Thank you for standing by, and welcome to the Bega Cheese Limited Half Year 2022 Results Conference. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Barry Irvin, Executive Chairman. Please go ahead.
Thank you and welcome everybody. Delighted to have you here for us to report our first half result for the financial year 2022. Very pleased to be speaking to both long-term shareholders and new shareholders. It has been a very interesting time, we could put it that way, in terms of the period of time we've been living in, indeed the execution of what was the largest transformational deal Bega Cheese has ever done in terms of the purchase of Lion Dairy & Drinks, which we now refer to as Bega Dairy & Drinks.
In the context of an extraordinarily challenging period around COVID-19 and significant change within the business, we're delighted to report our financial results for this first half. As you would expect with the purchase of Lion Dairy and Drinks, our revenue is at a record high for the first half of AUD 1.5 billion, and with a statutory EBITDA of AUD 97.2 million, normalized EBITDA of AUD 106.4 million. Paul van Heerwaarden, our CEO, and Peter Findlay, our Chief Financial Officer, are on this call and will speak to you during the presentation. We'll go into more detail on the financial performance of the business.
From an overview perspective, very pleased with the performance in the context of what we have been dealing with in the last six months, and to a certain extent, continue to deal with. The balance sheet continues to strengthen and our leverage ratio of now 2:2 is where we're expecting it to be. We look forward to further strengthening of the balance sheet in the coming periods. In terms of the integration, we've been very pleased that, despite restrictions related to COVID-19, we've been able to integrate Lion Dairy and Drinks very successfully. The synergies that we're expecting to achieve are on target.
That's, I think, you know, a very good performance by the team in terms of bringing the two companies together and executing on synergies in a period where quite often we're working from home. In terms of the global dairy market, I think everybody would be very aware that we're seeing extraordinarily strong commodity prices. They have certainly strengthened in recent months and continue to do so. In terms of global dairy commodities, very pleased to see that strengthening. Interestingly, we're obviously also seeing that in terms of input prices of other commodities that affect both the company and our farmer suppliers that are exposed to those commodities.
Obviously there are a number of factors for that, not the least of which is the disruption associated with COVID-19 and indeed, the need for companies to secure their supplies and make sure that they have inventory on hand in what is now a slower supply chain than what it traditionally was. I think the other is, of course, uncertainty related to some of the geopolitical tensions that are also seeing that market strengthening in case there are further challenges in that area. I'll talk a little bit about that later. The truth is, it is a very positive signal for us to see those global dairy markets strengthening in the way that they are.
It should be said that global supply is relatively flat. Certainly in Australia, Australian supply is flat to decreasing a little. It was pleasing again in the context of the six months we've just been through, that we have been able to successfully transition from our Reckitt nutritional arrangements. We made that announcement in the last period that those arrangements were coming to an end. Again, Peter will talk a little more about that later in terms of the financials, but it was very pleasing to have been able to transition from Reckitt and not have any interruption for our other nutritional customers.
I think many have spoken about this and it is truly, I think common knowledge that the Australian food service demand continues to be significantly disrupted by COVID. We are pleased that we are beginning to see some recovery. Certainly the advent of Omicron caused even further disruption both in the supply chain and in food service in particular in the convenience channels. Driven by that milk supply issue that I was talking around earlier and the strong pricing that we are seeing in dairy markets, farm gate milk competition continues to remain very robust and we obviously continue to monitor our competitive position in that area.
I think from my perspective, they're the key issues that I would like to highlight out of the first half. As I said, Paul and Pete will expand on a number of those. For those following the presentation, if I move you to page three of the presentation. It is always the slide where we talk about the values that Bega achieve. I think it's really important to talk about it in the context of the first half, because the discretionary effort that we have asked of our people, and they have willingly given, is why we have been able to achieve what we've been able to achieve in the first half, both in terms of long-term strategic projects and dealing with the issues that have been at hand and immediate for us.
I think of all the values, the passion for the customer and the consumer on the one hand, trying to make sure we got product to them as required, when required, and the other one of supporting each other have been the two bookends, if you like, that have ensured that the business has been able to be very resilient and continue to perform in really unpredictable circumstances. Slide four, many listeners would be familiar with, but it is always worth recognizing the growth at Bega and the transformation we've been looking to execute with our latest acquisition. We now feel very comfortable with the business that we have.
Importantly, in a period such as this, where you suddenly see commodity prices moving up very quickly and some disruption in retail and indeed some heavy cost burdens in that area, it is good to have that balanced business that is able to both manage milk and other commodities in the most effective manner to take advantage of various markets as they change, but also just manage a very disrupted supply chain. We've been very pleased with how we've been able to do that with our capacities in manufacturing and our distribution capabilities and our processing capacities in terms of our brands and the Australian market.
Really that does go, if I'm moving you to slide five. It is talking about how we look at this company and that, and the key of having an integrated value chain that goes right back down to our farmers and our juice growers and our peanut growers and our dairy farmers, to make sure that we understand all the issues that are occurring at the very beginning of our supply chain, and then right through, you know, owning our manufacturing capabilities, owning our distribution network, and then working to make sure we are meeting the expectations of our customers and consumers. Those expectations, of course, include things such as sustainability and reliability.
Our ability to actually deliver to our customer, work with our customer, make sure that we can meet any challenge has very much been tested in this first half, but I think been tested and proven to be strong as it always has been. It is important that we continue to talk about our sustainable development goals and indeed our alignment with the UN Sustainable Development Goals and the announcements we made at the full year around our emissions targets and the work that continues there, and indeed the circularity project that we are championing in the Bega Valley.
I think those subjects remain top of mind for us, and we continue even with lots of activity in the business, we continue to make sure that we do work and work with others to make sure that we are delivering to the expectations of the community and our customers, and indeed ourselves. From my perspective, that is the overview of what's happened in the first half. I think, you know, there is more detail which I'm really pleased to hand over to Paul, who will elaborate on the financial performance and the operational aspects of the business. I'll come back to talk to you at the end, following the presentation from Pete and Paul.
For those that are following the slides, you would move to slide seven, and I'm very pleased to hand over to our CEO, Paul van Heerwaarden, for further detail on the first half.
Thanks, Barry, and good morning, everyone, and thank you for joining us on the call. We are on page seven, and I would like to take you through the financial performance highlights. Revenue has more than doubled to AUD 1.51 billion following the acquisition of the dairy and drinks business. This is a very different business from a year ago. It was significantly larger and more diversified customer base and a product portfolio across our various channels. EBITDA first half of FY 2022 has increased to AUD 106.4 million. This is an increase of 45.7%, sorry, in comparison to a very strong first half in FY 2021.
The statutory EBITDA was increased by 47.7% to AUD 97.2 million. Pete will explain the adjustments between the normalized and statutory results later in the presentation. You'll also note that the dividend has increased by 10% to 5.5%, 5.5 cents per share, which was a decision supported by a strong balance sheet and confidence in the medium to longer term outlook for the company. Page 8 includes the table aligning our brand portfolio with the relevant categories that they compete in, from fresh milk and yogurt down through to plant-based milk and water ice. It's difficult to summarize the various trends across each of these categories for the past 12 months, and the prior comparison period impacted in many ways due to COVID.
For example, the spreads category, which is down slightly in the past 12 months, is cycling off a very strong prior year comparison, which includes the initial lockdown periods across New South Wales and Victoria, which we saw, where we saw a lot of pantry filling. Importantly, we have seen underlying growth across our categories, and we have maintained our strong market share position. I'm now on page 9, which provides a status update on the market, which has been well reported on with regard to the ongoing disruptions across several channels in both the domestic and international markets. It's been very pleasing to note that despite these challenges, we've been able to maintain momentum with new business development, including a range of new products and leveraging our consolidated product portfolio across our chilled distribution network.
I'll draw your attention to a couple of points, including the range of the Sparkling Cold Brew products that we launched during the first half, and the no-added sugar extensions that were launched with the Double Espresso range. These are examples of responding to market trends in terms of both nutritional content and also with the consumption occasions across the day. I'd also like to acknowledge the work done by our commercial and supply chain teams with the implementation of contactless delivery. It was implemented to limit the risk of transmitting COVID across our network and ensure that we were able to maintain revenue and service through to this important channel.
As outlined on page 10, despite the various challenges and disruptions in the first half, we've continued to progress major initiatives across our supply chain, including the DuPont Safety Behavioral Leadership program, which has now been rolled out across our dairy and drinks sites, major capital work at several manufacturing facilities, as well as efficiency programs at our sites and across the chilled distribution network. The termination of the arrangement with Reckitt, announced about 12 months ago, has now been completed, with the final payments from Reckitt received recently. We've reset our cost base at Tatura and initiated alternative arrangements for canning and blending that supports the ongoing supply of infant formula products to our customer base.
With regards to the integration of the dairy and drinks business, and having recently reached the first year anniversary post-acquisition, it is pleasing to note that the synergy program we announced in November 2020 is well on target, and we have recently completed the transition services agreement with Lion. This required an extensive effort by our IT team to replace servers at all of the dairy and drinks sites, and I'm pleased to say that due to their commitment and some long hours, this transition was completed successfully with minimal disruption to our operations and was maintained within our budget allocations. If you can turn to page 11, you will see the Fresh Agenda Dairy Export Index that we include in each of our investor update presentations. We typically like to see relatively uninteresting charts with slow price trends rather than the significant price movements.
If you look back at January a couple of years ago, you'll see a spike in the index to 275, which declined rapidly to about 195 in just a little over six months. This was followed by a recovery and over the past six months, an even greater spike in the index to over 300. For an explanation of these movements, we look at the global supply complex rather than global demand, which has been relatively stable. Milk supply in all major regions, including Europe, New Zealand and the U.S., is down for a variety of reasons unrelated to price. As an example, milk production in New Zealand last month was down over 6% compared to a year ago. In Australia, milk production is expected to be flat to a 2% decline compared to the prior year.
The market remains very competitive, with processing overcapacity continuing to be a challenge. While we are able to realize some of the global returns in our bulk commodity business, the majority of our milk is directed to grocery and route channels, where it has taken longer to realize price increases. It is also interesting to reflect at this time on the sanctions placed on Russia in 2015 at the time when the European Union was removing production caps for milk production, which resulted in a material increase in supply. In 2015, Russia was a large export market for the Europeans, which is no longer the case. As we start to see further sanctions placed on Russia this week, the situation is very different to six or seven years ago. We continue to monitor the situation closely.
Before I pass on to Pete, if you can turn to page 12, it's worth taking a moment to reflect on our business model, which Barry touched on earlier in the presentation. You'll have seen this model presented previously, and it is referred to extensively within the company to explain our value chain from farm gate through to the consumer. The importance of having a level of control and transparency across our supply chains has never been more relevant in the past couple of years, and more specifically, the past couple of months. An example of this is the ability to direct milk solids relatively seamlessly across our bulk segment and the branded segment during periods of significant channel disruption.
This has been particularly beneficial as dairy commodity prices have spiked, and we've been able to realize strong returns on milk redirected from our cafe and foodservice channel customers who recently have been facing labor availability shortages. Another example of the positive impact of our business model is the capacity and capability of our chilled distribution network to flex with the various challenges and provide a level of service that would not be achieved if we were entirely dependent on third-party operators. Thank you, and I'll now pass you over to Pete.
Thanks, Paul. If we just go into the first slide, which is our segment performance, which ties in with the business model that Paul just talked about. The branded business you'll see there increased earnings by AUD 42.6 million on prior year. A lot of that was, or most of that was due to the addition of the Lion Dairy and Drinks business to the branded segment. I guess the highlights here have been really strong performance in grocery. Spreads retail growth was up 4.6%, and our yogurt grew 4.1%. The grocery channel within the Lion, the Bega Dairy and Drinks business actually grew at about 1.5%. Very strong growth there.
Offsetting that, though, were the challenges in our non-grocery channel, where we saw a lot of our market closed or operating below full capacity for the first half due to COVID. Also demand in those areas being down, and we were actually down nearly 3.5% across our non-grocery channel in BDD. What we did see also was some price rises that we've pushed through that will come into play in the second half, and those have been agreed with some of our larger customers. Also saw a significant increase in cost in the branded business, and I'll go into that in a little bit more detail, but that was really attributable predominantly to the impact of COVID-19.
In the bulk business, we'll see they're down on prior year by nearly AUD 16 million. That was really impacted by a suppression of our powder business, infant formula powder business across Nutritionals, which we called out. Some decrease in lactoferrin pricing on prior year, although I would note that our lactoferrin numbers are in expectation with what we expected this year from a budget perspective. Also a higher increase of milk that will be equalized with increased commodity prices in the second half. In fact, we think that we'll see a significant lift in our bulk earnings performance in the second half of very, very strong commodity prices as they start to flow through.
If we go down to the next page, which is just a reconciliation of our normalized result. As you can see, the two key factors playing out there have been the termination of our agreement with Reckitt. We received about just over AUD 22 million of revenue that came through for the half. There's another AUD 2.5 million to come in January, then that will end that process. You'll see there, though, that we did have some costs that we netted off against that of about AUD 5 million, separation costs and restructuring costs.
It's good to know that a lot of work's been done around our footprint at Tatura and our capability at Tatura to take out any excess costs or lack of capability in the business. The LD&D transaction-related costs were just over AUD 27 million. Most of that related to separation costs, which, as Paul stated, have now been completed. That drain leaves us. There was some consultancy and legal costs involved in that. Just a few more separation costs, but there'll be a little bit of that left in the second half, but most of those costs are now done.
If we just move on to the next slide, which is a balance sheet. You see that the balance sheet looks quite different. I guess the main difference around that is really the addition of the Lion Dairy & Drinks assets into our division, known as Bega Dairy & Drinks. It was valued at about AUD 602 million in net assets, and that accounts for most of the lift there. Trade receivables has come down a little bit, mostly off the back of a little bit more use of our trade receivables fund. But apart from that, not a lot of change to the balance sheet. If we move on to the cash flow, there was a cash drain for the half of just under AUD 36 million.
A lot of that is seasonal, and we would expect a fairly big seasonal swing and some positive cash flow generation in the second half up to sort of AUD 60 million or AUD 70 million. We also lose the drain of the TSA agreement now that we've transitioned off that. Those TSA charges come away. We're looking forward to some positive cash flow being generated in the second half. If we just have a look at COVID-19 now, we've called out that COVID-19 costs in excess of AUD 20 million. They're across a variety of different areas.
There's probably most of that relates to direct COVID-19 costs that were incurred during the half, and they were for items such as absentees and testing programs, additional logistics costs to ship product around, loss of margin just due to customers being closed and a number of other ancillary costs, such as cleaning, security and warehousing set up. There was also additional indirect costs involved in that. You know, we had an increase in material costs through availability. We had to close plants because suppliers couldn't meet our windows with production, and we had people away sick. With our demand changing, we also struggled with some coverage and not getting the volume through our plants.
Overall, those costs were in excess of AUD 20 million for the half. We think that we'll incur more costs for the remainder of the year. In fact, January was a particularly bad month, and we have factored in some continuation of those conditions through February and March. We anticipate that there'll be a substantial improvement in the last quarter of the year. Obviously, a lot of our route channel was closed down. We did have problems getting international supply and with materials and packaging. We'll anticipate a little bit more of that, but we're hoping that that's done. Absences across our plants and warehouses reached up to 30% during the period.
We are confident, though, that changes in recent government regulations about allowing people to get back to work will help us on that recovery in the last quarter. I'll just pass back to Barry now.
Thanks, Pete. I'm really pleased to perhaps just provide a little bit of a wrap-up around where we are today and what we see as the way forward or what we see is in front of us. It is fair to say for those that are following the slide presentation, we're now on page 19 and we've got a wonderful picture there of Ash Barty. So we're delighted with our association with Ash, and I'm sure as the rest of the country is, we were delighted to see her successful in the Australian Open. So that's a nice thing to be able to talk about where we are today.
One of the places we are is that we have an Australian champion in the Australian Open, which is great. But perhaps more specifically into our business, to our business, we have been, as Pete just described, significantly impacted in operational costs and in the market as a result of COVID-19, particularly in our domestic operations and business. We are still managing that. We are not through it, but we do see signs of improvement. We've certainly seen some signs in February, and we are expecting that to continue. As Pete mentioned, we're seeing our markets open back up, and we're seeing, you know, our staff are more readily able to staff our plants and get back to normal operations.
Certainly we are still managing it. From that perspective of all the costs, some of them, which we will expect to decrease, but others will stay with us, particularly around those input costs that we talked about, particularly any commodity input costs. It will be important for us to get price realization as we move forward. Many have spoken about food inflation and I think it is well and truly with us as has been spoken about by others. We are very pleased, and it's been mentioned by both Pete and Paul, that the integration of Dairy and Drinks into the business has been very successful and it is worth calling out.
The transition of the information technology systems always a worry, I think, for anybody that's been engaged with or following large business carefully. It's always something that tends to be very difficult to bring in on time and on budget, and the fact that the team have managed that in such challenging circumstances is a credit to them. We do have a strong balance sheet which continues to strengthen, and it is worth mentioning that we have expanded our banking syndicate. We have been delighted with the support of our traditional banks, Rabobank and Westpac, over a great many years who have continued to support the business and there is no change in their willingness to support.
Given the size and scale of the business, we thought it appropriate to strengthen up the flexibility around our banking options, and we've expanded the banking syndicate and accordingly, giving us, you know, security and flexibility around our funding. It is also, you know, on the theme of balance sheets, we do have that very substantial property portfolio on our balance sheet at the moment as well, which is obviously, you know, further strengthens the overall position of the business.
When we think about where we would like this business to be and when we think outside the challenges of the immediate and getting through COVID, we continue to be delighted with the brands that we have in growth categories, and we still see that there is great opportunity there. We see that there is opportunity for further growth and further business improvement across the entire business, but that integration will continue to yield opportunity for us. There's no question that both the geographic positioning of our business and the diversity of our customers, be they in Australia or internationally, has helped with business resilience.
It has created our ability to manage product and manage difficult circumstances and manage supply disruption well, and we think that will stand us in very good stead for the future. As Paul mentioned, very significant competition for farm gate milk as we do not see growth from suppliers in Australia or around the world, and we expect that competition to continue. Geopolitical tensions are something that we continue to monitor and obviously there's plenty of commentary without me adding to it around those tensions, except to say that clearly they will impact imports both for our farmers and for the business itself.
Indeed, we continue to monitor and be ready to respond to any changes we might see. It is a very changing environment. Moving to page 45 and my last slide. Obviously, in terms of the priorities for the business, I think the strategy is very clear. It is unchanged despite the challenges of COVID. We remain very confident with the medium-term outlook for the business, but there are indeed short-term challenges that are being spoken about across the food industry, I think. Part of that is the ongoing management of the impacts of COVID-19.
As we said, we have seen that settling down a little in February and signs of recovery, and we expect further recovery, but we think that we'll be dealing with this at least into the fourth quarter. It goes without saying that but it is appropriate to emphasize that the safety and well-being of our people is our first priority. During this COVID period, that has been, you know, a priority while we have tried to juggle all the things that we need to worry about in terms of not only safety but the well-being of our staff.
You know, many of whom have been working from home, many of whom had no choice but needed to often attend factories, and we needed to make sure that we made them feel safe, and that continues to be a priority for us. We are confident, as mentioned earlier, that we will continue to realize the synergies that we modeled for Bega Dairy and Drinks. We are continuing to invest in brands and markets with that long-term view, continuing to make sure that we have a good pipeline of new products, you know, that will engage our customers wherever they might be in the world.
We think there are still opportunities to optimize the capacities and the capabilities across the bulk and brand supply chain and how those two segments of our business can work together to create even greater value. We think there is great opportunities into the future in leveraging our cold chain scale and reach to customers and the options that we can offer customers and indeed the full service capability of our business. We of course continue to support further diversity and inclusion in our business, and we recognize that we've got more work to do there, but it is something that we continue to focus on and work hard.
As I mentioned in the conclusion of my initial presentation to you, the sustainability and circularity initiatives continue to be championed within the business and from the leadership of the business. We're very pleased with the progress we are making there. Ladies and gentlemen, that concludes the presentation. Very pleased to take any questions that you may have and Paul and Peter are on the line with me to assist with the answers to those questions. Feel free to. I'm happy to hand over for questions.
Thank you. If you wish to ask a question, please press star 2 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star one
. If you're on speakerphone, please pick up the handset to ask your question. Your first question comes from Michael Peet from Goldman Sachs. Please go ahead.
Morning, Barry, Paul, and Pete. Just first question, just on the guidance from December. It's probably pretty obvious, I'd assume, but just wanted to confirm that given January and Omicron sort of throwing a bit of a spanner in the works, that that's you probably backed away from that guidance from December.
Michael, we don't have any further update on guidance at this stage. Obviously, the issues that we're dealing with are immediately in front of us, but we don't have any further update today. I think, you know, as per the presentation, there are challenges that remain with us around COVID that were very much there for us in January. We are seeing recovery, and we are seeing some opportunity in commodities, but we're obviously keeping that guidance under review.
Okay. Just if I may, on BDD, I'm just trying to get the revenue line. I've probably underestimated, overestimated it in the first half, and I'm just trying to get a sense of if I sort of take the 787, try to annualize what you've booked in the second half last year, I'm getting around AUD 1.3 billion of revenue. Is that the number? And is that impacted by the current situation from COVID?
I might see if Pete can elaborate on that in terms of what we're forecasting.
Yeah, no, Michael, we've got a bit more forecasted than that. We'll have a slightly stronger second half. We'll be closer to sort of the AUD 1.5 billion, one point five billion dollar net sales revenue number.
The seasonality, notwithstanding the disruptions at the moment, but the EBITDA seasonality, can you just sort of remind us what that normally is, sort of first half, second half, and whether that's just, you know, irrelevant at the moment given the situation?
Look, it's usually slightly weighted towards the first half. BDD's traditionally been a bit more heavily weighted towards the first half than BCL. This year that gets equalized a little bit. We've got some price increases coming through in our retail business and our branded business, and we've also got significant commodity price increase in the second half in our bulk business. You'll find it'll be a bit flatter than what it normally is. A bit more even first half, second half.
Okay, thank you. Final one just from me. Just COVID, you called out the AUD 20 million. It sounds like most of that's costs, but just trying to also get a sense of, you did mention that some of your customers were shut, just what revenue impact there was in the half?
Oh, gross margin was about, around about AUD 6 million.
Great. That's helpful. Thanks very much, Pete.
Thank you. Your next question comes from David Errington from Bank of America. Please go ahead.
Morning, Barry, Paul, and Pete. Yeah, very interesting times to follow the company. The first question I've got, first of all, I think to be only impacted by AUD 20 million in that first half is a terrific performance really, given what the world has thrown at you, to only be knocked around by AUD 20 million, given what's happened to other companies. You obviously, you know, you're on top of your game in terms of operations and managing the absentees and there. My question is more from the point of view of raw material cost increases. I would imagine that because of post the acquisition of LD&D, you're more leveraged to things such as, you know, the commodity and the plastics, the sugars, the coffee, packaging, all that sort of stuff. Have those cost increases started to impact your bottom line?
Is this something that's now likely to feed through coming in the second half and beyond? Because, you know, there's been some pretty significant increases in costs. What are we likely to see there? Probably, Pete, I don't know whether it's. This question's toward you.
Um-
Yeah, what sort of things can we expect going forward for that?
David, I might throw it to Paul for some initial commentary, but yeah. Yeah, so look, Paul, I won't bother adding an overview. You might just provide some initial commentary on that.
Thanks, Barry, and thanks for your question, David. Yeah, as you were providing some background thinking on that, it did feel like a lot more than AUD 20 million. It's been a pretty tough few years. See, what has been, as you've rightly pointed out, and we'd add fuel costs in there very much in terms of you know, with our expanded chill distribution network and reliance on and exposure on fuel cost, that's certainly another one to add to the list that you provided. Those prices that you would've seen increase came through pretty early on in the year.
They were starting to hit some of our business in the first quarter, and if they didn't hit us in the first quarter, they were certainly well and truly alive by the second quarter. One of our challenges across particularly our consumer and food service business is how quickly we can realize price increases in a pretty dynamic market where there's a lot going on. One of the sensitivities, for example, particularly across Victoria and New South Wales, is we've got customers under significant financial pressure.
Yeah.
Just being sensitive to that as well. It's certainly hard to put a number on it, but it's fair to say that we've been chasing costs through that first half. As Pete mentioned, we have seen price increases coming through this quarter and into fourth quarter. Just with what's going on around the world at the moment, we expect that that's going to be a continued theme going into next year. Indeed, if you had a look at the Coles and Woolworths announcements over the last 48 hours, you'll see that's one of their key call-outs as well, just in terms of food price inflation and cost increases and how they get absorbed across our value chain.
It has been a bit of a challenge for us, and there's no doubt we've had some impact in our business with the timing gap between those increases and price realization. We've got a bit more work to do there, as we sort of prepare for next financial year.
Yeah, I suppose it's always an ongoing challenge to get those price rises where, as you say, your route customers are under financial duress and the supermarkets are always kicking and screaming to pass it on. I suppose it's just a case that it's a business as usual. You just gotta get those price rises through. It's a challenge as to whether you can get the full cost pass on. I suppose that's following on to my next area with the dairy price. I don't know whether Paul or you, Barry, but I mean that really big increase in farm gate milk prices, and you mention you've got an overcapacity, not you, but or you-
Mm.
you do, I suppose everyone's got an overcapacity of processing. What's gonna be the end game here? Because that's, as you say, it's a sort of like a one in almost 10-year event or two in 10-year event that you see such a big spike. You seem to highlight that it's almost a structural increase in price now. What's the end game in that milk processing game, Barry?
David, I think there's two things. Without wanting to seem too old, I have seen these spikes before and I am always a little careful to not make too many judgments on how much those really quick up spikes, how long they will hold for at their peak levels. I think in terms of where we are in global supply and demand, as Paul mentioned, I think we will see a strong base and I think, you know, pretty solid returns for farmers for the foreseeable sort of medium term, if you like.
In terms of that competition to milk, look, my view is always one of saying, we're actually pleased to see strong prices for farmers because, you know, that will generate profitability which ideally generates milk. Now, one of the things that we have seen, particularly in this year, is that we are actually seeing the competition come from, as much as the challenge, the overcapacity in processing, it is the alternate use for the land, particularly the beef industry, where for the first time in many, many years, we've seen dairy farmers tempted
To have an easier life and run beef cattle. We're seeing exits from the industry, which is creating that additional challenge with what you would normally see in a circumstance like this with pretty strong prices and pretty good seasons, you would see supply growth. We aren't seeing that growth, but we would say that is more down to exits and alternate uses. I think as we go forward, you will see further consolidation. You know, I think that the thing that we are doing, Tatura is a good example, we are right sizing some of our facilities. For us, some of that is right sizing our own capacities and capabilities and making sure that we're focusing on high returning products.
I think we have seen some level of consolidation within the Australian industry already. We've also seen some closure of some plants. I think that will probably continue. But I expect to have robust competition for some period of time, which from our perspective means that, you know, quite frankly, what we've got to make sure we're doing is having a product mix, whether it be in commodities and bulk dairy or indeed in our retail branded product that is more than able to compete with for milk against our other competitors. It is really about us making sure that we've got a product mix and a supply channel and that allows us to make a very competitive and consistent offer to our farmers.
Now, when you see a big commodity spike like that, it's hard and indeed dangerous to just follow it up because it can quickly come down again. But we think we generally get the balance right.
Okay.
more than understanding it there.
Well, well done in running the business the way you have in such tough conditions, guys. You seem to be navigating your way through in unprecedented conditions. Well done.
Thanks, David.
Thank you. Your next question comes from Phil Kimber from E&P. Please go ahead.
I just wanted to ask some questions. On those COVID costs, the AUD 20 that you called out, and I think you itemized 6 of it from lost gross profit from shut customers. Are they, I mean, have you sort of given them on a net basis? I'm sure you're working hard to take other costs out. Are they a gross number or have they been netted off against sort of-
Look, I'll just add a slight refinement, Phil. Where our wording was in excess of AUD 20 million, so it is above AUD 20 million. We didn't wanna go to the higher side of the number. It's AUD 20 million is probably conservative, but we thought that it was appropriate to be conservative as we call out the number. I'll throw to Pete to add some more flavor in terms of how that number was arrived at. Yeah. Thanks, Barry. That is the total number, Phil. We have tried to
Yeah, if you look at our result and add somewhere between AUD 20 million-AUD 30 million back, that's the cost of COVID to us, and that is the gross number. What I would say is that January was a very difficult month. You know, to David's question earlier, we started to see material costs increase through the first half. What's really hit us late in the first half and in January was the spread of the Omicron virus and those high levels of absenteeism. We've had a big chunk of cost in January. That cost will be reduced in February and reduced again in March.
We start to see hopefully the revenue come. Well, the revenue's starting to come back already in February. That is the total cost. When you extrapolate the cost over the year of all the material increases and the big hit we've had in labor in sort of November, December and January and probably some of February, you know, we expect or we're forecasting for our total COVID cost to be more in the second half. That's built into our numbers.
Yeah. Okay.
We're having to slash quite a few other costs in the second half to counter that.
Right. That's, I guess where I'm going is, I mean, where this year ends up, who knows, given what's going on. You know, trying to look out to 2023, I mean, if we assume that, hopefully, fingers crossed, we're all, you know, largely through this, whatever those costs are and, you know, let's call it AUD 40 million for the sake of the argument for the full year, I mean, is that, does that pretty well just drop back into the business? I guess that's what I'm trying to get at, how one-off these really are and how we should think about 2023.
It'll probably be a bit more than 40, I think.
Yeah.
We don't know yet because it's still playing out. You know, the way I look at it is there's a direct chunk of those costs that should go away. I mean, hopefully, we're not spending, you know, a couple of AUD million on masks and testing and security guards and cleaning and those sorts of costs. Hopefully, we don't have 30% of our workforce away again. You would like to think that a lot of those costs will exit the business. Where global fuel prices that impact resin, where the, where shipping costs go, you know, those sorts of things, we'll need to sort of assess over the next six months.
Yeah. Okay. I guess following on from that, you talked about some initiatives having a material benefit in FY 2023, and I just wanted to make sure I'm not double counting here. I think there was an extra AUD 5 million or incremental AUD 5 million of Lion Dairy & Drinks synergies coming in.
Yep
the second year. It, I get a feeling that these initiatives you're talking about might sort of capture some of that 5. I just wanted to make sure I didn't double count.
No. That's a little bit separate. We did go to the market with AUD 36 million of synergy savings in first financial year and 41 in the second year. There is that additional amount. What we're referring to is, yeah, we've got a really good yogurt program happening at Morwell investing AUD 15 million down there in a new pouch filler line that will start to really reap some good benefit in 2023. We've also got some packaging initiatives that are happening on site in New South Wales. That, yeah, that's another sort of AUD 10 million-AUD 15 million of spend. Three large capital projects that will add to the business next year.
Right. That CapEx, is that coming through in the second half? Just, that was the other side to the-
Yeah. Some of it came through in the first half, Phil, but most of it comes through in the second half.
Do we have a sense of what the full year CapEx, I mean, round numbers?
It's sort of around that AUD 70 million-AUD 75 million dollar mark.
Okay. My last question, sorry to be so numerically focused. The tax rate was really low in the first half, and there's a note as to why in your appendix. I just wanted to know whether in the second half and looking into 2023, we should assume you get back to a sort of normal tax rate.
Yes. Yeah, we will. Yep.
Okay. The second half, don't expect that sort of 23% again. You sort of, I don't know if you head back or you just go straight back to a normal-
No. The head back. Don't expect.
Yeah
23%, but it'll head back. We've just gone through the PPA work, but it'll definitely be heading back towards a more normalized rate.
Excellent. I'll let someone else ask some questions. Thank you.
Thank you. Your next question comes from Jonathan Snape from Bell Potter. Please go ahead.
Yeah. Hi, guys. Can you hear me okay?
Yeah. Hi, Jonathan.
Hey, Barry. Look, just a couple of questions if I can first. I know there's been a lot said on these COVID costs, but distribution in particular, if I have a look at the segment, it looks like it's jumped about 300 basis points as a proportion of your revenue. Like, it's quite a material jump by, I think, almost AUD 50 million relative in the second half. Trying to just figure out how much of that is fuel costs and stuff like that relative to, you know, truck drivers being out and things like that.
I think we'll leave COVID sitting in your wheelhouse at the moment. I would say that around 70% of our COVID costs are people not being there, having to pay contractors extra money, testing, security, extra washing, and those things associated with that. The other 30% would be lack of recoveries in factories through demand changes, price of material increases that have happened as part of this sort of, as part of this-
Okay
Process. Does that sort of make sense, Jonathan?
Yeah, yeah. Look, just looking at your marketing costs as well, they seem to step change in the first half. I'm referencing to the second half of 2021, 'cause I don't think you can look back at-
Right
you know, the first half because you didn't have Lion. They're up around AUD 54 million. Is there any particular phasing of how the marketing investment goes in that Lion business? Is there anything-
Oh, no. We will. No, there's not. We obviously will pull back on marketing costs in the second half. You know, we had a number of initiatives in play and, you know, you'll see by the strong category performance and our strong performance in grocery that, you know, those. We thought it was really important to continue to invest in our brands. We'll see a little bit of a decrease in the second half. That's, you know, we haven't completely slashed and burned marketing.
Okay. Look, I just wanna make sure I got my head around the second half rather, and looking at it, because I'm just piecing together kind of, I guess, what you guys have been saying today. I mean, it sounds like, you know, if it was AUD 20 million COVID in the first half, it's gonna be probably closer to AUD 30 million in the second half, like January to December and maybe February to half of January or something like that. So you've got a headwind sitting there that maybe wasn't as big a headwind back in December when you gave the guidance.
Yep.
The second thing is, I think you've mentioned some price increases through. If I recall correctly, there was a fairly material shelf price increase pushed through on the house label, white milk products that you guys haven't yet followed, and I'm guessing you're referencing that. Have you got something in the system on your white milk product at the moment to come through?
Without giving away too much detail, we have put a price increase across, you know, probably 80%-90% of our portfolio. That was put in play before Christmas. It'd be fair to say that, you know, we think there's probably more price pressure to potentially look at passing through moving forward. In the second half, we've also got significant lifting commodity prices, Jonathan.
Yeah. That was the next bit I was gonna ask is
Sure.
I mean, typically, your ingredients business has a phase into the first half. The difference, I guess, your balance date adjusted to, you know, December 31 values or December 26 in this case, but your farm gate price is lower seasonally. You get margin in the first half, you don't necessarily get in the second. It sounds like you're expecting that to be quite different this year given the commodity price, I think you're up almost 20% since you were rolled off.
Yeah.
The balance date. How are we meant to think about that ingredients business? Like, it sounds like it's back slightly, so much can be flat half on half, because of the benefit. I guess what I'm trying to piece together is, yeah, you've got AUD 30 million headwinds in one bit, but you've got some price increases coming through that probably give you a bit there, and then you've got ingredients as well, which is gonna have an unseasonable bias to the second half. Just how should we look at this?
Yes. The way I think about it, Jonathan, is your two big levers, you're exactly right. That cost impost that we've got around COVID in the second half being neutralized by a significant increase in commodity prices across our bulk business, and that comes back to the point Barry made about having exposure to those two markets, which has been terrific. We've got increased pricing coming through in the second half, the full half-year run rate of that. We've got synergy benefits flowing through in the second half, second half weighted. We've got cost control around marketing and other, you know, costs that we've got in place around headcount and so forth. Those equal that sort of cost pressure from COVID.
Okay.
Although .
Yeah. Jonathan, the only other view I'd add to that is that, you know, so there's a lot of dynamics going on obviously, as you can hear, Jonathan.
No, I know. Yeah. Yeah.
The only other dynamic is obviously, which we've touched on a couple of times, but not to be let go, which because I know you're very aware of it's the competitive position for milk procurement as well, you know. Obviously, when we see those big commodities spikes, we see a lot of activity in farm gate milk pricing. We've seen that happen.
Yeah
In the last week or two. We're keeping that under review as well.
Okay. Look, Barry, where farm gate is at the moment, I mean, I know farmers always like to complain about everything, but, you know, it's probably as good as it's ever been, in terms of milk prices.
Yeah.
You talked about supply issues this year. I would have thought there'd be a fairly reasonable incentive for farmers to expand at this point. You know, they've got water, they've got feed-
Mm-hmm
They've got record milk prices. How are you thinking or how are the discussions, 'cause I imagine there's people getting ready to dry off pretty soon.
Mm-hmm.
How are you kind of talking to your farmers at the moment? What indications are they giving you going forward for their plans on expansion or contraction of herds?
Interestingly, Jonathan, I'm about to hit the road now that I'm actually allowed to and go and, you know, do the traditional farmer meetings that I haven't been able to do for a few years. I mean, my observations would be, we've sort of got two categories, if you like. A good indication of one of the challenges around expansion is the guys that are looking to expand or acquire a dairy cow, they're hard to find. That-
Mm-hmm
On the one hand, we've got people that are thinking about expanding and getting good market signals that they can be confident in, as you say, good seasonal conditions. That's one category. Then on the other category, we've got the people I mentioned earlier, those close to retirement that see circumstances now as good as they've seen. Unfortunately, instead of seeing them be excited, they're thinking if they don't have succession plans in place, they look at land prices, they look at cattle prices, and they think this might be a good retirement.
One of the things that is impacting the industry is, as I mentioned earlier, the fact that I think we've got a component growing, but it's either people saying, "You know, I've never seen land prices like this. I've never seen cattle prices like this. I might retire completely, or indeed I might flip my dairy to beef." Now, I think those of us that have been around a lot stick with our knitting because we know that, you know, dairy is more traditionally stable than beef. Yeah, I've got a couple of competing themes that make me hesitate in saying I think we'll get, you know, good growth in the industry.
There's no question we've got confidence in our farmers, but growth is being a little harder to find. We would expect growth this year, and we haven't seen it. Now, some of that was weather conditions, Jonathan, 'cause we had a very wet start to the season that did affect a number of people.
All right. Thanks, sir.
It's worth adding also there, Jonathan, one of the major levers for farmers has been that'll come online soon, will be just availability of labor with the borders opening up.
Mm-hmm.
That's been a significant challenge with, as we've seen across our entire supply chain, but it is very evident at farm gate that, availability of labor, milking cows, has also been quite a significant contributor to that decision around production. And it's pleasing to see just, you know, even just this week seeing, you know, students back at universities and people getting back into the country. So at a time when we've got record low unemployment rates.
Now that is a challenge, but hopefully we'll start to see some release with people returning to international travel.
All right, great. Look, maybe just one to round it all up. If COVID or Omicron hadn't happened, I mean, would you still be comfortable with the initial AUD 56 million number that BDD was gonna do, plus the synergy target, which I think was 41, which would have been upward north of 90, I guess, on a pro forma basis? Because it looks underlying it that you've actually gained a little bit of share in some of the categories, particularly cream and juice, if I'm looking through your numbers in the six months. Really it's been COVID more than anything else.
Yeah, would entirely agree, Jonathan. I mean, I think, yeah, we would've been probably more than confident, if no COVID, even without Omicron. I mean, it was, you know, quite frankly, and I might ask Paul to add something here, but quite frankly, I think the rubber band was stretched as tight as you could stretch it, in terms of the cumulative impact of COVID. When Omicron hit, it just, there wasn't any more stretch left in the rubber band. That's why I think, you know, I think plenty of people are sort of commenting that December-January period and was really, it hit hard, might be the right way of putting it. Paul, I'm not sure whether you'd like to add anything. Yeah.
Yeah. Jonathan, what you've asked about and what
Mm-hmm
Barry's just responded to is the main aspect of this. Back to David's earlier question, we are seeing commodity prices continue to travel up and that's something that we're just. I would just qualify the answer.
Mm-hmm
... with that comment, that's something that's putting a bit of pressure. I would say on that we're, as I answered in response to David's question, the market and the supermarkets have that expectation around inflation pressure and price increases is reasonably well sort of established. It's gonna be challenging, but it's not a significant fight like it would have been previously with price increases. We are seeing that pressure continuing and that will be our challenge, but one that we are much better placed to deal with than we were 6-12 months ago.
Great. Thanks, guys.
Thank you. Your next question comes from Paul Jensz from PAC Partners. Please go ahead.
Thank you. I think it's mainly to Barry and maybe on to Pete. Was there a review and I think it's probably an unfair question to ask at the moment with all of the short-term issues going on, but there was a review across the supply chain, the cold supply chain and so on. Whether that has been completed and whether there's some initiatives gonna happen in the next sort of six months or so, apart from the CapEx programs Pete outlined.
Look, Pete's been leading that review, so I'll go straight to Pete. We've continued to work on it, Paul, and, you know, probably fair to say, you know, pretty positive about what we think the opportunity is. I'll throw to Pete.
Paul, we've focused on, I guess the key areas we've looked at has been around cost, and we've been out to RFP for sort of 60 or 70% of our network, and we've got some very successful results there that we'll kick off in FY 2023. We're very pleased with that, just from a pricing point of view and just looking at how we do things a bit differently with some of our partners, which has been very good. That will be a good step change. The other two things we've been doing is we've been looking at automating our DCs.
As you know, our cost to serve in that route market probably isn't quite where we want it to be. We're about to go to the pool with some submissions to spend some CapEx in a couple of our DCs to reduce our cost to serve, which we think will give us sort of a much better offering for our customers. Then the other piece that we're looking at is around sort of the front end, and we're actually just conducting a review of our digital strategy and how we engage with customers. We're using pretty old customer portals, and it'd be fair to say that our customer experience there is not great.
We're currently working with a third party to review that, what that needs to look like for our customer experience to be sort of best in class. They're the three areas. We'll get a good hit on pricing next year. We're really happy about, we've got the automation of some of our key DCs happening. We've also got, we're sort of leaning into the digital strategy. They're the key areas.
Because I know we'll have some of our commercial colleagues listening to the call to point out that a big push from Pete and I is around just expanding around business development and expanding our product portfolio through that channel and, also, just developing a new customer base because that's where we see the significant opportunity. That can be extended into third-party product as well. Operating as a 4PL through that network. A lot of opportunities. They are, I think it's fair to say, Pete, sort of longer term, some of those.
Yeah.
Certainly more tactically something that we've been able to trial reasonably successfully in Victoria before Christmas, notwithstanding the disruptions and that's something that we'll look to roll out across the rest of the country and just some good momentum driving behind that, which in addition to the three initiatives that Pete's outlined positions really, really well in that space.
Thanks, Paul. Pete, with those costs, with that cost at 60%-70% that you've looked at, is that both, I suppose, the property costs and the operating costs, or is the property review on top of this?
Sorry, with the COVID-19 costs or
No, no. It's just you talked about the three areas of reducing costs, automating DCs, front end. I'm just wondering where the, I suppose, the property rationalization side might reside.
Around DCs? Consolidation.
I mean, you've got, you know, you've got a lot of manufacturing sites. You've gone from having, I suppose, four major sites many years ago to now sort of 25 plus. You know, you've gone through a crisis, so you don't want to waste a crisis, as Barry has said many times.
Yes. Certainly part of the cold chain network we have rationalized some DCs. We've sold a few. There's a very small amount in our normalized result for that, just a small profit on sale, but we've sold several DCs and we continue to sort of consolidate that area. Barry, I don't know if you wanna talk about facilities.
Yeah. I get the broader question you're asking around our property portfolio, if you like, and potential consolidation. That would be outside the work that Pete's talking about there. That's obviously still something that we've got some thinking of. Some of that has been, if you like, in terms of what the operational team are dealing with. We've given them a little bit of space to just make sure they can get through the challenges of the moment, which I think is what you're referring to in the beginning of your question, and not put additional burdens around consolidation on them.
There are some opportunities to consolidate facilities which we hold under review, but we don't have any sort of. We're not enacting any in the short term. Then the second part of the answer is in terms of the property portfolio, it's that standard answer that we know we have some solid options there. We haven't progressed at the moment. So they're all additional to what Pete was describing to you around the warehouse review and our service review.
Good. Just the final question was just on the international sales, because we used to sort of break them out in the segment and talk about them. I would imagine, Barry, I think you mentioned that from a logistics point of view, you'd be able to, you've been able to service these customers. With that service, I would imagine you can now grow if you've been able to go through this tough time and you know, provided that service to the international customers.
Look, I'll let Paul comment. Yeah, look, we've even the new platform of adding Lion's international, albeit small business to what we had, it increased our offering to customers, you know, and as we say, we continue to see it as important and an opportunity to grow. Paul, I might get you to add.
For the most part, Paul, we've been able to continue with the servicing. It's fair to say that in some markets and some channels, it's been more disruptive than others. Overall for the six-month period, although we don't separate out the reporting on it's been a pretty challenging period in that period. Underlying the actual revenue number that we see in that international part of the business has been really good work done around the consolidation of the two international businesses with the Dairy & Drinks acquisition, which has got a strong retail focus, particularly in Southeast Asia. Just the consolidation of resources and capability in that market is working really well.
We are facing, this does come back to David's earlier question, just some challenges with the immediacy of price increases and the lead time on that international business. That certainly causes some challenges in that part of our business, which are just sort of resetting as the beginning of the second half. Pete, I think as we look into FY 2023, I think that'll be well sort of managed and settled into the business as we look out. That first six months, Paul certainly had a fair few challenges on that commercial front on the international business. Main markets, some of the important longer term business that we continue to support, including markets like Japan, we've been able to service without too much disruption.
Other markets have had some challenges.
Thank you. Thanks for your time. Much appreciated.
Thank you. Your next question comes from Mark Tovey from Select Equities. Please go ahead.
Good afternoon, gents. I suppose just first question, if you can talk to the milk intake. Are you getting your share as things stand at the moment in a competitive environment that you've alluded to? I suppose a follow on to that in terms of yield management, and I'm thinking particularly around the export side, being able to maximize the return in terms of commodity high prices on particular commodities, and give us some insights without flagging too much in terms of the sort of commodities you might have been producing for the export markets, whether that's going to Detroit or elsewhere.
Thanks, Mark. Yeah, so look, we've lost a little bit of milk this year, which we actually lost in the early part of the year, you know, when the battle was genuinely on. We, you know, as I say, we still see that as very competitive and we respond appropriately and on the full burden to make a strong offer to our farmers. On some occasions, we just decide that we can't justify the return or whatever else it might be. We have lost a little milk. We're probably a little behind budget, but I wouldn't say it's sort of material or a substantial amount.
We would certainly, I think like most dairy companies, we would prefer to have a bit more volume than we've got. Look, these are always challenges around being very responsible around pricing and knowing what's in front of you and taking a judgment about, you know, when and where the appropriate time is to get a good read on what you think the future market will be. Of course, you know, when the market goes rapidly up like it has done, you can look very clever if you've run out with a high price. Equally, it's very dangerous if the market goes the other way.
We're reasonably comfortable with where we are, but would like to win some milk and have lost some milk in this period, or in the year. In terms of product and returns, Paul, I might just throw to you, but obviously there's some solid opportunities in commodities at the moment.
haven't seen anything like it before, Mark, in terms of the opportunities. It's, you know, what's similar in your world with financial markets. Typically, we say you take the stairs on the way up and take the elevator down. It seems like someone put a lock on the stairway, and everyone's just on the elevator these days because it's just been an extraordinary period of spikes and declines, dealing with a tremendous amount of uncertainty. What's really pleasing in our business is the increased flexibility that we have across our product mix that we build that sort of realized value.
It's really important, notwithstanding the front end of our business around brands and where there's a significant growth opportunity, going back to that business model, we don't lose sight of that bulk complex in our business and how that actually operates. Because having the ability to dial up, dial down, in that space has been really important for us in that first 6-month period. I would also say that if I go back even as recent as 5 or 6 years ago, we saw a reasonably significant shift in the market where longer-term pricing commitments, and when I say longer term, we talk about sort of out 6 to 12 months.
A lot of traders in particular, who drive a lot of the volume, were getting stuck with stock, particularly in the Chinese market at the time, and they were losing money as markets came down. There's been a tendency to shorten up the commitments, and we talk about periods of closer to 2-3 months. Our ability to actually hold off and then actually respond to the those market signals has been a real positive for us. What's been quite interesting to note is just how the different dynamics and the interplays between the different mixes around cheese, skimmed butter and cream cheese, which continues to perform very well for us, both domestically and in international markets.
Just to add, one of the key benefits that we've got with the bringing together of the two businesses is the significant opportunity we see in fresh cream and our ability to shift between butter and cream in a reasonably dynamic market is also something that we've been able to exploit in recent months, and we'll continue to dial that up moving forward. I'm talking there, Mark, very much around the food service industrial market domestically.
Not that consumer market, which is pretty stable and pretty fixed, but the ability to move volumes in and out of those industrial and food service markets domestically through that dairy and juice capability has been one of the benefits and the synergies that wouldn't be in the numbers that Pete refers to when we talk about synergy benefits that we get.
That flexibility in managing your milk pool, that includes perhaps moving milk from around regions now, maybe New South Wales or into plants where they can produce the maximum. Because I'm really thinking about that yield management that you're going to be able to
Yep.
exercise in the second half.
Yeah, no, 100%. Look, there are some obvious geographic barriers around, you know, Northern Queensland, Tasmania, WA, in terms of distance. But certainly when we talk about Southeast Australia across to Adelaide and even up into Southeast Queensland, it's not an all or nothing scenario, but it's about how you actually optimize across, you know, the monthly buckets, but also the weekly buckets. And not just across straight milk, but also very much cream. So without going into too much detail or the risk of going into too much detail, the Lion business historically would've shipped a lot of cream around the country as it tries to optimize.
We are able to do that a lot more efficiently with our much larger milk pool overall, but also the network that we have, particularly across the eastern states where we can actually optimize that within our own network and also ensure better and fresher products across that type of product mix as well. That's been good. I should point out, Mark, while I've got you on the phone, that mozzarella is not in a particularly good position at the moment. I think that's off the back of all those factories that came online after that report a few years ago.
I say that somewhat jokingly, but also importantly, just the ability to sort of dial up and down on that is an example of where you know we're doing a lot less than what we were a year ago, and we're pushing that into product mix returns, which are significantly better.
You don't get them all right. I do hear the Chinese are eating a lot more cheese, Paul.
Yes.
Just lastly, perhaps on the farm gate. Obviously, Fonterra's put through their latest price hike in New Zealand. I suppose my question is, do you see that flowing across into pressure into Australia, whether it be from Fonterra or others, in terms of, you know, those sorts of price pressures now being applied on the farm gate?
Mark, you would be aware, we did a farm gate milk price review, and we put through an increase in late December for our farmers. Interestingly, we've now seen that responded to in some cases, aggressively responded to, including Fonterra. In the last week or two in Australia, we have seen a number of companies move their price. You know, yeah. It is flowing through and competition is heating up. We'll expect that there'll be competition. You know, there was already strong competition, but it has flowed through.
Those signals that you're seeing out of New Zealand around commodities are also driving improved prices in Australia at the farm gate level. We've just got to continue to keep that under review and make sure we are in an appropriate competitive position.
Very good. Okay. Thank you for that.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Evan Karatzas from UBS. Please go ahead.
Thanks for taking my question. I get the 1H, 2H for the branded business. You made that pretty clear. Just with bulk, obviously typically, it's been a pretty significant first half sort of earnings in the business, I guess. This year, just given the run-up in those dairy commodity prices, bulk earnings and revenue should be pretty evenly weighted, at least. Is that the way we should be thinking about it? Is there anything else I'm sort of missing or we need to consider there as well?
That's more than likely gonna be the situation, Evan. If you have a look historically, I'm going back probably even 10 years now and having for that period since then, you'll typically track a Northern Hemisphere market and that'll flow around a calendar year. You'll typically see these cycles, and it's been one of the biggest challenges, not as much these days, because more and more milk's going on the domestic market. Certainly, if I go back 10, 15 years ago in dairy, the commodity markets globally were more dictated by what happened in the Northern Hemisphere spring, and that sort of set the scene for the calendar year. We would often have a financial year of two halves sitting in two different seasons, if that makes sense.
We're certainly seeing that dynamic play out this calendar year and likely impacting the results accordingly. I should point out, too, though, that there is a bit of a volume impact to second half, first half on milk volumes, which Barry alluded to as well, just with regards to the season and milk supply being tight and competitive pressures. That'll have a slight negative effect in that second half. But overwhelmingly that commodity pricing will certainly benefit us.
That makes perfect sense. Thanks for that. Then just quick, my last one. Just on the corporate or the unallocated line, I think it's about AUD 7 million here in the first half. Is that a sort of run rate that we should expect into the second half and I guess going forward as well?
I'll throw that one to you.
Sorry, can I just get you to repeat that again, Josh?
Yeah, sorry. Apologies. Just on the unallocated, the AUD 7 million or just under AUD 7 million of corporate or unallocated.
Yep.
Is that a fair run rate we should use for the full year and I guess going forward as well?
Yeah. That was about AUD 7 million down year-on-year, because we didn't have those, you know, AUD 4-5 million restructuring costs in that last year that we didn't have this year. Then there's just been you know more of an adjustment around some wages. Yeah, I'd say double that is a fair run.
Okay, great. Thanks. Thanks for your time.
Thanks, Evan.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Irvin for closing remarks.
Well, thank you, everybody, for joining us, and thank you for the comprehensive questions. As we said, I think throughout the presentation, I think, you know, many would understand the flavor of what we've been talking about here. Clearly some short-term challenges, particularly relating to COVID-19 and the costs associated with it. Some challenges around some significant input prices that will require price realization on the one hand. On the other hand, obviously record global commodity prices, the effects of COVID hopefully being largely behind us and letting us see the market open up and see some return to normalcy among our Australian customer base.
Overall, we would sit here today saying still very comfortable with the strategic position of the company, still very comfortable with the initiatives that we've got in place to see continued improvement in business performance. Very pleased that we've been able to continue to execute those initiatives even with the challenges of COVID being around us. You know, we see that we will deal with the next six-month period, which will no doubt have still challenges in front of us, but some opportunities as well and go into FY 2023 with the business in good shape in terms of customers and brands and markets and indeed the opportunities that we might find there.
Thank you, everybody, for listening, and I look forward to catching up with a number of you soon. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.