital, and most importantly, we have a plan to return to robust profitability as soon as we can. Look, I know that is quite a long presentation and there's a lot more material we didn't cover. So at that point, I'd like to hand over for questions that might be heard from the listeners.

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

I guess maybe starting with the new Nutritionals customer and appreciate the color on volumes and the uplift. I guess what I'm trying to understand is, the volume uplift. I mean what growth is that implying or assumed over the coming years before they actually transition to you, is there any growth assumed or is it all existing business that's coming to get to those levels? And then secondly, the margin on that volume, should we be thinking about it at a similar level to what you're achieving in that segment today, or is there something that we need to be aware of with that?

And I'll get Rob to answer the margin question, but this is -- it's quite a different business than we have worked within the past. A very large -- that has a large position in various markets around the world, and then as part of their own long-term planning, they have a very small number of third-party arrangements they have put in place from time to time and they might tend to work with those parties over long periods. So we're not, it's not reliant on been growing those markets. We have a very good relationship with them. We are constantly looking at the markets that we are preparing to serve with them, and we are looking at their numbers within month to month to month, it's already getting those sort of sales and operational planning processes between us and are already up and running. The numbers that we're talking about, are pretty much where they are now, that could be higher and they are based on existing products and existing markets, and not products that we need to grow to get to those volumes. I'll hand over to Rob to talk to margins.

Chelsea, look obviously, there are some commercial sensitivities around this. But what I will say is, they are hell of a lot higher than our ingredients products, and a little bit lower than what our current nutritional products are priced at. So good -- really good value-added business. It's slightly different business though, and that they bring more to the partnership than we're used to. So they will -- it's not exactly like-for-like for the things we're doing. So in terms of -- there's various things in the supply chain, but we are making it a little bit different.

Helpful color. And second question on Dairyworks. So I appreciate you've called out a few one-offs and things that are going to change going forward. I mean, is there a -- if you took out the Talbot's loss and the inventory write-down, what's the go forward EBITDA that you would have had in FY '21 as a sort of a baseline for us to understand thinking into FY '22?

Okay. So how big is the drag and Talbot Forest Cheese that's been -- and that tends the consolidated into the Dairyworks number, I'm asking that question to Rob.

Yes.

Okay. Look I think it's not hugely material and that's part of it, Chelsea. I think we were giving guidance around that business being between NZD 15 million and NZD 20 million EBITDA previously. Obviously, we haven't got this year, that we speak to be well within inside that range going forward and with the measures that we've taken in the last few months.

Got it.

Yes, and just add to that, I'll point to -- and the guidance we talked about significant cost savings, not just here at Dunsandel, which are the ones that it would be a little more public about but also within the Dairyworks business and at Talbot Forest. So there's has been significant cost savings achieved in both of those business in recent months.

Your next question comes from Adrian Allbon from Jarden.

John and Rob, just the first question around the nutritionals going into FY '22. Like if you sort of take the risk, stock is on here in the mid-trades and the uplift that you are sort of signaling from the [indiscernible] production volumes. Is it fair to say like this sort of the consumer packed volumes are sort of assume to be sort of flat year-on-year with a net or as we have come out sort of for change in both inflation with A2 at in the mix, I presume given the volumes, a lot more for the suit level?

Our out term assumptions for our existing finished infant formula business are reasonably conservative. We need to make sure that we are able to meet any uplift or growth in demand that might come through, but it's probably fair to say, internally, we're being a little bit more conservative than the market is at the moment, but I don't think that's because we have a bit of view of where the market might go, and actually we have grown in confidence in the way that a2 managing their business and developing the market in the way they think well. I think that we would be quite positive about that. But we had felt that it's prudent to make sure that we manage our business pretty conservatively and base and financial predictions around a pretty conservative set of numbers given the year we've just had. So we're not -- when we talk about returning to robust profitability, it is not expecting any significant increase in the volumes on the last 12 months.

Just saying sort of just conservative capital, so as -- in terms of the inventory reduction like, you had sort of pointed consider that spike for the financial pretty clear as that attained and the way that you are in the [indiscernible] or as the professional look to sell out, is it sort of fair to say that you've got the benefits an uplift.

Generally, it's just that's bulwark effect that we've been talking about now for quite a few months and our business to get manufacturing efficiencies we have been building up quite large volumes of work in progress of both powder, which is blended into final products as a second step and with the current outlook, we don't need -- we don't make anything like as much as we turned out, we don't make as much as we had on hand. It's not financially as efficient to have so much on hand, and so we've run that right net down and that's part of the story, but if you look at, there is a detailed graph of the year that had begun through FY '21. So FY '21 with really started to run those tariff that's what had quite a big impact on our fixed cost recoveries or net-zero. And when we talk about fixed cost recoveries in the genuine cost of sales in the business and that we're only now we're really seeing it through the restructuring that we've just undertaken or we're -- and the choice of undertaking. So we've maintained a cost structure that's been high enough to do much more product, we're taking that out of the business that's really internal planning and processes it's not a new agreement what I told we're able to make an agreement and obligations and they provide it's -- and somewhat it's probably be a providing the most fresh or bigger product and then we have been able to in the past.

And we did see a recovery in basic volumes, then we definitely got the capability to ramp up base powder production very quickly, still.

Okay, that's specific. And maybe the same question for Grant for you well. Are you able to sort of -- just in terms of the [indiscernible] is it mostly just the fact that we sold a little bit more of the excess volumes only when you're expecting? And then, just related to that, can you give us sort of an indication of the CapEx for the year here and then how is the review of the basement CapEx plan so too high, what should be the sort of legal [indiscernible] going forward?

Yes. Adrian, so how they see the capital expenditure one faced, our capital expenditure for next year is going to be circa NZD 90 million to NZD 100 million. So again I'll step down on this year, we'll stoke out and the Pokeno, multinational customer project to finish off. We still got the team who -- project to finish off and a couple of other things. The operational CapEx for the business, if you include both Synlait and Dairyworks should really be setting under NZD 20 million per annum and likely to see a little bit lower than that, post co, but year-on-year we're around NZD 20 million. We still will have to invest in technology and dairy products going forward, but we're conscious of that. With regards to the net debt, the main reason that we came in a little bit low was 2 or 3 factors actually. So our capital spend phased more into FY '20 so hopefully gets published there. We had a better mix of our receivables, our customers during the end of the year, so we got a little bit extra money per year, and this is just on good working capital practices vary in the last little bit basically and what we anticipated a couple of months earlier.

Your next question comes from Nick Mar from Macquarie.

Hey, guys. Just kind of a big picture question. Previously, there was a chatter and talking about a NZD 200 million on a value opportunity across the business. Will you guys kind of sit on the view on that going forward?

Sorry. Could you just repeat that. I didn't quite understand that.

Yes. So it was previously kind of chart looking at the kind of opportunity to increase earning through value across your asset base. So kind of extracting premium margins and kind of shifting that and the number was around NZD 200 million of long-term upside. What's the kind of view whether that's still the kind of a relevant long-term number?

Yes, no, I understand that. Yes, we've done -- we think that number is still robust, we've probably got a slightly different view on how the deliberate more on there has more opportunity around cost savings and efficiency out of their underlying business. We probably, it's fair to say that we --- a little more if you line up that chart which I've just now flicked through to, many of the same things that are working we're just advancing them and giving them a little more visibility. So things like the food service creams, made with the milk, bringing the multinational customer on Pokeno, moving to branded products, formulated liquid Nutrition type products, capturing all of the value of milk components that we use with Talbot. So the same themes are there. We see the same opportunities, we're just getting much more focused on how do we deliver them efficiently and how do we do that while minimizing capital spend. And so we've got -- we've spent enough capital we think to get through that NZD 2 billion in revenue, a lot of these projects, some of them made a little bit more capital. So it's about emphasis and priority. We're certainly prioritizing projects that can be delivered from existing customer systems and processes without any more capital and while making out creating options to make the business more efficient. And what we need to do, we've also got more focus on what we need to do in the different parts and what we need to do in terms of maybe better milk, which is essentially built on our ingredient platform and our Lead With Pride milk supply base has simply developed the customer relationships. We can do that, while increasing throughput and efficiency of our ingredients operations. The customer at Pokeno that's been very much about building the relationship with that customer searching for future opportunities and growth while investing a capital and then the liquid part of the business, you know, things like liquidated formula and some of the liquid branded products. So we have, that's really about picking up the R&D that we've already invested and developing the market opportunities and something that we think that Grant Watson is going to make an enormous contribution to in this time with us. So it's not a U-turn on that at all. It's just how do we deliver to it quickly and how do we get, and without increasing cost structures and particularly, without spending any more capital amount to it.

Okay, great answer. And then in terms of -- just a question on the 35% to 40% uplift from the multinational customer. Is that against the current level of expected production in your business or is that against your FY '24 expectations, if that customer wasn't there?

That's against our FY '24 expectations. However, we are taking a reasonable concern and view in terms of our way to it. So we've got a conservative outlook for other customers, it's -- but it is against where we expect to be in FY '24.

Okay. Right. Thank you.

Just to be clear that we expect a slow build from other customers, not a decline.

Your next question comes from Stephen Ridgewell from Craigs Investment Partners.

Yes, I should say. But, first question is for John. I just wanted to clarify that with the debt structure refreshed that the outlook provided today, that the Board doesn't see the need for additional equity to fund the company's operation and CapEx plans over the next couple of years, so it hasn't been a reference explicitly?

No. Good question. No, we don't. So I'm sure that as you work your way into the detail provided and look at the magnitude of unwind that we can get out of inventory that use and the cash flows that we expect in the next 12 months that you feel comfortable with that. We've got to hit our numbers, but we've set up always be conservative see the numbers to hit and we are on track. So no, we don't expect to raise capital in the next 12 months.

That's helpful. And if the company was to raise capital down the track, I mean what would be the potential uses of that capital. I just, sort of, in light of the trend in the last few years of kind of diversifying operations away from the a2 relationship. What would be that from primary uses?

Well, it's not in the plan at the moment. So we -- this is a plan to make sure we deliver the opportunities out of the capital that we've already spent and that is in 3 places that's in plants and equipment, that's in business, it's a product of Business Development and of course it is quite important to all this is underlying ERP system that we're moving to a set-based system that's been quite large investment that is going to be put in place in December. So we see significant growth and the categories that we've laid out ahead of us without the need to spend more capital, so we don't have a plan to raise capital at any point because we see debt coming down reasonably quickly, while we grow out these other areas of business and for the next product foreseeable future anyway our focus is going to be on delivering from the capital and the strategy that has been spent rather than hitting at the New Year as a business.

That's great. And maybe just one last one from me just also on the -- sort of medium term kind of outlook, it's a 20% return on capital still a realistic target for us to think about John or is it was the board and the strategic review, suggesting returns a bit lower than that and can you just share your thinking about with us what you think Synlait what return to come in on a medium-term basis relative to its industry and peers?

I'll hand that to Rob.

Hello. Look, we will definitely be wanting to get close to that number. We -- obviously any new business that we come across will be at that -- but actually, obviously we need to kind of work back into that sort of range.

Okay, maybe...

If we go to a higher level, the company is well-positioned in terms of the high value opportunities in the industry and we are a very small part of a very large industry and so just as we got used to showing early in the life of the company, very good returns to the capital that we invested. We do think that we're well positioned to get back to there, whether it's through improving the ingredients business by capitalizing on the investments that we've made and discipline in the quality of the supply chain and now we're investing with farmers in terms of new Labor Pride programs and the other differentiated Milk programs that we have in place. Nutritionals business we think has a strong future and we -- that the main effect that we've landed customer is points to the fact that these sales were recognized as one global leaders in terms of manufacturing these products if, you know, we're very proud to be sitting alongside the third-party manufacturers globally. These are all the other companies that in the companies that we've aspired to be the limited number of third-party manufacturers of that customer chooses to work with and then our liquids business, we think that there is a very exciting future there as we build perhaps our own future and some of their exciting products that we have developed. So if you look across the space, we're not -- and lower return in categories of the industry, we are in high return and categories of our industry and it's over to us to make those investments. And by building the company in the first place and in the way that we've set it up to make those work and we think that we can.

Your next question comes from Marcus Curley from UBS.

I just wondered if you could talk to what you think normal returns look like maybe at a gross margin per ton and ingredients, obviously that's, yes, obviously the reference in terms of where the business could be hitting this year.

Okay. Rob to talk to -- but with the graph the that where we sort of disclose some of our products per ton and historic terms. But if you know that it's certainly a big pull down, a big decline on FY -- on the previous year in FY '21 but I guess the point that we're trying to make is I don't know discovery work, it's pretty clear that even by FY '20 we had a cost structure coming into that part of the business that was higher than it needs to be. And so we would see, I would like to think that we'll see a rebuild to back to where we've been historically and was made with better Milk particularly further.

Yes. I mean I think that's pretty good explanation from John, but there's a lot of moving parts in here Marcus around how well utilized the plants are. We've got plans to fill up our plants further, pulls the cost efficiencies that we're working on at the moment and yield efficiencies will mean that we'll get back to what we've been used to in the past, we have much more robust returns for our ingredients. So I think there's a lot of one-offs in FY '21, but that you will see explained in the back.

Do you think potential inventory cost headwinds are a problem for the Ingredients business, particularly in the first half?

What do you mean by inventory costs, Marcus?

Well, I suppose Fonterra talked to the fact that, yes, the last quarter of the year was particularly high, milk price, if they fell sharply, I think it's reasonable to assume that you've got high cost inventory heading into the first half, do you think that's a -- is that a material impact for you in terms of the expectation for the Ingredients business this year?

Look, to be honest, yes, the way that you explained it, that is as higher costs, products, Marcus as we head into the year. I mean, most of that product that we held at year-end has been sold through already and as we move through the whole of FY '22, that product really relatively immaterial is probably about team.

Okay. And secondly, could you talk to the performance of lactoferrin obviously with the new consolidation and you can see the lactoferrin result. I just wondered if you could talk at least directionally to what happened on gross margin per ton, within that category in the last 12 months?

Yes. Look, yes, sure. So the lactoferrin business is still fairly successful and really strong. Volume-wise, we added another 3 tonnes onto what we sold the previous year. So that was good how we have -- we did see some softening and pricing, which means that our margins actually came back a little bit, anything you can say that on the bridge and within the pack. So lactoferrin business will continue to be really important for us in '22 and beyond, Marcus.

Are you seeing that stabilize, on a gross margin per ton basis?

Yes, I think it's fair to say we are that, there's been a lot of talk about large lactoferrin capacity coming to the market, but there is more and more lactoferrin being built into product and as it should be. It's a great product and actually it brings and performing closer to the mother's milk and that's the aim. Our lactoferrin is globally recognized now as one of the latest. We would like to think it's the leading product in the market and so, we're seeing prices are actually a little firm than we were expecting right at the moment.

That does conclude our time for questions. I'll now hand back to Dr. Penno for closing remarks.

Well, thank you very much. Firstly, thank you everybody for the patience. There is a number of investors on this call who have stayed with us through what has been a difficult year. So I acknowledge that and I thank you -- particularly those who invested in capital raising is anticipated in our capital raising and who have been with us, we're very mindful of that. And we're equally mindful that during the year, things turned in a way that we weren't expected. I do hope that through this pack and then the days in which that come people see that we -- both the Board and Management are very focused on bringing the company through this period, returning it quickly to financial strength and then getting back to the business of growing a great New Zealand company that is what we are looking to do. We firmly believe as be it for us and I think everybody took the patience as we work through this, and look forward to the various conversations there to come. Thanks everybody for participating.

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