Synlait Milk Limited (SML) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Synlait's Full Year Results Conference Call. I'm Hannah Lynch, the Head of Strategy and Corporate Affairs. And today, I'm joined by our CEO, Grant Watson; and our CFO, Rob Stowell. Grant and Rob will provide a short update based on the investor presentation which we released to market this morning. We'll then open for Q&A. [Operator Instructions] And we're happy, of course, to take any follow-ups following today's conference call. I'll now hand over to Grant, followed by Rob.

[Foreign Language]. Good morning. And again, welcome to Synlait's full year results investor presentation. FY '23 was an extremely challenging financial year with a poor financial result delivered, driven primarily by a reduction in consumer demand and formula force majeure event impacts, ERP go-live impacts and inflationary cost pressures across the business. In saying this, I'm pleased to report we launched our Joyhana UHT foodservice whipping cream into the China market. We received reregistration of our SAMR license. We made significant improvements across staff engagement, health, safety and well-being. And I'm delighted to confirm our executive leadership team renewal phase is now complete. Our strategy refresh is also complete, ensuring a more focused Synlait, with an appropriate organizational structure now being in place to ensure quality execution against our strategy. I would also like to add commercial production for Synlait's new customer [ EBIT ] commenced in Q4 FY '23 at Pokeno and Auckland sites, focused on business-to-business relationships. I'd now like to hand over to Rob Stowell, our CFO, to take you through our financial performance.

Thank you, Grant. Good morning to all those online. There's no doubt FY '23 was a challenging year to navigate. In saying that, the business has completed several large strategic projects while also having to [ negotiate ] many business challenges, some of which were in our control and some of which were outside our control. Unfortunately, some of those challenges materially impacted our profitability and debt reduction targets. And I will shed some light on those this morning. Just turning to results at a glance. Revenue was down 3% to $1.6 billion, mainly impacted by lower Ingredients volume and commodity prices. Net profit after tax was down $42.8 million to $4.3 million loss. On a normalized basis, we were down $33.8 million to $2.5 million. This wasn't in our guidance range. No matter how you reflect on these results, they're disappointing. The normalized profit figure considers [ a normal ] spend and income items in FY '23 such as the ERP project and other items. EBITDA on a normalized basis is down $27.4 million to $95.6 million. Average milk prices finalized at $8.49 a kg of milk solids, base milk price $8.22 per kg of milk solids, which are still relatively high in historical terms. However, we know our farmers are still experiencing high inflation, a tight labor market and rising interest rates. Operating cash was down 83% to $39 million, again a very big drop from last year, mainly due to lower operating profitability and higher inventory levels. CapEx tracked down 32% to $65.1 million, pleasing to see this step down further as planned. Net debt is up 21% to $413.5 million, again good to see this much lower than it was at our half year result. However, it was much higher than we originally targeted. If I turn to Slide 5, Synlait's FY '23 result. The slide unpacks some of the key components of the result. If you cast your eyes across to the adjusted NPAT profit bridge on the top right-hand side: It [ tracks ] the adjusted NPAT of $36.3 million for FY '22 to adjusted NPAT of $2.5 million for FY '23. I'll quickly summarize the key factors. Ingredients delivered a $2.9 million margin loss due to volume impacts of roughly 18% less ingredient volumes. This was mainly due to 38% higher Advanced Nutritional base powder manufacture. This had a negative impact of $10.3 million. Profit margin impacts from excellent skim powder, AMF stream returns was roughly $7.3 million, offsetting the volume down; a big shoutout from -- for our teams for getting all the ingredient sales delivered in the year despite the ERP system challenges earlier in the year. The next bar is Advanced Nutrition that reduced $16.8 million margin. This was due to a negative volume impact of $3.4 million compared to FY '22, from roughly 5% lower volume caused by demand reductions and SAMR reregistration delays; also a negative margin impact of $13.4 million driven by the timing impact of lagged pricing, where it takes some months for increases in raw materials and packaging to flow through to the invoiced sales, also large increases in manufacturing costs and more normal FX. This was partially offset by higher volumes of Advanced Nutritional base powder production. Consumer Foods. This includes our beverages business and also Dairyworks. This delivered $7.6 million margin growth, obviously good to see these businesses perform better in FY '23. The margin growth of $4.3 million in beverages and cream came mainly from pricing lag and lower overhead costs. Dairyworks benefited $3.3 million from a full year of the closure of the Temuka cheese plant and the first full year of a new cool store operations. The next bar is milk trading and other income. This is $11.1 million upside. This is predominantly made up of milk and cream sales, also foodservice and Synlait farms. The key reason we made gains here was the way the market and the contracts performed, including FX, as we sold milk [indiscernible] to maximize stream returns. SG&A costs, large increase in adjusted SG&A costs of $21 million, with material drivers being employee costs, legal and consultancy, logistics, travel and general inflationary pressures. We split out reoccurring ERP costs. Our annual cost of running the ERP system is $10.6 million, and this includes $6 million of depreciation. Financing costs: Our adjusted interest costs compared to last year were higher by $12.8 million. This was predominantly due to the higher wholesale interest rates and also debt balances. Turning to Page 6, revenue and sales volumes. Overall revenue was down 3%. However, revenue attributed to the business units was down 8% or $117 million. This slide simply gives more detail on the key components, so I won't dwell on it, other than to say that you can see that most of the dramatic drop comes from the Ingredients being down 20% to (sic) [ or ] $165 million. This was offset in part by increases in all other areas. And please note our first year of sales of the UHT whipping cream business of 757 metric tons. We turn to Page 7, production and inventory volumes. Overall production reduced 2% or 3,804 metric tons. This was mainly due to ingredient volumes being driven down by higher production of Advanced Nutritional base powders, displacing ingredient product. Also our milk processed was down 4% due to us maximizing skim-versus-AMF production and where we sold the surplus milk and cream to other processors. And good news: Despite the challenges we had with the ERP project early on, high inventories at our half year, we closed almost 50% down on our previous year's inventory on hand. In Advanced Nutrition, there was a healthy increase of 26% in volumes for both consumer packaged and nutritional base powders as we successfully built inventory for the SAMR registration launch and to optimize production for the FY '24 peak milk processing. In consumer, we had a -- relatively stable volumes of production and inventory levels. And foodservice, we made 1,514 metric tons of Joyhana UHT whipping cream as we started to commercialize this business. While we have had some teething issues getting going in FY '23, reports back from our key customers are that the product is of high quality; and demand is very strong. Hence, we are already into producing much larger volumes for FY '24. Overall, inventories were up 30% on FY '22. This was made up of an -- increased levels of Advanced Nutritional base powder, roughly 55 million; and 21 million in raw materials and inventories, mainly due to price rises. If we turn to Slide 8, gross margin performance. This slide unpacks by business unit where the gross margin was made. In total, our gross margin was down 2.8% compared to FY '22, sitting at $144 million versus $146.8 million for last year. The slide really is a repeat of a lot of the summary information in Slides 5 to 7; however, gives some more detail and shows the impact by business unit on a per-metric ton basis, so I won't go into further detail on this call, but the information is there. We turn to Page 9, SG&A and manufacturing cost performance. As mentioned earlier, the group was impacted by a range of challenges throughout the year, including a complicated sales and production plan caused by SAMR deliverables, implementation of the ERP system, challenges around COVID-19, critical material shortages, extreme weather events and unexpected plant outages. The slide gives visibility to what is driving the makeup of these costs. In short, there were many reasons, but the main themes are as follows. We have increased our people costs in response to a very tight labor market, where Synlait felt it necessary to give market-based pay increases to help retain and attract new talent. Supporting the China SAMR registration process, including the inventory build required, we employed 3 extra shifts and other staff to manage the volumes. We also invested in capability and resource and the readiness for much higher volumes of Advanced Nutrition at our Pokeno site and our advanced [ liquid milks ] plant. We continued to make changes to our ELT. We have had extra costs incurred on our ERP implementation. While we went live on the 1st of August, we had to spend more than we anticipated on [ hypercare ] and stabilization phases of the project. This was critical, as we sought to stabilize the business around the new system while still trying to [ disparately ] serve our customers. While there are several other factors such as increases in travel due to the borders opening up, high levels of R&M due to a couple of one-off events, the overwhelming driver is that our costs have been pushed up due to strong inflationary pressures. This has been a major headwind for several similar manufacturing companies in New Zealand, so what are we doing about it? A key focus for the last 6 months has been focusing on how we mitigate inflation and waste in the business. We have run wide-ranging cost-out programs [ and a thinking that approaches ] staff recruitment. We are very pleased to say we'll be spending $10 million to $20 million less on costs in FY '24 than we did in FY '23 even in the face of inflationary pressures. We turn to Page 10, cash flow and net debt. I'll be honest. Strong cash flows and net debt reductions have been challenging over the last 12 months. This was due to significantly lower profitability, including higher interest costs and higher investment and inventories, [ mainly ] Advanced Nutritional base powder and raw materials. This has meant our debt has risen $72 million compared to where we were a year ago. Key points to note on the slide. Operating cash flows were $39 million, down 83% on FY '22 due to the reasons already mentioned. We have continued to reduce capital expenditure. For example, we have wound up our ERP project. We have also substantially completed our Pokeno upgrade project, and operational CapEx is also tracking downward. As a guide: Capital expenditure will be less than $30 million in FY '24. Net debt has increased up to $413.5 million since last July. While we remained within our facility limits throughout FY '23, we did need to adjust our banking ratios due to the large drop in EBITDA. It's an obvious comment, but it's critical we continue to deleverage over the next 12 months so we can manage our high servicing costs. We are confident we have a good plan to do this. You will also see a guidance note that we are targeting a debt ratio of below 3.5x for FY '24. We turn to Page 11, banking facilities and debt structures. We were pleased to announce last Monday that Synlait has successfully refinanced its debt facilities, introducing 4 new banks to the syndicate led by ANZ. The new banks are Bank of China, China Construction Bank, Rabobank, HSBC. The facilities, when combined with the bond, give us a peak funding through the year of $660 million and tapered down throughout the season to save on cost. The agreement is require to make a repayment of $130 million in March next year. This is part of our deleveraging plans, in any case. The refinancing is the first step of many to get our capital structure in a much better state. Both management and the Board are highly committed to this. The next step is to repay the $130 million while also continuing to produce strong operating cash flows. Synlait's new syndicate provides increased service offerings, extra capacity at significantly reduced cost. We welcome the new banks and thank ANZ for their ongoing support. That's a wrap on the financials. I'll pass over to you, Grant.

Great. Thank you, Rob. I'll now take you through an update on our various business units. Advanced Nutrition. In terms of leadership, Naiche Nogueira started as Director of Advanced Nutrition in January 2023. The 5-year Advanced Nutrition strategy refresh was completed during the year. Our category focus is on early life and adult nutrition. We remain focused on B2B relationships where Synlait can provide formulated powders in bulk or consumer-ready format with key focused partners such as The a2 Milk Company and strategic Chinese and Southeast Asian local partners. From a business development perspective, our plant-based capability has now been fully ratified and related new product development work has been initiated and aligned to strategic priorities. In terms of achievements, as previously mentioned, Synlait achieved reregistration of The a2 Milk Company's Chinese-labeled infant formula, stages 1, 2 and 3, in June 2023. Reregistration allows Synlait to manufacture and export this product for China until September 2027. In terms of U.S.A. market access, all 3 Synlait manufacturing sites Dunsandel, Pokeno and Auckland were audited by the U.S. Food and Drug Administration and received positive outcomes. It is worth noting, as we look to FY '24, Synlait is forecasting a further softening in infant formula of approximately 11.4%. Moving on to foodservice. From a leadership perspective, Abby Ye started as President of China and Director of Foodservice in March 2023. A 5-year foodservice strategy was created, with the initial focus on functional UHT whipping cream sold to B2B customers. The total cream market in China exceeded 250,000 metric tons in 2022. And New Zealand is the leading country for cream exports with roughly 58% market share. Both butter and cream cheese categories have been considered as potential long-term opportunities for foodservice. From a business development perspective, FY '24 will see Synlait continuing to expand Joyhana within China, focusing on bakery and pastry, along with beverage chains; and considering access to Southeast Asian markets in the second half of FY '24. The launch of -- the Joyhana partnership between Synlait and Savencia Group commenced in FY '23, and volumes will continue to ramp up in FY '24. Market feedback to date around the product has been extremely positive. Joyhana UHT whipping Cream won the New Product Innovation Award at May's very prestigious China international bakery exhibition. The Savencia Group and Synlait partnership is very complementary. Savencia Group is responsible for distribution, branding and marketing; and Synlait is responsible for high-performance product development and manufacturing. During FY '23, Synlait and Massey University celebrated 5 years of our partnership. This is our home for cutting-edge innovation. In terms of Ingredients. Our 5-year Ingredients strategy refresh has also been completed. The focus is on driving strong sales disciplines while ensuring we have a leaned-out cost base. From a business development perspective, we are exporting to a diversified range of markets, approximately 50 countries, with low concentration into China. Our focus is on generating high-value multiyear contracts for differentiated specifications. We are driving sustainability initiatives with global customers that leverage Lead With Pride and supports best practice development on farm. We are tightening premiums and lead bucket disciplines to maximize returns and sales timings against the milk curve to ensure that we minimize risk. In terms of achievements, as Rob mentioned, we delivered record-low year-end inventory levels and working capital positions. Despite the supply chain challenges that we experienced in the first half of FY '23, 100% of contracted volumes were shipped and delivered in the second half of FY '23. In terms of our consumer business, which is primarily Dairyworks. Dairyworks has recently focused on its core cheese category, exiting yogurt and spreadable butter. The strategic growth focus is very much on the diversification of geography and channel, not category. From a divestment perspective, Synlait announced its intentions to divest Dairyworks and its Temuka cheese assets in June 2023. Synlait is actively engaging with several parties and will provide a further update in due course. As Rob mentioned, the proceeds will be used to pay down debt if the divestment occurs. In terms of business development, a significant pipeline of opportunities has been developed for Southeast Asia and Australia. During this very challenging period in the economic cycle, Dairyworks is really well placed to address consumers' cost-of-living focus with brands across all stages of the economic cycle. From an achievements perspective, our manufacturing market share in key natural cheese increased to 70% from 64% in FY '22. Foodservice volumes in Dairyworks continue to grow [Audio Gap] capital projects to enable greater labor efficiencies, health and safety improvements and quality at the processing facility in Hornby; capital improvements to be commissioned during Christmas shutdown later this year. On-farm excellence and sustainability. From a leadership perspective, Charles Fergusson started as Director of On-farm Excellence and Business Sustainability in February 2023. Our on-farm excellence 5-year strategy was developed. In November 2022, we established a Synlait Farmer Leadership Team, 8 farmers who are effectively a conduit between Synlait and our farmer supplier base providing feedback and direction on Synlait's strategic choices and prioritizations -- and prioritization against tactics. In terms of our Synlait farms, we continued to invest in on-farm infrastructure and our people. Our ambition is to become Lead With Pride certified and to establish a center of excellence for all of our farmers. In terms of industry engagement, we became a founding shareholder of AgriZero NZ, a partnership and investment fund between agribusiness and government to accelerate agricultural emissions reductions by 30% by 2030. In terms of sustainability, a further 19 farmer suppliers became Lead With Pride certified in FY '23. We transitioned Boiler 2 at Dunsandel to biomass, using wood pellets, as a fuel source, enabling a significant reduction in emissions. Our B Corp certification is on track for December 2023, confirming that we are paying a market -- farm gate milk price for FY '23 of $8.22 and an average farm gate milk price of $8.49. We retain our current outlook for the '24, FY '24, season at $7. I'll now take you through a brief update of our strategy refresh. As mentioned, our strategy refresh means the creation of a more focused Synlait. The Board and our executive leadership team have now completed our strategy refresh. Our refreshed strategy leverages Synlait's world-class capabilities and asset base to partner to produce high-value advanced nutrition and foodservice B2B products, supported by a disciplined and well-run ingredients business. On Slide 20, we have a very high-level overview of our Synlait strategy, effectively a top-level view based on our Ingredients, Advanced Nutrition, foodservice and consumer business strategies. The structure of this page gives a clear definition of our ambition, what success looks like in FY '28. Right to play speaks to the importance of having strong foundations. It then covers our channels, categories and geographies. Our right to win speaks to where we believe we can gain and maintain competitive advantage. And our key enablers speak to the important areas of execution across the business. In terms of some of those key changes. Right to play is Synlait's core capabilities. Some might refer to this as our tickets to the game. For us, it sits in food safety and quality; highly utilized, efficient plants; advanced nutrition and foodservice know-how; integrated value chain; regulatory know-how; and sustainability credentials. Channels, otherwise described as the business units or business types that we choose to focus on, are the areas that we will apply our efforts to. Clearly it's Advanced Nutrition, foodservice and Ingredients. Categories, clearly the products Synlait manufactures within its business units. Category focus areas include infant nutrition, adult nutrition, advanced ingredients such as lactoferrin, foodservice cream, AMF. As mentioned, we're exploring opportunities with both butter and cream cheese. And then of course, commodity powders. Summary of key changes to our key enablers. And as mentioned, these are the areas that will drive greater execution to ensuring that we deliver against our ambitions. These include on-farm excellence; best-in-class customer engagement; disciplined product innovation; high-performance culture; systems, tools and processes; world-class manufacturing and supply chain. So again this is a very, very high-level summary of our strategy on a page. We now have an outstanding leadership team in place who are 110% capable, committed and determined to returning this business back to being a highly profitable business again. In terms of Synlait's full year 2024 outlook. FY '23 was highly challenging for Synlait with material reductions in customer demand, CO2 shortages, extreme weather events, the COVID-19 pandemic, inflationary impacts, ongoing investment in new product work streams and the launch and stabilization of the company's new enterprise resource planning system. Looking ahead to the 2024 financial year, Synlait could still face challenging China market dynamics, softening global conditions more generally and continued inflationary pressures across its cost base, which could impact future customer demand and the company's overall profitability. Synlait does, however, expect Advanced Nutrition volumes to continue to grow at the Pokeno site in FY '24. And the company's overall EBITDA performance is also expected to improve in FY '24 compared to FY '23. The a2 Milk Company's purported cancellation of exclusivity arrangements under the Nutritional Powders Manufacturing and Supply Agreement, the NPMSA, for the a2 Platinum and other nutritional products is not expected to impact Synlait's FY '24 results. Synlait disputes that The a2 Milk Company has the right to cancel the exclusivity arrangements. Whilst Synlait is confident in its strategy to rightsize its cost base and current activities -- sorry, to rightsize our cost base to current activities and its near-term Advanced Nutrition and foodservice growth opportunities, the uncertainty of broader macroeconomic factors means the company will not provide guidance at this time. Synlait is committed to its refreshed strategy to create a more focused company and remains largely on track to meet its 5-year FY '28 strategic ambitions. In terms of next steps, management will host an institutional investor site tour at Synlait Pokeno on Monday, 30 October 2023. The agenda includes Synlait Pokeno site tour; a presentation by myself on the Synlait strategy; Q&A with key members of our Synlait executive leadership team, again including myself. In terms of our annual meeting, this will be held on Friday, the 1st of December 2023, at 1:00 p.m., at Synlait Dunsandel. The notice of meeting released in early November 2023 will include further information. I'd now like to open the call up to questions.

[Operator Instructions] Your first question comes from Nick Mar from Macquarie.

Just on the volume outlook, you mentioned infant volume is down around 11%. And Pokeno [ is obviously up for new customer ]. On a net basis, what should we expect for Advanced Nutrition overall?

Thanks, Nick. This is Rob here. Look. We're looking at a lower double-digit growth for our whole nutritional business in FY '24.

So the 11.4% included [ advanced ] ramp-up.

No. So the 11.4% is a down in the infant business. The, say, 10% to 12% growth in our total nutritional business next year is what we're expecting.

Sorry, overall growth, yes, got it. That's great. And then in terms of the cost-out numbers you talked about, does that include the costs that might leave the business from Dairyworks? Or is [ that different to the ] $10 million to $20 million?

Yes, yes, good point. Now look. It's actually separate. We do -- we've done a lot of work over the last 6 months. [ That, it's just ] testing all out across, right across the board. And we're pretty confident that we can get at least $10 million to $20 million out on a -- I guess, a group basis including the Dairyworks piece.

So including the Dairyworks -- sorry, cost-out Dairyworks, or costs leaving the business because Dairyworks is being divested.

I'll just work on the basis assuming Dairyworks is in for the whole year. Even if that was the case, we'd still be looking at $10 million to $20 million of savings on our expenses for FY '23, yes.

And then in terms of the capital structure, you talked about repayment subject to the [indiscernible] milestone. Are you guys still ruling out raising equity at this point?

Look. We're really focused and committed on the Dairyworks sale, Nick. Obviously there's a number of options open to us, including capital raising, but we're not willing to discuss those at this point.

I think previously you've ruled it out, so you're no longer doing that.

I think it's fair to say that there are a range of options that we could pursue in the event that the Dairyworks business doesn't sell, including a capital raise.

Okay, great. And then lastly, just on the bank refinancing, could you just talk about any changes to the sort of margin profile of those facilities?

Sorry. You're just coming through pretty lightly, Nick. Are you talking about the margins?

Yes.

Yes. Look. We -- I can't go into specifics, but we have definitely lowered our average margins across our debt by bringing in [ a really good ] competitive process [ and ] bringing in new banks into the syndicate.

Your next question comes from Matt Montgomerie from Forsyth Barr.

Just checking if you can hear me all right.

Yes.

Yes, yes.

Great. I just -- on your qualitative EBITDA guidance comment. There's a fair bit of crisscrossing in here, so I'm just after some clarification. So firstly, your EBITDA improvement comment, is that on your FY '23 adjusted base of $96 million? And then secondly, how have you thought about the Dairyworks contribution with respect to that comment?

Yes, no, it's a good question, Matt. Look. We are looking at increases in EBITDA on an adjusted basis and not willing to give guidance on how much at this stage. Hopefully, we'll be able to give guidance later on in the year. I would think about Dairyworks roughly being in there for, say, half of the year, for your purposes, but again that's not certain.

I guess that's good enough. Maybe if I just go back to Advanced Nutrition's and sort of the margins in that business here: If we look at your asset base utilization on the back of your comments from Nick's question versus the potential margins in that business, it feels quite unlikely that you'll be able to get back to pre-COVID level of margins, but would it be fair to assume that maybe you can step it up to [ mid-2000s ] given the utilization of your asset base when we consider the volumes coming through in that segment?

Yes. Look. Obviously some headwinds currently, Matt, but look. We are optimistic that we can -- both through running the business more efficiently and taking out any waste, looking at the way that we can bring in more business as soon as possible, that we can get up to those sorts of margins again, so we're working very hard at that, yes.

But in the absence of new business, which there's been nothing disclosed today, you -- would you concur with the comment that getting back to those levels, at least in the next year or so, is unlikely?

Yes, getting back to those levels in the next year will be very challenging, Matt, but look. We continue to be optimistic that we've got a lot of capabilities and great assets and very good team working on business development at the moment.

Your next question comes from Ryan Li at Craigs Investment Partners.

Can you hear me okay?

We can. Thanks, Ryan.

Yes. Great. So first question, just building on Matt's question earlier, so for your net debt-to-EBITDA target of below 3.5x in FY '24. Is that sort of assuming 6 months of contribution, EBITDA contribution, from Dairyworks? And debt is being repaid during the year once the divestment is completed.

Yes, correct.

Yes, okay, cool. And second question. So what sort of timing are you expecting to complete the divestment of Dairyworks? And how reliant are you on completing the divestment to repay the $130 million of bank debt before March 2024?

Yes, Ryan, a couple of points there. Firstly, we have a number of interested parties that we're working with, so at this stage, we can't confirm the time frames, but we'll update you in due course. I think the second point that's worth noting is that there's not a direct link between the sale of Dairyworks and the $130 million that you referred to.

Okay, so can I just ask a -- follow-ups? If you are not able to complete the divestment before March 2024, what sort of levers can you pull to repay the debt? Is it just from your operating cash flows? Or just thinking about how confident are you to repay the debt without divesting the asset.

We're working through that at the moment with our financial advisers. And as Rob mentioned, there's a range of ways that we could shore up our balance sheet in the event that we didn't sell Dairyworks.

Your next question comes from Sean Xu from CLSA.

My first question is with a2. So with a2 Milk being one of your most important customer over the years, has Synlait made a plan based on assumption that a2 will move all its English label away? If so, what sort of timing are you expecting? And what's the implication on Synlait's business going forward, please?

Yes. Look. I think it's worth noting that we refute the claims made by a2. As you can imagine, we run a range of sensitivities around scenarios, including the phasing out of a2 volumes over time, but equally we have current and prospective customer opportunities that we're working through that will create significant value for the business and deliver diversified growth over time.

Sure. I'll probably do another question, please. So based on my understanding is Bright Dairy provides some support on the refinancing process of Synlait's debt facility with the Chinese banks. In the long term, is there anything you can leverage in your relationship with Bright's network in China? Because based on my observation, there's a lot of synergy between the two. Is there any strategy you can share with us going behind?

Yes, good question. Maybe more generally: As you can imagine, Bright are extremely supportive as a shareholder, yes, and through their strong membership around the Board table, so look. Whether it's banking relationships, SAMR processes or customer acquisition opportunities up into China, Bright continue to provide really material support to the business. And we expect that to be ongoing.

Can I just do a follow-up? So let's say the $130 million debt by 30 -- by March 2024. Let's say the divestment does not go well and you don't want to go through capital raising. Is there a possibility Bright can inject cash from China to support this repayment?

Look. I can't speak specifically on behalf of Bright, but what I can say is that there are a range of options that we have to ensure that we shore up our balance sheet.

Your next question comes from Marcus Curley from UBS.

I just -- can I just start with just a point of clarification on your guidance comments? And am I right in assuming you're talking about adjusted EBITDA growth with the assumption that Dairyworks is only in the business for 6 months? So effectively a 6 months contribution from Dairyworks and relative to a 12-month contribution from last year. Is that the right interpretation?

Yes, that's correct, Marcus.

Okay, great. And moving on, can you provide any commentary at this stage about gross margin per tonne on the [ EBIT ] contract and particularly in year 1, given it's a start-up year, and maybe long-term aspiration for that?

Look. No, sorry, Marcus, we can't give any sort of guidance on that on this call.

Okay. Gross margin per ton on Ingredients and -- was [ $870 ] first half, $500 for the full year, obviously a much lower second half. Could you talk a little bit to what's changed, whether that was inventory write-down, stream returns or just market conditions? And is that second half a good benchmark for how we should think about FY '24?

It's a good question. Look. There's a lot of volatility in the year. We had commodity prices moving around, FX. And also we had some -- a little bit of downgraded powder in the second 6 months, so that all came through. The $500 is probably -- around about probably 10% higher than what we'd expect on the go forward. However, an example where we did really well this year was around the skim milk powder, AMF differentials. We entered the year and it was neutral. We've actually seen that actually pop up again, so that's a benefit that we're trying to extract again this year. So it's -- in short, it's difficult to pick, but I'd just be taking a slightly more conservative view of the $500 at the moment, Marcus.

And if you -- Robert, if you stripped out the stream returns, what would have been that underlying number? And the $500 million would have been what FY '23?

Somewhere between $400 and $450 per metric ton, particularly in a situation where you're reducing your costs dramatically.

Okay. And thirdly, given no one stuck to the 2-question limit, I won't either. Just a point of clarification: When you talk about the $10 million to $20 million worth of overhead cost reduction, is that excluding the fact that you had $11 million worth of one-off ERP costs? So in essence that doesn't include the fact that, that cost has disappeared, so it's an addition to that $11 million.

It's absolute costs, minus $10 million to $20 million. And look. That's in the face of inflationary pressure. So you've still got inflationary pressure coming through for another year [ with, say, probably 10% ]. We're saying actually we're going to go below what we spent in FY '23 by $10 million to $20 million.

Okay. So in other words, it includes the fact that you're losing -- or one would assume, given the ERP project is finished, you don't have any further one-off costs for that this year.

No further one-off costs, but you'll see in the presentation there's a reoccurring cost of $10.6 million...

Sure, and -- but that was also in this year's numbers as well, right?

Yes, correct.

Yes.

Your next question comes from Adrian Allbon from Jarden.

Just wondering. Firstly, can I just clarify what you're sort of saying in Advanced Nutrition? So you're expecting the infant formula volumes to be down circa 11%, but I just sort of missed it at the start. You [ did it ] assuming that the overall volumes for that division will be up 10% to 12%, which includes the offset from the [ EBIT ] contract.

Yes. So the way to think about it, Adrian, is we're expecting infant formula to be down. We're expecting other parts of the advanced ingredients business to be up, and net-net, we're expecting to be up. So when I say other parts, there's a range of customer opportunities that will play out in FY '24 that ensure that we end up in a positive net position.

And just for clarification. Is that sort of infant formula base powder?

When we talk about 11.4%, we're talking about packaged goods rather than base powder...

No, no, but just in terms of you said there's a range of other parts that may play out in FY '24. There's obviously [ EBIT ]. And then there's -- are you talking parts likely being infant formula base powder for other customers or...

I can't comment specifically on the other opportunities at this stage, Adrian.

Okay, all right. Just while I've got you, Grant, just from, I guess, the back-and-forth ahead a lot of the a2 announcement last week: Like they've sort of made -- they're obviously looking to drop the exclusivity, which in practical terms, I suspect, allows them to sort of glide path off when it suits [ them ], like the English label volumes, as they build up their own capability or with other partners. Like can you comment on like what would -- like if they did -- like if you did agree to their loss of exclusivity -- I know you're refuting it at the moment. What would it mean for Synlait? Like does that mean that you have to maintain this 150% capacity for FY '23 -- of '23, sorry, that they cited through the [ lease of the ] contract? Or is there other mechanisms available to Synlait?

Yes, so maybe to talk through the process we're in. So we'll work our way through in faith and good faith. There's 20 working days. So that's the first part of the process. In the event we don't get resolution through that, we'll give thought to are there benefits in actually letting the exclusivity drop away. And we think there are a number of benefits but equally look at the benefits of challenging a2 on the position that they claim. So again, we'll work our way through that in good faith if that's where we get to. In terms of going down an arbitration process, again, if we do that, we're expecting that, that could take 12 to 24 months. So one step at a time. From our perspective, we're focused on continuing to deliver against that contract, onboarding new business and diversifying the growth of Synlait.

Okay, but sorry, just -- because my understanding is it's not take or pay, so like -- so their assertion that you'd have to maintain 150% of FY '23 volume is not necessarily correct, if you...

Yes, let's not prejudge what might come out of the processes that land in front of us. We'll work through those in good faith and determine what we think is in the best interests of our shareholders.

Okay, understood. And just like -- just to, I guess, circle the wagons a little bit, on Dairyworks: Like -- and my calculation is kind of correct. I'm just looking at your notes. Did it -- after sort of, just call it, short of $10 million NPAT, does it work back up to sort of $16.5 million of EBIT? And then with a bit of depreciation, it probably did around $20 million of EBITDA for FY '23. Is that sort of ballpark correct?

Yes, that's pretty good [indiscernible], Adrian...

And would that be a reasonable assumption for the next year, like just as a placeholder? I mean obviously we're going to divide it by 2 given the earlier comments.

Look. Actually the outlook for Dairyworks is actually growth, and they continue to be a growth story into next year. We've got a number of opportunities both in Australia and Southeast Asia, so we expect it -- we'd expect that to grow.

[Operator Instructions] Your next question comes from Jonathan Snape from Bell Potter.

Can you hear me okay?

We can, Jon.

Great. Look. Can I just ask a question? In particular, I'm looking at the segment note 4, on the expenses level. And there's a couple of numbers I just want to check because I might have lost it in translation, but the inventory [ positions ] and write-downs of $19.8 million there, the increase in inventory provisions of $6.1 million and the increase in onerous contracts of $2 million, I think, [ adds all up to ] just under $28 million. Is that in the headline number or in your underlying EBITDA? Is that correct? Because I couldn't see any adjustments in your little waterfall for it, but I'm assuming you've taken that $28 million as an expense against your underlying [indiscernible] whatever it was.

Jon, yes, we have. So that expense kind of drops into each one of those business units, mainly [ heaps into ] Advanced Nutrition, Ingredients; and also a little bit has gone into foodservice. So just it's part of the reason, part of the story around the margin erosion within those areas.

Okay, so when you're talking costs down $10 million to $20 million, does that include that not repeating? I guess what I'm trying to figure out is that, if I'm looking at next year, [indiscernible] should be up [ $28 million ] just opening the doors and not really having to write-down anything. And then if I've got some costs out, I've got another $10 million or $20 million there -- and then I can make my own assumptions around volumes and stuff like that. I guess what I'm trying to figure out is, is that in the $10 million to $20 million? Or is -- the $10 million to $20 million would be in addition to that.

Great question. So it's in addition to that. So the $10 million to $20 million is essentially our SG&A and manufacturing or operations costs excluding inventory provisioning, write-downs, so that would be on top of it, obviously really disappointing result around those areas. We were producing new products. That's -- part of it is the ERP system project and inventory tracking. And part of that is because some of our demand moved out in the year, but we definitely won't be repeating that in FY '24, so you can add that on top.

Okay. And look. Can I just ask around your debt numbers? Because obviously you used the assigned receivables facility as well. And it looked like that would have shifted $31 million-odd of debt onto your balance sheet this year relative to a year ago. So if a2 volumes are going to fall -- AMF volumes, sorry, are going to fall next year in your thinking, then obviously your ability to use that facility would probably drop as well, so when you're looking at your year-end debt targets, are you kind of factoring a lower usage of that facility by year-end?

Yes. There's a couple of things going on. Obviously the Dairyworks business also uses those facilities, so that would potentially come out; and saying that we are also pursuing bringing some more newer customers on to that facility, so I'm not expecting it to drop dramatically for next year.

Your next question comes from Deidre Copley from Craigs Investment Partners.

Just checking that you can hear me, please.

We can hear you.

Great. My questions are slightly different. In terms of the estimate of your financing costs, it was 5.5% for the full year this year, 5.5%. And you're talking about a reduction for the full year '24. Is that a reduction that you're looking at in terms of that cost, which I assume incorporates with subordinated bonds which are only paying a coupon of 3.83%? So I'm presuming that 5.5% is inclusive of that. And also are you expecting a reduction going forward on that 5.5% figure, or are you relating it to more recent financing facilities?

No, thank you. Great question. Look. I'm looking forward. Basically we have got a -- I guess, a price saving on our interest rates. Hence, obviously the other piece is our debt loading across the year and how we -- how that plays out with our ingredient sales. We've estimated at a high level roughly 10% across our total interest costs for next year because of improved pricing, which is -- could be in the range of $3 million or $4 million per annum.

So no estimate on what your financing costs might be looking at for full year '24, putting it another way.

You mean the interest rate.

Yes.

I don't have that to hand. Sorry.

Your next question comes from [ Sam Chu ], private investor.

Team, could you just help us understand how that issue with a2 came about? Like was that [indiscernible] shortages in the [indiscernible]? Or was it a labor issue?

I can't specifically talk to what sits behind their claim. We'll work through a process in good faith. And again, we refute their claim.

Okay, that's helpful. And just on the [ EBIT ] contract, how much of an impact can we expect from that going forward?

We won't be giving any information on that customer going forward.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Watson for closing remarks.

Thank you for -- thank you to everyone for joining our call this morning. We look forward to connect again with you on our annual results road show in the weeks ahead.

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