Synlait Milk Limited (SML) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Synlait Milk Limited Half Year Results Conference Call. I'm Hannah Lynch, the Head of Strategy & Corporate Affairs here at Synlait. I'll shortly hand over to our CEO, Grant Watson; and our CFO, Rob Stowell, who will provide you with an overview of today's presentation for our results. We'll then open the phone lines for question and answers. [Operator Instructions]. Over to you, Grant.

[Foreign Language] Good morning to you all. Thank you for joining us on Synlait's Half Year 2024 Results Call. It's been a challenging half year for Synlait as we continue to reset the company to better achieve our strategic objectives or working to finalize a clear plan to materially reduce our debt. After significant levels of investment over a number of years, Synlait has too much capacity and too much debt. Interest rates have roughly doubled in recent years and birth rates have roughly halved in our largest infant formula market, China. Today, we will explain our clear plan to utilize end or reduce capacity to materially reduce debt. In terms of our financial results, the half year to 31 January 2024, Synlait reported an adjusted EBITDA of $36.1 million, total EBITDA of $19.9 million nonadjusted, and then adjusted net loss after tax of $17.4 million, in line with previous guidance on an adjusted basis, the total net loss after tax $96.2 million. Net debt sits at $559 million. These results are extremely disappointing for a range of reasons that we will cover off during the call. Turnaround activities are broken into 3 pillars: First pillar, leveraging our balance sheet. We had too much debt. Our second pillar, filling our plants or reducing our manufacturing capacity, we have too much capacity. Our third pillar, improving our profitability across pricing, product mix, operational costs and SG&A. Combination of these 3 pillars will ensure we return Synlait to a position, sustainable, profitable growth. Today, we announced confirmation of amendments to our banking facilities, a strategic review of our North Island assets, a letter of support from our largest shareholder, Bright Dairy, an increase to our base milk price forecast from $7.50 to $7.80, and in doing so, reinforce our commitment to paying a market competitors milk price. We are very central to our largest shareholder and our banking syndicate remains supportive of our strategy, which is, first and foremost, focused on our Advanced Nutrition and Foodservice businesses. These are areas where Synlait has a clear competitive advantage, can deliver diversified, high-value growth. Enabled by our strategy, we have world-class manufacturing assets that are highly flexible and scalable, ensures we are well positioned ahead for emerging customer demand trends, especially in areas such as Early Life and Adult Nutrition. All of this has proven to be a competitive differentiator in our negotiations with our customers, both existing and new. We have several trials in place with new customers at scale with several new products in development. When you combine this with a refreshed leadership team and Board, we have all of the pieces to execute against our strategy and return to profitability. Moving to Slide 2. The 3 takeaways from today are: Takeaway number one, we have a clear deleveraging plan -- by our banks and largest shareholder, which include a strategic review of our North Island assets alongside our ongoing work to sell Dairyworks. Takeaway two, we have an aggressive forward-looking business recovery plan, which is working across the Synlait business to accelerate volume growth, reduce costs and increase the utilization of our assets. Takeaway three, our strengthened leadership and governance by restructure of our executive leadership team earlier this year. In the recent appointment, George Adams as an independent director positions us well for stronger execution. We acknowledge that there are a number of material uncertainties, we need to navigate our way through during the next 3 to 12 months. Please refer to Note 2 in the financial statements for more information. We need to deleverage Synlait, address our excess capacity and get back to focusing on what we do best. Sourcing, developing and producing innovative, nutritional and foodservice products for the world's best food companies, whether that's Nestle, [indiscernible], Savencia, The a2 Milk Company. Turning to Slide 3. We have a clear plan in place to deleverage. We have today announced a strategic review of our North Island assets in Auckland and Pokeno that will canvass several options to realize their value more fully, whether that's by potentially divesting those assets, whole or in part. To be clear, we do not go into the strategic review with any preconceived outcomes in mind other than to maximize profitability and shareholder value in the long term. These are world-class facilities with unique capabilities such as plant-based and dairy. As we have discussed with many of you previously, we had at various points considered a capital raise. We have not taken this option off the table. Also want to note that the Dairyworks sale process remains ongoing. This is a high-value business like the North Island strategic review, the Board wants to ensure the best possible return for shareholders, should this business be sold. As I've indicated in my opening comments, our banking syndicate has provided us with the relevant amendments to our banking facilities. Our cornerstone shareholder, Bright Dairy, has provided a formal letter of support, made additional loan facilities available to us if we needed and provided commitment to support an equity raise, if this is required, all of which provide Synlait with additional confidence and stability in the near term. Moving to Slide 4. I want to quickly highlight why a North Island strategic review was needed. Revenue and volumes are a proxy, you can see that Dunsandel is a strong profit center with the North Island assets a loss-making. Stronger contribution from Synlait's North Island assets is needed by filling capacity with new customers and/or increasing volumes from existing customers or by divesting assets partially or fully. Moving to Slide 5. In terms of key financial metrics, half year adjusted net profit after tax is a loss of $17.4 million, in line with guidance on an adjusted basis. Total group revenue was $793.5 million, up 3% on prior period. As mentioned, the adjusted underlying total group NPAT was a loss of $17.4 million and $31.7 million down on prior period. Total group NPAT was $96.2 million loss, down $101 million on prior period. Adjusted underlying total group EBITDA is $36.1 million and $26.4 million on prior period. Total group EBITDA is $19.9 million and $31.6 million on prior period. We are pleased to announce an increase in our forecast farmgate milk price for the season to $7.80, and on this basis, we are forecasting our average total milk price to be $8.09, $0.29 above the market base milk price. Operating cash flow with a negative $98.1 million versus an improvement on the prior period of $26.5 million. We improved capital expenditure by 48% and this is at $17.5 million for the first half. Net debt, $559 million. Total gross profit was $43.6 million, down 47% on prior period. Now I'd like to hand over to Rob Stowell, our CFO, to take you through financial performance.

Good morning everyone. Thanks, Grant. Look, it's been a very challenging 6 months for the business. The result is extremely disappointing for management and the Board. I'll dig into some of the detail within the result. On the first slide I want to go to is really explaining some of the significant noncash adjustments that have been made to the result, which kind of takes us from the $96 million loss through to the $17 million adjusted. These items, some of them are taxable and some of them aren't. So I'll try to explain it on a nontax basis. So the first adjustment is an impairment of $50.3 million before tax. This relates to the underutilization of our North Island assets, specifically the Pokeno site, where we have our dryer and also the Richard Pearse site where we have our canning line. We've invested significant sums in these facilities over the last 5 years. The assets need higher volumes to retain their valuations on the balance sheet. The second is a $31.1 million write-down of net assets value of the Dairyworks business due to Synlait holding this asset is held for sale. We are mandated under the accounting standards to value this asset at our best estimate of fair value less disposal costs. The way we've done this is we've valued it at our latest nonbinding indicative offers received. So essentially, the net assets of the business are sitting around $150 million, and we're valuing the business at around about $120 million roughly. The third item is for the product costing method change. This is $11.6 million before tax or $8.4 million after tax. And this occurs to some improvements that the finance team have made in a methodology of costing products. This change will allow us to do a much better job of understanding the sites in product profitability across the business. We had agreed to treat this as an accounting policy change, which would have had minimal impact on the current year. The late change by our auditors after consulting with the global technical department has us putting through this change in estimate, which is a noncash change for this financial year. We move to the next slide. This slide unpacks some of the key components of the result on an adjusted basis. And if you can cast your eyes across to the adjusted NPAT movement bridge on the right-hand side, it tracks what has changed from our adjusted NPAT of $14.3 million profit for half year '23 to an adjusted NPAT loss of $17.4 million for half year '24. Both half year '23 and half year '24 has been adjusted for the product costing change just mentioned. So to quickly summarize, Ingredients business delivered $20.8 million margin loss versus half year '23. It's a volume impact that were positive by 60%. Noting last year, we had issues with our ERP system upgrade. This had a small positive impact of $5.7 million. Negative impacts on margin, and there's a number of them offset this volume upside. Firstly, is in product mix. This is to do with our [indiscernible] lead. We had very good returns last year. And hence, this year, while we've got returns are not -- they're outweighed by the fact that last year was so good. We've also seen the strength of butter prices improve quite dramatically, and we don't have this in our product mix, we don't sell butter. And we've also seen higher level of product discounting within the segment and a large FX impact as well. So that all adds up to around $26.5 million downside on ingredients. This one is about nutrition. So this has delivered $11 million margin loss change versus half year '23. The negative impact mainly comes from volume. So it comes from roughly 1,500 metric tons less infant formula volume and also sales of about 4 tons lactoferrin in last year, it can be the last year. [indiscernible] around $9.4 million. And the other piece is really a softening in prices and within the lactoferrin area and also a little bit of FX. Consumer Foods business delivered $0.8 million margin loss compared to FY '23. Look, these businesses -- this includes basically Dairyworks and the fresh milk and cream business. These businesses did pretty well last year. And it's good to see some consistency kind of come through. Also this half volume was up 2,305 metric tons. And this was mainly due to Dairyworks building market share and a small uptick on the fruit milk and cream business as well. Margins were slightly down due to the softening of retail prices, the fresh milk business due to the pricing model. The other big down bar is sitting within our financing costs. A large increase in financing costs of $13 million due to interest rates being very high through that first half and obviously, higher average debt balances impacting there as well despite the ingredients business having less inventory. Number of slides following this one, which go into a little bit more detail. So I'll just touch on them. So firstly, ingredients. So this -- the margin on ingredients was $1.4 million for the half compared to $22.2 million last half. Key thing to note on this slide is a dramatic reduction in inventory on hand and the increase in production achieved in half year '24. The reduction in inventory in ingredients has helped reduce our debt balances. If we move to the next slide, Advanced Nutrition. This area delivered a margin of $32.7 million. It was down from $43.8 million the last half. Key thing to note is the increase in base powder on hand the half year. And this is due to change in approach across the 2 years. Firstly, as you might remember, we were building -- running down base powders to allow for the new and China formulations for The a2 Milk Company for the new SEMA registration. So that was the key reason we've got a difference in base powder. Move to the next slide, Consumer Foods, that area delivered $16.5 million margin, which was $17.2 million the last half, so pretty consistent. And it's fair to see the Dairyworks business continued to perform as we continue to hold this business up for sale. That set for a strong second half after doing capital works to improve their efficiencies around the Christmas period. The next slide is Foodservice. So this is basically a UHT whipping cream business into China, and this delivered a margin of $100,000 versus a loss of $100,000 last year. So it's a new business, sales have grown from $1.1 million last half to $9 million this half. The business unit was impacted by a number of start-up costs, but we see this area kind of improving as volume goes up over the next 6 to 12 months. Next slide is the SG&A and manufacturing cost slide. It's pleasing to see the results of our cost out program, reduced SG&A cost by $5 million, 7.8%. Last year, we had ERP system challenges. However, this year, we have again incurred costs in relation to customer contract disputes, deleveraging of the balance sheet and getting ourselves organized around asset sales and equity and debt options. And also implementing new warehousing in the North Island to assist with the new multinational customer here. However, within manufacturing costs, it's been a more difficult problem at time. These costs rose $13.7 million or 9%. And the key backdrop here was our strategic objective to increase the production in our North Island operations. Costs have to be put in ahead of volumes, which were slower to materialize due mainly to market entry issues, areas where we saw cost increase were around milk supply costs. This was due to the incentives, but also higher transport costs and inflation generally. Energy costs were also up due to higher prices and clean energy initiatives. Depreciation was up due to the North Island plant upgrades and the depreciation of those coming through. Employee and contractor costs were up with a modest range inflation, and the ramp-up of our North Island sites. Dairy costs were up $3.2 million due to the ramp-up of sales and production volumes into new markets. However, these costs are more than offset by the higher margins within that business. If we move to the next slide on cash flows and net debt. Net debt ended, as Grant mentioned, at $559 million. This was up from $519 million at the same point last year, an increase of roughly $40 million. This is always at a [indiscernible] at this point in the year due to the seasonality of the business. Lower profitability and higher financing costs are also contributing to the higher debt level. Key points to note on this slide is that our operating cash flows actually improved by $26.6 million compared to last year. This is mainly due to the fact that we didn't have the ERP issues affecting volumes like they did last year. Capital expenditure is tracking down and with all major projects now complete came in at 49% than the previous year at $17 million. We're not providing guidance on debt ratios at this point due to the uncertainty around the deleveraging items, both in timing amount and potentially EBITDA changes. The goal remains to get our debt ratios down between 2x and 2.5x debt-to-EBITDA as soon as possible. Turning to the last slide on banking facilities and banking covenants. Our expanded banking syndicate now includes 5 banks and has continued to be hugely supportive over the last 6 months. I'd like to take this opportunity to thank the banks publicly for their unwavering support. It's obviously been a challenging period where we had despite coming very close, [indiscernible] the binding offer on the Dairyworks business. Board and management had extremely strong desire to reduce debt and associated high servicing costs that go with it. As mentioned earlier in the presentation, we have several parallel work streams to achieve that in the next 3 or 4 months that center around both equity raising and asset sales. We expect the level we need to deleverage is by roughly $300 million to enable us to refinance both our senior bank debt and the bond maturity in December where in the meantime, we need [ space ] and have negotiated an extension of the $130 million repayment up to the 15th of July and have also completed amendments to several of our key banking covenants. Bright Dairy providing binding letter of support through this time has also been critical to allow us time to execute in this tough M&A environment. I would also like to thank Bright Dairy and Group for their binding letter of support. Over to you, Grant.

Thanks, Rob. I'll now take you through a business update. We move firstly to Advanced Nutrition. In terms of leadership, new Chief Revenue Officer role has been established. Naiche Nogueira, previously the Director of Advanced Nutrition has been appointed to this role. Chief Revenue Officer role will reduce complexity through a single point of customer contacts across the Advanced Nutrition and Ingredients business units. In business development, dairy/non-dairy hybrid nutrition products now being exported to a range of Asia Pacific markets and various can and flexible packaging formats. Trials and audits are underway to produce infant formula base powder for Southeast Asian markets following the signing of a memorandum of understanding with a new prospective customer. Our strategic priorities for Advanced Nutrition are to deliver compelling value to our 2 corner strategic customers, both Early Life and Adult Nutrition business in China and Southeast Asia, diversified specialty ingredients, plus product categories and customers. Moving on to Foodservice. Business development, Joyhana China sales volumes delivering against growth expectations. This partnership with Sinodis has achieved strong market recognition in China. Global food company, Uhrenholt, confirmed the first UHT cream order for April 2024 production under its Embold brand. Uhrenholt launches in Southeast Asia in May 2024. Innovation pipeline is underway to bring the second generation of Joyhana to market December 2024. Strategic products to Foodservice are growing market share and distribution in China and Southeast Asia. Expand innovation pipeline, and this includes beverage cream and other functional creams. Category expansion, as appropriate, involving a partnering approach in the medium to long term. Turning to Ingredients. From a business development perspective, we have a new 5-year investment partnership with Nestle announced through our Lead With Pride program to support Synlait farmer suppliers and on-farm sustainability. We have increased the number of high-margin multicontract and multinational customers. Strategic priorities for ingredients are optimizing product mix, covering premiums above GDT, appropriate sales phasing, growing our value-added portfolio, reducing operational complexity and continuing to optimize our cost base and commercializing Synlait's strong sustainability credentials. Moving on to Consumer, which is primarily Dairyworks. Dairyworks EBITDA performance continues to track positively towards budget expectations, this will be materially higher in FY '23. Capital improvements have been made to enable greater labor efficiencies, some safety improvements and product quality. Rolling Meadow brand positioning and visual identity has been refreshed for the first time in 15 years. Southeast Asia and Australia continue to be the significant growth engines for Dairyworks. Moving on to On-Farm Excellence and Sustainability. Retention of our high-quality milk supply remains a critical priority. The balance sheet has come under continued pressure, cessation notices from farmer suppliers have increased compared to previous years. Cessation notice period is 2 years, which means Synlait's current financial performance is not impacted. We're confident given the progression of the reset plan, there is currently limited material risk to future financial performance. Strong competitive farmer supplier offering remains in place. We've also made a number of enhancements to our Lead With Pride program. Synlait achieved B Corp recertification, global gold standard accreditation for sustainability. Moving on to our Forward-Looking Business Recovery Plan. Our plan is well progressed. As I mentioned, this is broken into 3 pillars. First pillar is deleveraging and cash flow improvements. We are targeting net debt to be below $200 million at the end of FY '25. Total debt reduction target for us circa $300 million. Second pillar, accelerating volume growth. We're targeting over 20,000 metric tons of volume growth in Synlait value-add products by the end of FY '26. The third pillar is optimizing performance. We're targeting an EBITDA improvement from both volume and performance initiatives $45 million per annum at the end of FY '26. Specifically, the first pillar, deleveraging and cash flow improvements. We have a clear deleveraging plan in place, we are focusing on further working capital and CapEx improvements. Moving on to the next slide, Accelerating Volume Growth. This was broken into growing Advanced Nutrition volumes, and we're speaking here specifically to Early Life and Adult Nutrition in China and Southeast Asia. Second part is growing Foodservice volumes in China, Southeast Asia and also exploring the Middle East. The third part is accelerating growth in China, leveraging our strong and committed partnership with Bright Dairy in China, accelerating volume and value growth opportunities for Advanced Nutrition, Foodservice and Ingredients. We are underweighted in this highly profitable market. The third pillar, specifically around optimizing performance, which is around improving manufacturing performance, improving quality performance, optimizing our supply chain and executing our cost reduction initiatives. Moving on to strengthened leadership structure. Search for a new independent director is complete, the appointment of George Adams to the Board in March 2024. In terms of our executive leadership team, Ruth reports to myself, reduced by 3. And this will increase business unit alignment, accelerate growth, reduce costs. Naiche Nogueira, as mentioned, now has Advanced Nutrition and Ingredients along with a number of other customer supporting options. Paul Mallard now takes ownership for the end-to-end supply chain planning, manufacturing, quality and supply chain. And Charles Fergusson takes on the additional responsibilities of Corporate Affairs and Strategy. It is worth noting that Tim Carter reports through to me as the CEO of Dairyworks until such time if this business is sold. Now I hand you back to Rob Stowell to take you through full year 2024 guidance statement.

Look, our guidance statements, previously, pointed towards an EBITDA of $90 million, flat or down. Synlait now expects FY '24 EBITDA result to be significantly down. We're putting out a range of between $45 million and $60 million, excluding any noncash adjustments for product costing method. That change will grow through the end of the year to roughly $17 million, but that's an estimate at this stage. Look, the key areas that we're seeing being impacted is softening demand and also margins right across all the business units. We're also seeing adverse foreign exchange affecting our results and also ongoing product mix headwinds. And the final bullet point there, we've given some examples, there's operating expenses continue to be challenging, legal costs -- a number of costs coming through on our inventory management and other costs. So look, as noted throughout our materials and financial statements, we do face material uncertainties around the timing and amounts of the deleveraging options. They're all currently progressing. We would hope to keep you updated on how that is progressing over the next couple of months. And look, final point there is the Board and management remain fully committed to deleveraging, that's #1 priority, and we'll continue to focus on improving the profitability for the balance of 2024.

A final slide before we open up to questions. Here's what you can expect from Synlait in the second half of FY '24. We will deleverage our balance sheet and improve cash flow. We will accelerate volume growth if necessary to reduce capacity. We'll optimize our operational and trading performance across manufacturing, quality, supply chain and our cost base more generally. Now I hand back to Hannah Lynch.

Thanks, Grant and Rob. We'll now hand through to Ashley at Chorus Call to start the Q&A process for us. [Operator Instructions] Ashley, over to you.

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

I might just start with your outlook commentary. I'd just be keen to understand, I guess, what's changed in the last 6 weeks or so, so dramatically. I mean if I look at the factors you've called out in terms of margins and costs, it's consistent with what was articulated in February. So I'd just be keen to understand within each segment with some detail, what's driven the big step change?

Matt, I'll try to give a little bit more color to what's going on. First of all, I'll touch on the Advanced Nutritional kind of segment. What we're seeing within there is impacts across lactoferrin. So we've got uncertainty around -- the market has really softened, uncertainty around value and also prices. As you know, the lactoferrin segment has been quite profitable for us in the past, and we are seeing some volatility in that space. The other factor heading success and also the other segments is foreign exchange. So Frontera released a FX assessment in late January, early February, which basically kind of crystallized the fact that actually we were behind on foreign exchange, we'd hit a number of tailwinds for foreign exchange, the previous 2 years that are actually behind, and that's affecting the Ingredients business reasonably significantly and also in other segments as well. Some of the other information has come through the last 6 weeks is really around inventory and discounting of inventory. And so -- we still got a number of issues, particularly within our logistics and our rehousing around inventory and products that are not valued at what we think they're valued at. And so we're working our way through that at the moment. And then I guess, the overlay is still not quite knowing exactly how we're going to go across the next few months around expenses, costs, supply chain disruption through the Red Sea shipping kind of play there. So the other things we concerned about, look, I would hope that, that range is a conservative range and that will be targeting to be towards the upper end of that range.

And just within the Advanced Nutritionals business, I think prior commentary was volumes to be up 11% to 12% in FY '24. What would that number be now? Presumably it's lower? And I guess, where is the differential coming from? Is it the EBIT volume slower? Or is it a2 moving volumes away from your facilities quicker than expected or in demand from them?

Look, this is commercially sensitive information, but I'll try and give you a little bit of color here. Look, we're actually expecting our infant formula volumes to be a little bit better than what we anticipated previously, Matt. And volumes produced up in the Pokeno sites to be a little bit down on what we initially -- we're predicting 6 months ago.

So net-net, no change?

Fair to say, net-net would be down on what we're originally anticipating 6 months ago.

Your next question comes from Nick Mar with Macquarie.

Just in terms of the strategy from here. It sounds like you're going to be sort of a single site kind of one customer business really again. Is that something that you guys are able to sort of manage the risk appropriately of going forward? What Synlait has been sort of working to get away from the last 5 years?

Yes. Nick, Clearly, we haven't made any decisions on the complete sale of North Island assets or potentially selling half of that asset base and there's still a possibility that we might retain those assets. Regardless, it doesn't take us away from our focus on Advanced Nutrition and Foodservice. Foodservice creams come out of the Dunsandel site, and any future category growth, Foodservice would also come most likely out of the Dunsandel site. Clearly, on the Dunsandel site, we've got capability for The a2 Milk Company business for other customers that were in the process of acquiring. And there are other potential opportunities that we could develop in the Dunsandel site, if any event. We did exit our North Island position. So strategy focused around Advanced Nutrition infant and adult remains and focus on Foodservice remains.

That's helpful. And then in terms of some of the longer-term goals you put out in the last sort of year or 2, are those parts now? Are they sort of unachievable in terms of the sort of 15% return on capital target? Just some sort of flavor around that and how much of, I guess, the challenges are still in your view, kind of short-term, kind of one-off things versus rebasing the returns for this business.

Yes. Nick, it's Rob here. Look, obviously, we're going through this strategic review in the North Island. So there's a few of the moving parts. And obviously, the Dairyworks process is still in play. And saying that, I mean, I think that's something to see a function of both profitability and assets. And so I think we would continue to revisit. We've still got ambitions to be a high-returning business in the future. But I think it will become clearer over the next 3 to 6 months on exactly what that return in the long term looks like.

Your next question comes from Marcus Curley with UBS.

Can we just extend on the asset sale program. So could you just give a little bit more of an update in terms of where Dairyworks sits? So you've had indicative offers at $120 million, you're still working on those? Or are those offers gone and you're restarting?

Yes. Look, we've had a lot of offers, nonbinding. But we came very close last week to getting a binding offer. I can't see who the party was, but it did not occur and it wasn't because of the business, and it was a very much a party that really like the business. But for regulatory reasons, it just wasn't the right time for them to bite down on it. So I think going forward, we -- that was a setback, but we've still got at least 2 parties who are interested and we continue to work with them over the next couple of months to see if we can build them into a credible offer?

Okay. And then the other option clearly is in North Ireland. Could you give a little bit of color about the value there? So you've written down Pokeno, but to what level? I can't see anything in the accounts that sort of stipulate the North Island values.

Look, Yes, I don't want to give away too much information here, but essentially, it depends what assets you include in the North Island, but if you are to include the key note there, we basically got the key notes, and we've got the recipes right at canning line and we do have associated warehousing for those assets under lease. Those assets -- the net book value of those assets, low $400 million. The impairment, which is kind of accounting treatment, goes across all our Synlait Milk assets, including the North Island site. So I wouldn't too much reference from that. Obviously, we need to go through a process over the next couple of months around really exploring the strategic value of those assets in the North Island.

And at the moment, is it fair enough to say the Pokeno and related assets are EBITDA loss-making?

Yes, correct.

Okay. And depending on how you account it, the blending and canning would be relatively profitable.

Look, we've got capacity in the South Island for blending and canning. So we've got headroom and capacity down here. And obviously, we have a lot of headroom up in the North Island. There's only small volumes going through the North Island canning line.

All right. Okay. So there's not a lot of revenue or EBITDA with the North Island blending and canning. So that would -- the value there would depend on the acquirer bringing their volumes into it.

I think it's the way to think about it is essentially, if you can increase the nutritional volumes through the Pokeno site, we've got a [indiscernible] line at that site as well. And then we've got canning, which appears to -- those -- all those assets start to work together. But you need to increase those debt base load of nutritional volumes within Pokeno first.

Okay. And then -- sorry, that was a long-winded first question. The second question was, you mentioned in the strategic component, an uplift in EBITDA of $45 million by end of '26. What base is that using? Is that using the new revised guidance for '24?

No, no, correct, using FY '24 as a base. Those targets basically include -- it's mainly driven by value. But also, there's other stuff we've talked about that a lot in the past around kind of leakage in the business where we've got improvements around costs and yields and inventory management, all those sorts of initiatives have been worked into those numbers as well.

Marcus, it's worth mentioning that the North Island asset base has high fixed costs attached to it. So a high contribution margin volume flows through those assets, it improves the profitability in a reasonably record session.

And then sorry, just extending on that so what assumption, if any, have you made around a2 volumes. Obviously, they've announced that they're planning on moving the Stage 4 away. Outside of that, is there anything else assumed within the $45 million for them?

Where we have certainty around the forecast and we've allowed for that. Where we have uncertainty around future volume, for example, dependent on the outcomes of say, arbitration, we have taken a risk-weighted view, and we can't specifically talk to that at this point.

Okay. But broadly speaking, it assumes that the China label and the English label Stage 1 through to 3 broadly remains in the business?

I mean, a simple way of looking at it for the time being is that we hold the SAMR license for the a2 product, depending on the outcome of arbitration may or may not impact English label volumes. So again, we've taken a risk-weighted view for that.

Next question comes from Sean Xu with CLSA.

My first one is around the capital raise. So it's great to see the support from your largest shareholder on its commitment to a potential capital raise and the bridging loan if needed. Given we haven't heard anything from a2 Milk being second largest shareholder on this. Does that mean you haven't got support from your second largest shareholder on the capital raise? I know it's probably a difficult question to answer, but any information you can share on this will be helpful.

We haven't directly engaged with the a2 Milk Company on the capital raise. If we get to the position where capital raise is consumed, clearly, we would engage with our second largest shareholder and largest customer on that point. But at this stage, we have not engaged with them.

No problem. My second question is around your interest costs doubled in the first half compared with GDT. How can we think about the full year interest expenses in the context of these $130 million debt extension also potential intercompany bridging loan from Bright, assuming that Bridging will be charged at the market rate, if that's correct.

Yes. Look, it's a good question. I think obviously, we are expecting funds to come into the business in February and March, and that's kind of been pushed out for a period of time. But it really is more likely that any deleveraging funds that come in will be closer to July, for instance, as opposed to around April. So interest costs will continue to increase on our original forecast. Any kind of loan that comes through from a related party, such as Bright, would have to be at market value.

[Operator Instructions] Your next question comes from Stephen Ridgewell with Craigs Investment Partners.

Just picking up on Bright Dairy's letter of support for equity raising. Are you able to elaborate a little bit more on the extent of the commitment that provided to Synlait? I mean have they committed only to take up their rights on a pro rata basis? In the event of an equity raising, is there scope to take up more than the pro rata, please?

Look, it's very, very premature, Stephen. At this stage, they have committed to anticipating in an equity raise if we went down that track. Whether they would want to increase their position through that process or normal trading at the market, that is a question for them, and it's certainly well premature given that we haven't decided on a capital raise at this point.

Okay. I guess -- but at the least, have they committed to pro rata taking up their rights on pro rata in equity raising. So I don't think that's premature, given that it's obviously been tabled as a consideration for the company in the next few months.

That's correct, Stephen.

Okay. Second question, also just on the recapitalization plan. There's currently the comment on -- I think it was about -- Plan B is to -- actually the preferred equity $100 million $150 million considered investment of the other North Island assets, including Pokeno, could we just be a little bit clear about what Plan A is because, Grant, you've alluded to on the call, the company's plan is to deleverage by $300 million. You obviously got a carrying really of $120 million for Dairyworks, but there is another $180 million. So if you're not selling [indiscernible] enough, you're not assuming the $100 million to $150 million of preferred equity, is the extra $180 million from an equity raise? So I'm just curious of how you'd deliver by that amount with plan...

The 3 big buckets here, Stephen. One is to potentially sell part or all of our North Island assets. Secondly, to sell Dairyworks and Synlait as an equity raise.

Okay. All right. So Plan A probably include some of the asset sells. Okay. No, that makes sense. And then if I may ask just one more. Just one for you, Rob. Just a $17 million adjustment, and sorry if I missed this before, but can you just give us a little more comfort to generally noncash item, the new interpretation from your [indiscernible]? Is it just an under-period accrual adjustment? Or is it generally a noncash one-off kind of factor to consider?

Yes. I mean basically, it's no extra cash is going out of the business. All we're doing is we're allocating our manufacturing overheads more for the Ingredients business and lease to the Advanced Nutritional business. And so what creates the adjustment period on period is the fact that we hold reasonable levels of inventory of nutritional products at each year ends, all the base powder that we need for the next season. So that moves around the numbers. So it's just a way of allocating our manufacturing costs into product costs essentially, which is throwing around the numbers.

Next question comes from Marcus Curley with UBS.

Sorry, just a follow-up. When you mentioned that first bucket around the potential North Island asset sales, is that one group of assets you're looking to market? Or are you looking to market them separately as well as together?

Our initial thinking, Marcus, is that it's a group of assets in the North Island. There may be interest as we get into the strategic review for them to be viewed separately. I think that's unlikely. I suspect they would be viewed together. .

Okay. And is there a logical type of buyer or investor for that collective group of assets? Do you see it as somebody who already operates dairy in New Zealand? Or how do you think about the appetite there?

Yes. Look, I think given the very high quality of assets, particularly at the Pokeno site, it's likely to be a buyer that has an interest in Advanced Nutrition. And potentially an investor that has an interest in both plant-based and dairy, given the segregation we've got on that site with the 2 [indiscernible] operations that exist. Look, I think it would be unlikely to be in the event we sold it for it to be picked up by a pure commodity player. Again, the whole point of getting into the strategic view is to really understand whether we are the highest value owner of those assets.

And has Abbott shown any interest in acquiring those assets? Or have you had any discussions with them?

We haven't commenced any formal discussions with Abbott at this point.

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

Again, a very, very challenging first half for Synlait. Today, we're very pleased with the ongoing support that we have from Bright Dairy from our banking syndicate. We are 110% committed to deleveraging the balance sheet, and it's important today that we signal to our farmer suppliers that we remain very committed paying a market farmgate milk price. Thank you again for your time.

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