Synlait Milk Limited (SML) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Synlait FY '22 Full Year Results briefing. [Operator Instructions] I would now like to hand the conference over to Hannah Lynch, Head of Corporate Affairs and Brand. Please go ahead.

Good morning, everyone, and welcome to Synlait's full year results conference call. Our CEO, Grant Watson; and our CFO, Rob Stowell, will shortly take you through the presentation, which includes a summary on our financial performance and refreshed strategy. We'll then open for Q&A at the end of the presentation and ask if you could please limit your questions to 2 per person. The presentation will take around 40 minutes. If you have any additional follow-up not answered on the call today, please feel free to reach out to me directly. Otherwise, we look forward to connecting with many of you over the coming weeks in person. Over to you Grant.

[Foreign Language] It is my pleasure to take you through our FY '22 results. We've certainly made significant progress in the last 12 months, acknowledging that we are on yet into a 2-year recovery program. The key takeaways from today -- our return to robust profitability is on track. EBITDA is up $91.8 million to $129.1 million. Our balance sheet returned to normal metrics, net debt-to-EBITDA ratio of 2.6, enabled by strong operating cash flows and inventory reduction. We've reviewed our Synlait strategy and executive leadership team structure. On the 1st of August, we successfully implemented SAP. Commercial production is on track to start in early 2023 for our Synlait Pokeno’s multinational customer. And last week we launched our Foodservice cream up into China under JOYHANA brand in partnership with Savencia Group. [indiscernible] was delivered whilst navigating omicron. Our team's commitment to keeping our people safe, keeping their families safe and keeping our facilities running was nothing less than inspiring. Our response resulted in no more than 5.8% of our team being out of action with COVID at any one time. I'd like to take this opportunity to pay thanks to our staff throughout New Zealand and up in China for their significant contribution in very challenging times. I'd also like to thank the commitment and loyalty of our farmers and the support and understanding of our customers again during this very challenging period. I'd now like to hand over to our CFO, Rob Stowell, to take you through our financial performance.

Thank you, Grant. Good morning to all those online. It's fantastic to see our FY '22 results showing a strong bounce back. Last year, when we set the turnaround plan up and included several key actions to ensure we would return to robust profitability as follows: tighter management of our ingredients business, improved infant base powder volumes, growing contribution from our Beverages & Cream, Dairyworks and Lactoferrin businesses, targeted cost savings from throughout the group, reductions in inventory, capital expenditure and the sale and leaseback of our Auckland premises, which would drive dip down to more comfortable levels. As we move through the next few slides, you'll be able to see we have delivered on all of these actions. Just turning to Slide 4, key financial metrics. Revenue was up 21% to $1.66 billion. That's a new record for us at Synlait. EBITDA was up $91.8 million to $129.1 million, no record but fantastic progress on where we were last year. NPAT is up $67 million to $38.5 million. So a very solid bounce back from the group. Now the adjusted NPAT was $34 million. This was due to 2 significant one-off offsetting impacts. The first was the sale and lease back of our Auckland premises for which contributed a positive $13.4 million NPAT. The second is the offsetting impairment of the group's Temuka cheese plant for $8.8 million NPAT. I'll expand on this in the coming slides. Total average milk price settled at $9.59 per kg milk sellers. This is a record for Synlait and one that we hope make Synlait suppliers very happy. Now this includes a base milk price of $9.30 plus premiums of $0.29. Operating cash was up from only $18.4 million last year to $232.9 million, again, another record and a real highlight to the results. CapEx tracked down 33% to $96.3 million. Pleasing to see this further step down as we had planned. Net debt is down 29% to $341.9 million, Again, great inroads into our debt and probably for me, the highlight of the results, seeing this come down so much in only 12 months. That places that debt ratios into a much more comfortable range, and you can see the listed on the slide. We go to next Slide 5. The improved FY '22 financial performance. This slide really demonstrates both the size of the turnaround and where it came from. If you cast your eyes to the right of the slide, you can see the increase in EBITDA. Below that is an NPAT bridge, showing how we got from our loss of $28.5 million last year to a profit of $38.5 million this year. I'll probably summarize the key factors. Firstly, Ingredients delivered a $43 million margin growth due to product premium attainment, sales phasing and a product mix weighted towards skim milk powder versus whole milk powder. Higher sales volumes from our FY '21 inventory sell down, lower cost structures, strong FX management. The next part is Nutritionals and that delivered $27.2 million margin growth due to higher production of base powders. We also had positive impacts from similar factors of the Ingredients business unit with cost reductions and strong FX performance. Our lactoferrin business continued to perform with a record sales of 37 metric ton, up 4 tonnes from last year. This included very [ firm ] pricing as we see continued strong demand from international infant formula brand owners. Next bar is Beverages & Cream, which delivered $3.4 million margin growth. While we hear some delay in our UHT cream business launch, which only just launched this month, we had some positive impacts due to the cost reductions and pricing model changes within our key liquid milk contracts. Consumer Foods, otherwise known as Dairyworks delivered $7.4 million margin growth due to very good cheese procurement practices, slightly higher sales volumes and again, improved cost structures, including the idling of the Temuka cheese plant. The next bar there offsets, so we had some other income in costs, which we came through. They offset to about $100,000. The key point here is those costs and income were mainly one-off items unique to FY '22. It included such things as some reversals of inventory provisioning and write backs, legal claims, SAP costs that could not be capitalized in higher freight costs. I'll expand on those later. The 2 large bars at the right of the graph, firstly, the sale and leaseback of the Auckland premises, as mentioned, this contributed $11.9 million. Again, it was canvas at our half year results and the sale was completed to take advantage of the hot Auckland property market while maintaining operations and releasing capital for debt repayment. The second is the impairment of the group's Temuka these plants of $12.2 million to reflect the decision taken by management and the Board to idle the plant for another 12 months. Management is going to continue to evaluate when the plant should resume operations. It was planned to continue in FY '23, but it was delayed due to other strategic priorities. Now while this impairment is disappointing, there's a noncash technical accounting treatment under [ IAS 86 ] where impairment needs to be taken when plans for resuming operations are considered uncertain. It does not take away from similar continuing to find a solution over the next 12 months. Moving to Slide 6. Revenues and sales volumes. Overall reported revenue was up 21% to $293 million, which is a great result. This slide gives visibility by business units. The increase was mainly driven by Ingredients, Ingredients business being up 30% with higher dairy commodity prices being the main driver and also 5% higher sales volumes. There was a record volume for us to shift in a challenging supply chain environment. Nutritionals business, up just 2% and this was due mainly to higher input prices, milk, raw materials, offset by 850 metric tons of lower value. Lactoferrin volumes were up 4 metric tons, while not material on a revenue basis, it was material on a margin basis. I should note here that the second half volumes for Nutritionals, we're building nicely compared to our first half. Beverages & Creams was up 22%, due to a relatively small volume increase but a lot higher dairy commodity prices. Revenue would have been higher if we had launched our new UHT product earlier in the year, but this was delayed to the start of FY '23. Consumer Foods or Dairyworks were up 15%. And due to higher commodity prices and 3% increase in volume as a growth focus starts to shift to new products in other geographies such as Australia and Southeast Asia. Turning to production and inventory volumes. Overall production reduced 4% or 8,800 metric tons. This was mainly seen in Ingredients that was mainly driven by higher production of infant base powders displacing ingredients products. Our milk supply was also adversely impacted by weather, some 4% lower milk volumes. We also saw significant cream volumes for good returns as we maximize the skimmed milk powder mix due to price differentials between whole milk powder and [ skimmed milk ]. The AMF plant was fully utilized throughout the year. In Nutritionals, there was a healthy increase of 48% in volumes for both consumer packaged and infant base powder production as we build for an increased demand in the second half of FY '22 and early FY '23. In Beverages & Cream, we saw stable volumes, of production as the UHT Cream product launch was delayed until early FY '23. The decrease in production in Consumer Foods is due primarily due to temporary idling of the Temuka cheese plant. Our closing finished goods inventory saw a massive reduction of 40%. This was down to the sell-down of the ingredients products compared to the high level we had at the start of the financial year. Goods reductions in our cheese inventory is mainly due to the idling of Temuka cheese plant. So just move to Page 8, which is our gross margin performance. Look, this slide unpacks the business by business unit where gross margin was made. In total, our gross margin was up roughly $80 million on last year, now sitting at $146.8 million. This slide really repeats a lot of the summary information that is on Pages 5 to 7. However, it gives some more detail where it shows the progress we have made in each business unit, both in dollar terms and on a per metric ton basis. I won't go through the detail of this slide on this call but the information is for you. Moving forward to Slide 9, operating cost performance. I've mentioned earlier, we've made good performance on cost reduction, cost to group, despite the challenging trading environment. Firstly our organizational reset that we conducted in November last year made savings as they were anticipated to roughly $7 million. And we have investment partially offset or roughly $3 million as we brought on 2 [indiscernible] earlier than anticipated. If demand rise and we also provide an after cycle wage increase to start off and may this year. While most of the savings are above the gross margin line, so I haven't seen any SG&A bridge offset but improved our gross margin performance. We've [indiscernible] $3.5 million of milk cost increased in SG&A overall despite of $3.7 million savings made. I won't go into detail of these but they are outlined on the slide and related areas such as the Talbot Forest Cheese brand relaunch, COVID-19 cost to protect their sites, SAP costs which are noncapitalizable, temporary employee costs and higher distribution costs. Costs will continue to be a focus in FY '23 as the company bids and SAP manages inflation pressure and the trading environment continues to be challenging. Just move to Slide 10, cash flow and net debt. We've made fantastic progress in the space. This has meant we continue to stay well within our extended banking arrangements set out last July. Four points on this slide. Operating cash flows were up to $233 million, up $215 million compared to last year. This was due to much better profitability performance. As noted on previous slides, and careful management of our working capital. We continue to reduce capital expenditure. Currently, we only have 2 major projects in flight. That's our SAP project, which is winding down at the moment and our Synlait Pokeno project, which winds down December. We saw a reduction of $47 million on last year's spend, and we see capital expenditure tracking down to around $70 million for next year. And we believe the operational kind of CapEx envelope is around $20 million to $25 million per year. So we'll continue to track that down. We executed the sale and lease back of our Auckland Land and Buildings in October, which gave us a gain of $17.1 million and brought debt down by $30.1 million. Net debt is down massive number of $137.5 million since last July, that exceeded our expectations as we made faster progress on improving working capital and had leased headwinds than we expected from supply chain disruptions towards the end of the second half. You will also see our guidance note that we are now targeting a lower debt ratio of between 2x and 2.5x for FY '23. If we move to our last slide, I just want to make a couple of points on our debt facilities and banking covenants. Our banking syndicate, which is made up of the ANZ and BNZ have been hugely supportive. And obviously, pleased with the progress that we've made this year and the headroom that's been created within our banking ratios. And banks for their ongoing support. With the progress in our debt reduction in our bank debt up for renewal next year and our retail bonds a year after. We'll be reviewing our capital structure requirements over the next 12 months in detail. Finally, I'd like to thank our long-standing shareholders who have also been very supportive from patient over the last 12 months. That's a mark on the financials. Back over to you Grant to take us through business performance and strategy.

Thank you for that, Rob. Now what I'd like to do is give you a high-level overview of our business performance, our refreshed strategy and give you an update on our outlook. In terms of our business review across the last 12 months, based on business functions and critical projects using the trip light system we used at midyear. Firstly, cost structure review that has been completed, taking some significant cost out of the business and reviewing the organizational structure. Working capital, debt and treasury management, green also cash flow initiatives completed, as explained by Rob. Improved sales phasing and inventory reductions, and again, the sale and lease back of the Richard Pearce property in Auckland. The Ingredients business had a strong financial result. We appointed a new executive into that business and again, look at the structure of that business unit. In the Nutritionals business, recovery of the infant formula business. The lactoferrin business remains strong and all key growth projects are tracking on plan. Dairyworks delivered a very strong financial result and did a great job of improving their working capital position. So some very, very good progress across each of those 5 years where we have [indiscernible] 2 key areas: Beverages & Cream, we did launch that Foodservice product up in China last week. However, the delivery of that project was delayed. We've made significant progress in the last 12 months developing a pipeline of globally recognized customers against UHT consumer product. Capital projects management. CapEx was down in FY '20 -- against FY '21, I should say, as explained by Rob, we implemented SAP albeit delayed in time and an increase in CapEx off the back of that. So Pokeno's new customer is on track. And in terms of the [indiscernible] operations performance, a very, very challenging year. We're in the process of rebuilding operational capability, both manufacturing and dealing with a very challenging supply chain environment. And we are working with the Integrated Work System continues to improvement methodologies to strengthen our position operationally. We are adapting to post-pandemic ways of working, ranging from making set labor shortages and high inflation, geopolitical dynamics and other challenges that I've mentioned. Temuka cheese plant, we've also classified as red, as mentioned by Rob, we've made an intentional decision to continue to idle that plant. And as a result, we've made that impairment. The bit overview of the business units. Our Ingredients business has made a very, very strong recovery, delivering record revenues and record margin. a real focus there on disciplines if they relate to premiums, the phasing of our sales, optimizing product mix and chasing the lead bucket, which has been in favor of skim [indiscernible], delighted to appoint Adam Maxwell and to the role of Director of Ingredients, and you'll continue to see a similar level of focus across the business for the year ahead. Turning to our Nutritionals business. We were very pleased to get the SAMR registration for the old GB standard, which takes us through until the 21st of February in 2023. We're working hard with the a2 Milk company with SAMR and MPI to ensure that we get registration for the new GB standard, which we expect to get at some point next year. We're also working very, very closely with the a2 Milk company around inventory cover as we look to phase out of one product and phase into the new product. And it goes without saying that the SAMR registration process is a very, very top priority across the business. In terms of nutritional base powders, we've built up a very good pipeline of potential future demand. Acknowledging that there has been a slowdown in this space off the back of birth rates slowing down, particularly up in China. Lactoferrin has already mentioned, demand is strong and prices are firm. And then in terms of our multinational customer, up at Pokeno. Product trials are progressing. We're in the final stages of commissioning our CapEx spend and volume expectations remain on track relative to the contract and the tenure of that contract. Commercial production is planned to start in early 2023. In addition, we are working through trials later this year for new product opportunities that relate to the clinical nutrition category. Also worth noting that we're planning to have an Investor Day up in 14th of May in 2023. In terms of the Beverages & Cream business unit, clearly, the launch of our Foodservice cream just last week. We've also -- we're also in the process of commercializing a UHT coffee beverage for an existing multinational customer. As mentioned, we've developed a very, very strong pipeline for consumer products through the UHT line. And in terms of Swappa bottle, we're working through the business case at the moment to understand whether we should scale up that opportunity or not. Does it make a really strong financial sense. We certainly had fantastic consumer feedback of the back of that great piece of innovation. In terms of our Consumer business, so we're talking about dairy works there a really, really strong year for Dairyworks record profit result, $18 million of EBITDA. And that number is exactly on track with the forecast that we used when the business was purchased some 2 years ago. That result was driven by strong procurement disciplines and improvement in the cost structure and increased volumes throughout the business. The business also consolidated their supply chain and lead into one distribution center capturing product and finished goods. During the year, there was a refresh of the Talbot Forest Cheese brand. And in fact, first month, we're now exporting that product over to Australia and have an exclusive arrangement in place with Woolworths in Australia. We launched Spreadable butter in June and the Dairyworks branded milk and cream range was launched late last year, and it's focused primarily on the Foodservice channel. As it relates to sustainability, in terms of our off-farm decarbonization road map, Phase 1 is now completed with 2 significant investments there, 1 relating to a an upgrade of a boiler to biomass and the other one was upgrading our [ EV Max ] electrode boiler while the benefit of that this year is reducing our greenhouse gas emissions by 38,000 tonnes. And once these 2 assets are at peak, we expect to reduce 38,000 tonnes of greenhouse gas from the atmosphere that's expected in FY '26. In terms of on-farm, we've worked closely with our farmers and have incentivized them to reduce greenhouse gases on farm and provided a tool to help enable that. In 2023, we go through a recertification of B Corp and for the first time that will include Dairyworks. Made With Better Milk is a brand that really does capture our sustainability positions right through our value chain was recently launched as well and certainly very, very strong interest off the back of that with a number of customers. If we switch gears now, I'd like to take the opportunity to give you a very, very high-level overview of our refreshed strategy. And we will spend quality time with you at the AGM taking you through more of the detail. In the month of March, we kicked off the process of reviewing our strategies by the 4 business units. This was being signed off by the Board in June. So typically march and June, there was an iterative process with business units in the Board. And in July, we focused on the executional enablers that would drive that strategy. So that work has now been completed. Our next strat refresh will take place and we made in July next year. And in really, really simple terms, our purpose remains the same, doing differently for a healthier world. Our ambitions have changed, and I'll take you through those. And the core pillars of the strategy have also changed, and you'll see I'll take you through those that there is more focus attached to our 4 business unit strategies. Down to that process, really, really simple underlying assumptions. We know that innovation disruption and sustainability is absolutely at the heart of Synlait. However, we acknowledge the need to be more focused to improve execution and improve accountability. We also appreciate that we've been operating in unprecedented crisis environment. Our competitors are improving their performance. We acknowledge the need to deliver diversified growth across channels, customers, categories and geographies, but it's important we do that where we have a clear right to win more a clear competitive advantage. And we recognize the sustainability propositions are no longer and nice to have. In terms of the time horizons that we're working to as I mentioned, we're 1 year into a 2-year recovery program. So this next 12 months is very much around stabilizing our business. Horizon 1 being year 1. Horizon 2 being year 2. We then look to accelerate the business. And then Horizon 3 being used 3 to 5 is then looking at opportunities where we might extend into new territories. So if you're -- briefly taking you through the strategy on the page, it's important to note that this is a consolidation of 4 business unit strategies on a page. And the best way to think about this format is in box #1, we have our ambitions and box #2, it's been really clear on the strong foundations that we have and need to continue to invest behind boxes 3, 4 and 5 being channels, categories and geographies really are the core pillars that relate to strategy. Box 6 being right to win, speaks to the competitive advantage model that we have developed and will continue to develop to ensure with our farmer suppliers we are the best choice as a processer of and exactly the same thinking applies with the customer competitive advantage in terms of being the preferred supply tanner. Box #7, arguably the most important box on the page, deals with the areas that will drive the greatest level of execution across our strategy in work for us to deliver against our ambition. So let me just touch on a few from an ambition perspective, it's about taking the already high standards that we deliver against under the B Corp framework and lifting those up even higher. It's ensuring that we have high staff engagement that from a farmer perspective and from a customer perspective that we have very high levels of satisfaction in that from a return on capital perspective, we deliver a minimum of 15%. In terms of channels, broadly speaking, operating across consumer food service and manufacturing and again, the detail of channels sits within the individual business unit strategies. From a category perspective, base milk powder, Beverages & cream, AMF and butter, cheese, infant and adult nutrition and, of course, lactoferrin. Geographical areas of focus for us very much China, selectively Southeast Asia, Australia and New Zealand. And just to be clear, it doesn't mean to say that we won't technically trade in other market but in terms of where we put our resource, those are the key markets that we are focused on. We'll spend more time together at the AGM going through those competitive advantage models for our farmer suppliers and customers. And when it comes to delivering fantastic execution on farm excellence is critical clearly, customer engagement and staff engagement are both critical. Systems tools and impress respect to the need for us as a real is as an organization. And NPD and NTD, which is new technology developments completed in a very, very disciplined fashion. And we continue our journey of improving manufacturing and supply chain performance. [indiscernible] came back in July with -- we have adjusted our organizational structure to meet the refreshed strategy. You'll see that we have several vacant roles. We're currently working our way through the recruitment for those vacant posts, and we will have a full leadership team in place for the first quarter of 2023. Looking forward, our priorities as a business, no surprise, in being our new executive leadership team, ensuring that we enable the growth agenda of the a2 Milk Company that we commercialize our multinational customer at Pokeno the same license as mentioned, is a critical and top priority across the business, but we continue to grow our Foodservice cream and consumer beverages business, but we stabilized and we continue to adapt to the post-pandemic world that we now live. I'd now like to hand back to Rob Stowell, to briefly take you through our guidance statement.

Thank you, Grant. Look, we've chosen this year to not disclose EBITDA or NPAT guidance at this stage, and that's just due to the level of market volatility and the risks that we see across the next financial year is fully our intention to get back to doing that as soon as possible. So to summarize, what we see carrying next year. Tighter management of our Ingredients business, they will continue. We probably won't have the one-off foreign exchange gain that we experienced this year within the business unit, and we'll continue to divert milk to higher-margin products in the Advanced Nutritional business unit, and consumer's business unit as we see it coming through during the year. We expect the performance of our Advanced Nutritional business there to continue to build nicely throughout FY '23 and new multinational customers will start to lift margins and improve asset utilization, both at Pokeno, but also our Dunsandel liquids facility, and we've seen some good pipeline opportunities that evolve on that plant, which is encouraging. The Consumer Foods business will deliver steady contributions as it maintains growth but also navigates the high cheese commodity prices, their prevalence at the moment. And it will continue to expand overseas, as mentioned throughout our pack into markets like Australia and Southeast Asia. Just setting to some P&L factors, costs will increase modestly. We expect there, and that's due to increasing volumes, but also the fact that we need to stabilize our SAP system over the next few months. There's still high inflation. There's still supply chain pressures, and that's on both sides. So that's on the input side, raw materials and also export. And as Grant mentioned, within our strategy, we will be investing in certain areas of business development and also enable activities within our operations and systems space. Operating cash flows, that will continue to be robust. We'll continue to work hard on them. They won't be at FY '22 levels. They were held by tailwinds of their high inventory in FY '21. So we expect them to still be pretty robust than FY '23. Our debt-to-EBITDA ratio, we placed debt guidance between 2x and 2.5x, that we're targeting. Still relatively conservative, but we think it's a right range to guide on considering on a normalized basis our ratio is at 2.9x at the end of FY '22. Yes, in FY '23, that will be the end of our 2-year recovery. As previously indicated, we intend on exiting FY '23 to end to FY '24 at similar levels of profitability experience before FY '21. So at layman's terms, we expect it to be at similar levels of profitability that we were prior to the downgrade in FY '21. While managing several risks, that includes the SAMR reregistration time line and the stock build there we need to do there, tight labor market, inflation, supply chain pressures. They're all still very much there and could impact our results in FY '23. I will leave it there and hand back over to Grant.

Thank you, Rob. And in terms of next steps before we go to Q&A, our annual meeting will be held on the 2nd of December. At 1:00, you can either attend in person or online. And we'll certainly go through the presentations and make sure that you are fully up to speed with the strategies and give you a sense for some of the execution elements that we're working on as it relates to Advanced Nutrition, Ingredients, consumer and food service. And as mentioned, we will have an Investor Day up at Synlait Pokeno on the 8th of May, including the site tour. And again, you can expect a presence there from a number of our executive leadership team, given presentations and of course, plenty of time for Q&A. So on that note, we'll now open the call up to questions.

[Operator Instructions] Your first question comes from Matt Montgomerie with Forsyth Barr.

Grant and Rob, just checking, you can hear me okay?

We can, Matt.

Yes.

Perfect. Maybe first, if I start on debt. So firstly, well done on another good half of debt reduction. But I guess, looking forward, and just any comments you can make around debt movements for '23 in light of your guidance for the ratio. I appreciate you don't really want to provide a number, but I guess it would be helpful if you could provide some more color around that and potentially comment on the working capital balance today if you see that as a reasonable level going forward, particularly on the inventory front? And then secondly, somewhat related as I guess, the extent of the operating cash flow decline that you're referencing in FY '23?

Yes. Sure thing, Matt. Look, Yes, tricky. We were a little bit conservative in FY '22. I think moving forward into FY '23, there's still uncertainty there. But what I would say is, so if you back calculate the stock that we had on hand on FY '21, that will take a bit of the probably push us right down, probably be above $150 million operating cash flows, but it will be below $200 million. We are expecting to, as mentioned, target around $70 million of capital expenditures. So they will continue to track down as well. So look, we do expect to -- we have a large chunk back off debt at the end of FY '23, which will be good. And I'd like to see us targeting the bottom end of that range. From an inventory point of view, our sustainable was it, Yes. There's still work to do there, to be honest. We have increased our stocks of raw materials because just a bit of insulation around our supply chain pressures. I'd like to see us moderate that back over the course of the year if we can and continue to work on even reducing some of their ingredients inventory. So there's plenty of opportunity there as well. So I think many think it's sustainable. Does that answer the question?

Yes. No, that's useful color. And then maybe if we stick on your guidance commentary. It's slightly changed wording from previously for '23. What does that actually mean in a sense in terms of the exit run rate? Are you essentially saying that you might start FY '23 at a similar run rate to the second half in terms of profitability and then come to say the last quarter you might run at $6 million a month in parallel, similar like you did in FY '20. We're starting at this space today and then ramping through the year rather than saying '23 as a whole will be in line with that pre-capital F '20 level? I just rather opaque, I guess.

Look, the major driver of our profitability is our Nutritionals business. And sorry, we just had some technical questions here. The major driver is our Nutritional business. And what I will say is we expect in the second half of FY '23, the Nutritional volumes start to ramp up to a higher level than what they were in the first half of. And we expect that to continue through into FY '24. So that's really what's driving the profitability there, Matt.

Your next question comes from Nick Mar with Macquarie.

Just a couple. The FX benefits, can you quantify roughly how much that was on a full year basis for ingredients.

Yes. Look, you'll see in our accounts and all of the accounts, you'll see that our foreign exchange rate was very good compared to the industry. The EBITDA amount within ingredients probably sits in the range of around $12 million to $15 million. So reasonably significant in FY '22. What I will say, and I'll just add to we actually feel there's a lot of opportunity within the ingredient space to continue to offset that because we just -- while we did pretty well with our phasing and also our product mix differentials. We could have done a lot better. And they came through in the second half, so that kind of will offset some of that one-off FX position.

Okay. Great. And then on the new UHT cream product, can you just talk through which part of the sort of supply chain and sales you're participating in a purely sort of contract manufacturing for the other party? Or are you participating further than that?

Thanks, Nick. We're effectively manufacturing the product. We jointly own the brand and Savencia, basically have the front end in terms of sales and distribution.

Okay. Great. And can you provide any color around sort of targets you're looking forward for this brand and how big it could grow. It's obviously quite a competitive space for you actually?

Yes. Look, we are really cautious at this stage. And the reason that we -- I mean it's a massive market, right? And there are some very pretty, pretty strong players in the market. We just launched the product. We think that from taste, texture, functionality, we're really, really well positioned to gain some good market share. But look, until we get the product in the kitchens, working with chefs and we see repeat orders come through. We're just very, very cautious to assume what that growth could look like. But we believe we have a very, very competitive product.

Great. And then lastly, just on the ROIC target, can you just talk through the sort of 15% number versus sort of north of 20%, which is the previous management we're targeting. And is it to get there by 27%? Or could you do that? So what's the sort of trajectory of that?

Yes. Thanks, Nick. It's really to get there by FY '27. And I think there is a possibility we could get there sooner definitely. But I just think we need to be conservative on that front. It just depends on how volumes ramp up over time.

Sorry. And just the first part of the question, how it compares to the north of 20% the previous management were targeting?

Yes. We have pulled that level down, Nick. We've just looked at -- looking at our 10-year plans, and we have reduced that outlook.

Yes. So what are the sort of drivers behind that is that the margins are unrealistic, the cost to run the plants, is there any specific factors?

I think the key factor is we're still targeting the same strategy, the same sort of business. We just don't expect it to ramp up quite as quickly as we did previously.

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

And well done on the improved results, and particularly the improved cash flows. I just wanted to talk about your -- a couple of questions on a2 the backup options for the company. I mean you would have seen the result from a2 last month where it's talked to reminded the market that is being the in-source manufacturing margins to a really over the medium term. Can you perhaps just talk a little bit about the degree to which that's already happened. What are your assumptions the degree to which that happens in FY '23 and perhaps over the next few years and the guidance you've provided for EBITDA run rate, except run rate?

Look, clearly, I won't get into too much detail around the commercial arrangements we have with the a2 Milk Company. We've got a very, very good relationship our contract that we have in place certainly allows for a2 to produce their own stage for ANZ. Look we've -- the a2 Milk Company got a very strong plan in place to grow their business, and we are lined up right behind them to enable that growth.

I guess if you sort of think medium term, if a2 does continue to in-source to the extent they seem to be telling their investors they will. Is that exit EBITDA run rate guidance that you've got to this year sustainable? Is that kind of the key question.

Well, look, the guidance is very sustainable. We've got very, very clear demand signals from the a2 Milk Company for the year ahead, so we stand behind our expectations.

Okay. And then just maybe a second question. You've talked to strong progress trying to set a new base powder customers, including China, but no new contracts of note at this point. When would you be hopeful that you might be come to market and perhaps with some new customer wins?

Look, we've got a really healthy pipeline. And certainly, when we have material information to update the market on, we will. The key driver there, Stephen, there's a slowdown in birth rates of the back of COVID. So there's -- it's literally for us just means a slowdown around that expectation that we had say a year ago.

Okay. I sneak in one more, just the capital structure review. When you sort of allude to that, is it going to include consideration of equity side, potentially a dividend policy? Or is that review more focused on kind of a structure?

Stephen, it's Rob here. Look, it's going to include equity or dividend policy. So both debt and dividends will include that within that review. So that's quite a detailed review. I think it's time to do it as we see our debt coming down quite quickly and we look at what we need over the next 3 or 4 years.

Your next question comes from Richard Barwick with CLSA.

Can I just understand or just talk a little bit more about this timing for the new JV recipe approval and what it means for the risks around inventory for Synlait and how that sort of balance of risk sits within Synlait versus a2. Obviously, the later the approval coming through, the greater the difficulty in transitioning from the old recipe inventory to the new recipe inventory. So just be curious to understand or to hear your explanation as to what -- when you're transitioning and you're making the product at what point is a2 on the hook for that inventory versus Synlait because you can you could easily get a situation if this approval comes through very late to that February date. And you've got a lot of inventory under the old registration and not much of the new and you'll have a customer set who will be much more interested in buying than new recipe.

Thank you, Richard. Maybe if I just talk through, firstly, at a very high level, what time frames are that we're working to. So we're currently working, we've been working our way through the technical review process with SAMR so that we put forward a dossier. They request feedback. We work through that together. So that will take place between what is taking place, and we expect that to conclude between now and the end of the year. Next year, we would then expect to be audited by SAMR, which would be effectively carried out by NPI. And at some stage next year, we would expect all things going well. we would expect to get our registration for the new GB standard. So what we've done with a2 is that we've worked a whole range of scenarios as to how those timings could move around. And then off the back of that, what do -- what does a phase ramp-up look like. So obviously, that speaks to the -- need to build up inventory. But before the 21st of February, and then once we get registration on the basis, we get registration, which we're expecting to, we would then be ready with all of the right materials and base powders to then go into production against that new GB standard product. So look, there's no point getting into any detail. We've got one core assumption that we're operating to a number of different iterations around that. And we're confident that between a2 and ourselves we're confident that we'll ensure the market has product on shelves. And look, it's -- we'll manage the risks around transition together in the true spirit of a partnership.

Do you feel that -- I mean, if you look back in relatively recent history, it felt like Synlait got the raw end of the deal on some of those inventory situations with a2 when they pulled back their -- the -- I guess, the sales targets and that put you guys in a very, very difficult position. So and I guess the risks are, you could end up with another difficult situation. Does that -- is the relationship -- is that -- does it take that into account the previous scenario where it felt like Synlait did carry more of the burden than a2.

To say that the learnings have been banked on both sides from the challenges of FY '21. This is such a critically important piece of work for both organizations. So we are joined at the hip on all fronts as to how we navigate our way through this. Again, to ensure that we keep product on shelf up in China through a period of transition.

Your next question comes from Marcus Curley with UBS.

Can we just start with your outlook for the adult nutritional business. Can you -- in previous results, you've given some lease guidance in terms of volume expectations. Can you talk about what would be an appropriate range for this year?

Mark, it's Rob here. You mean nutritional powders at all, nutrition? Is that what you're talking about?

Yes, add on Nutrition at Pokeno.

Yes. Look, that plan that -- the plan is in place to have that commissioned in December, January, we'll start making products on the line. Then we will be exporting product at the end of Q3 of this financial year. The volumes are materially the same as what we anticipated previously, and we're working very hard towards that.

Okay. And the same question on the liquid cream into China. Can you give us any color on your volume expectations for this year?

We're fairly cautious at this stage, Marcus, again. It's really important. We understand how the product responds in the market and get a sense as to what demand could look like. So we're very cautious, but we expect certainly heading into FY '24 that will have businesses growing and will set us up nicely for the future.

And then on lactoferrin, could you talk to the contribution that made at the gross profit level? Or at the very least of directional color on gross profit contribution from lactoferrin FY '22??

Yes. Look, lactoferrin continues to be a really strong contributor, Marcus. It's -- I probably don't want to disclose that at the moment. But if you look at market prices for lactoferrin and look at our volume, it would be quite easy to work it out.

Well, to be fair, there isn't a market benchmark for pricing unless I'm wrong. An indication that we have had as lactoferrin prices are significantly down over the course of the last 18 months.

Yes. Look, -- there is really -- we're seeing really strong events of robust pricing. And the reason we're seeing that is because a lot of the major formal manufacturers putting product into China putting that into their products. And so from our perspective, we're seeing very strong signals from a number of international players. I probably don't want to say anything more than that market at this stage.

And how about on bulk and sent formula. Could you give us any color on the volumes achieved on that part of the business this year?

Those volumes are very small markets. of our old result very small material.

Okay. And then finally, you mentioned, I think, $70-odd million worth of CapEx this year. Could you give us a breakdown of what sits in that?

Look, it's mainly just the tail end of our ERP project, the Pokeno project, and a couple of smaller sustainability projects and an RO project. So we've reversed notes through -- and to the drivers that's going to allow us to process more milk in the future. We signaled that previously. And so that's basically and the rest is operational CapEx and cheese line at Dairyworks.

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

Just first question, I guess following on a little bit from what Mark was asking about the Nutritionals gross margin per tonne. Like if you do take out some an estimate for sort of lactoferrin but it looks like your gm per metric ton for, if you like, the infant formula stuff to 2, it feels like it's sort of either sort of around 1,300 per meter tonne to about 1,500 in the second half. Like it still sort of 45%, 50% down on what you would have been achieving in FY '20. Can you sort of provide like a bit of a bridge on that delta?

Yes. Well, it's hard to apply the details, Adrian. But basically, the key reasons, the margins are lower as our base powder manufacturing engine just still having caught up with the consumer packaging. So in FY '22, at consumer packaging, production was kind of in line with demand, but the base out in well better than the previous year, was no in near what it was being FY '20 when we're building base powders for increased volume for the following year, the following years when the demand was going up. So that's kind of how it works.

Okay. So then -- so given that some of your previous comments, you're sort of saying the volumes have sort of been building nicely through the second half and you're expecting further into '23, like we should assume some leverage back in that in the '23 guidance?

Absolutely. Okay.

Okay. And like -- and in terms of -- sorry, this within the same question, like as in the 2,700 that was sort of like the FY '20 sort of level, like what sort of level -- like is there any sort of reason why it couldn't get back to that?

No. Look, I think -- No, I don't think there is actually, I think providing we can continue to become more efficient as a producer. So we've got the Pokeno site now. So we need to make sure we continue to look at filling that site up and running our plants more efficiently on an Dunsandel as well. It probably just depends on the timing of the inflationary pressures and how that affects wage rates and all that sort of stuff within our cost base as well.

Okay. And maybe a second question, probably more for Grant -- just in terms of some of that strategy refresh stuff on the slides, but you mentioned sort of developing a 10-year asset footprint and '23 and implementing that in Horizon 2. Can you give us a sense of like on that '27 ambition of a sort of return on invested capital import around the 15% mark. Are you thinking about like a sort of stable capital employed number from the sort of $1.1 billion now? Or are you thinking growing that? kind of reducing that with the potential of dividends and stuff like that. But can you just give us a sense of what you're thinking there and what that asset footprint would be.

Yes, sure. The really important point there is that off the back of the refresh strategy we need to give thought to what categories and assets we will invest in. So we'll work through -- we'll work our way through that process in the next 12 months. Certainly, when it comes to the return on capital number that we've stated in the strategy that comes off a bottom-up build. So we've factored into the equation. Clearly, a revenue series product mix, and we've made some initial assumptions around capital investment, whether it be health and safety, food safety, business continuance all the way through to our type opportunities. So it's so high level at this stage but it is bottom up, and we'll be in a position to firm up our thinking in the next 12 months once we have completed that 10-year asset footprint.

But I guess at this stage, should we be -- we're not talking about new plants, right? We're talking about optimizing existing stainless steel footprint on this horizon presumably, given what you're just in the rate back in terms of health and safety and stuff like that.

Look, our key focus right now is to utilize the existing capacity we've got. Clearly, Pokeno is a great example. The liquids plant and Dunsandel a great example. But certainly, if there's compelling opportunities to invest behind more lactoferrin capacity then we'd look to do that. We'll look at -- we obviously, we'll work our way through a process in the next 12 months around cheese at Temuka. So again, let's complete the plan, and then we can give you more flavor to that at this time of 12 months.

Okay. And then just maybe -- sorry, just related probably to the '27 timing, but presumably, that would be if there was a significant loss in the a2 [ inventory ] level volumes that would be sort of happening around that time as well. What are you sort of thinking in terms of that target and potentially the risk around that [indiscernible]

Look, we've got plans in place to grow the business to reduce concentration risk and it relates to customers, categories and geographies. So as much as there might be 1 scenario and could have a negative impact on us. There are many other scenarios that could have a positive impact on us.

Okay. And those are the ones that through the presentation you're sort of alluding to, like the beverages customer, multinational execution and also the -- just the one on Beverages & Cream, presumably is the other one?

Yes. I mean, look, there's a whole range of obvious opportunities for us, again, filling up the Pokeno asset, the [indiscernible] cheese plant the base powder opportunities throughout Southeast Asia and up into China. So there's a whole range of opportunities for us. And look, we'll give you more of a flavor when we take you through the strep work in early December.

Sorry, just to comment, maybe if I clarify it this way. Like should we -- over the next couple of years, should we be expecting quite a strong free cash flow yield of Synlait as it sort of -- as you fill up the plant the CapEx come down? Or should we temper that by quite a lot of reinvestment in terms of achieving some of these customer outcomes that you've sort of talked about? Just trying to understand the mix of linking around that. I know ultimately turn up in the dividend policy when you come forward with that, but just give us a start on that.

Yes. Robert -- Adrian, it's Rob here. I think [indiscernible] there is plenty of opportunities, but we do have a reasonable amount of excess capacity in our assets. So we've got -- we'll work hard to fill that. Free cash flows, you're right, they're going to be coming through. And so we will balance that if we've got really high or to invest them, we'll do that. Otherwise, we'll pay out dividends is probably what we will get to. We have the opportunity for one more question.

Your final question comes from Tim Hunter with NBR.

I just wondered if you could just clarify the situation around the new certification from SAMR. You mentioned that you're expecting to get that approval sometime next year. I just wondered if you could just -- I know you've answered one question on this already, but I just wondered if you could say a bit more about what happens if that decision happens much later in the year than February, how that transition goes over from making the original recipe to make the new recipe, how that will work?

Yes. Good question, Tim. Look, there's 2 factors for us to consider. One is the ability to build inventory and make sure that we've got enough cover on that transition period, and we're really well positioned in that regard. The second clearly is consumers' expectations around freshness of product in the market. So we're very aware of that dynamic as well. Look there are other ways of access in the China market. So an obvious would be through an online [ CBEC ] type channel, which would allow us continued access into the market will be through a different channel. So we've worked through a number of those scenarios, and we believe between the 2 organizations, we've got a plan in place that will address that type of outcome.

That's all the time we have for our question-and-answer session. I'll now hand back to Mr. Watson for closing remarks.

Thank you again for your time today. We look forward to engaging with a number of you one-on-one during the coming weeks and would certainly appreciate the opportunity to provide more flavor around our strategy refresh at the AGM in early December. Thank you again for your time.

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