Thank you. Hello everyone, and thank you very much for joining us for this FY 2025 result presentation. From my point of view, I'll only say a few words before introducing the executive team. It is indeed wonderful to actually see a vision, a business vision turned into a business reality. That is a testament to the work that's been done over many years. For those of you that have been shareholders for a long time, you would recognize the transformation that we continue to present to you, that I think we present to you with real substance today.
Over the time that I have been obviously leading the company, we've transformed from very much a business-to-business company, very much a company exposed to the modern days, to one that realized the importance of brands, of value adding, of having an efficient supply chain right through to our consumer, both here in Australia and internationally. We continue to work to make sure we achieve that vision. Each result shows a further step towards that great vision. It is really important when we talk about how we went from very much a dairy business, very much commodity facing, and business-to-business to one that began its transformation to brand through the acquisition of Vegemite . That iconic brand that we're still very much known for today gave us the foundations to build an even stronger business through the acquisition of Lion Dairy & Drinks .
We've seen the platform that has given us to deliver innovation, to deliver new products, to have the agility to respond to changing consumer needs, changing market circumstances. I think we've built the strength in the business and indeed the infrastructure in the business to make sure that we are well positioned for the future. The future is one that I see as very exciting. We actually are demonstrating our capability around new product development and innovation pipelines. People will talk a lot today about the productivity that we are achieving, what we'll achieve through technology and scale. Our opportunity internationally continues to be strong. The sophisticated approach that we now have to global sourcing, I think, builds the business for the future.
Ladies and gentlemen, it is really my role to introduce the team that I think, not unlike the business, has been developed to have agility that is fit for purpose, that is able to deliver on the vision that we've had for a very long time. Without further ado, my words will be few, and I'll be delighted. I might add that people will, each of the speakers will mention one slide we're on. Obviously, my introductory slide is slide three, but I'll hand it to CEO Pete Findlay. Gunther Burghardt also joined us today, our CFO. They will take you through the result for FY 2025, and then I'll come back to chat to you a little at the end. Peter.
Fantastic, Barry. Thank you very much. I might just direct everyone to slide six, which is our key messages, around our performance for the year. We're really pleased with our normalised earnings result that the team has delivered. I think we've achieved this result through absolute focus on delivery of our strategic plan and the key initiatives that we outlined around that to the market a couple of years ago. As we continue to stick to that plan, we still believe we have some significant opportunities ahead of us in the future, both from a growth perspective, but also a productivity and efficiency perspective. It's really nice to see that our strategic plan is playing out and performance is playing out with both a mix of productivity and growth opportunities. If we look at the business, we've put in place, it's been a year of change.
We've put in place some big initiatives that will help us in both FY 2026 and FY 2027, and those are around, obviously, the announcements of the closure of our Strathmerton site and the closure of our two PCA sites, which helps our bottom line significantly in FY 2027 and creates significant efficiencies for the group. Also, around growth, we're in the middle of implementing our third pouch line, which is at a price of about AUS 16 million. We're also spending significant money on the flow through of our mobile facility to improve capacity there and improve efficiencies around our cooling cells, which we use to get product ready for the market. I see a really good mix of initiatives there supporting both growth and cost optimisation. Obviously, another key plank of the year was our brand and performance driven by a focus on category innovation.
In a year where the consumer was fairly constrained and we saw consumer sentiment continue to be challenged, the team's ability to innovate, particularly in the second half, I think, was important for some of our growth, but also, I think, sets us up really well going into FY 2026 and FY 2027. We're particularly excited around our volume growth in white milk, yogurt, and spreads, and the launch of our high-protein and better for you products in key categories around milk-based beverages and yogurt in particular. As I said, we're really excited about where that can take us over the next couple of years, particularly as we see the desire for better-for-you and functional benefits flowing through into that dairy category. Our strategic plan has been very much, we've been pretty bold around that.
You know, we wanted to continue to focus on core grocery where we knew growth would be more constrained, but across a significant size and scale, there would be benefit there, and that was achieved. We were trying to seek out accelerated growth in our food service business and our international branded business. I'm really pleased to say we achieved both of those. Despite the local out-of-home market in Australia being quite constrained, we were actually able to grow well ahead of the market growth in that area by taking market share, by getting more focus with our offerings, and by aggressively pursuing new accounts. We were very pleased with that. Once again, outside of the big transformational changes we talked about with Strathmerton and our PCA sites, we did execute on a successful withdrawal from our Leeton juice site.
We were also able to execute a number of efficiency savings around our network, based on a focus on line utilization, waste, and overtime. In a year where our top line was constrained, we were able to dig out some really good efficiencies out of our network. I think that there's still plenty of room to go with those efficiencies. We've obviously got the big transformational ones I just mentioned earlier, but we will continue to wear our footprints harder and in a more effective manner as we move forward. The bulk business recovered from those lows of 2024. That was a combination of obviously better alignment between farm-gate milk pricing and commodity pricing.
It was really also due to the hard work that the team did back in 2020- 2024 when we were faced with some pretty heavy headwinds, around removing costs from the business and really working on premiumising our commodity sales mix. The ability to transition into higher value protein offerings, focus on our high-returning fat streams, and increase capacity, particularly around cream cheese, really did set us up for an improved bulk result that I think gets us back to a far more sustainable normalised earnings range. We are sitting within the earnings range we talked about within our five-year strategy, being that AUS 30 million-AUS 40 million APPI number. If we just move on to the next slide, our financial performance highlights, slide seven. I'll get straight off the bat and talk about, you know, there was a difference between our normalised and our statutory result.
That was primarily driven by the significant changes we've made around Strathmerton and the PCA sites. That's the writing off of some of the assets there that we'll no longer use. Obviously, some significant restructuring costs. As I said, we feel very strongly about taking that stand because of the significant material impact that will have, particularly in FY 2027 and beyond, if it makes us a fast forward business moving forward. You know, normalised earnings, strong growth, year on year. I think what that does is it starts to set the business up or create those data points that demonstrate that our 2028 strategy is very much in line with where we want to go. The earnings result and financial outcomes we posted there, obviously, flowing through to a significant improvement, profit after tax, and the lifting in earnings per share.
We continue to focus on trying to drive more margin into our business, both as we go through premiumising or achieving growth and premiumising our mix in our branded business. As I said, improving the underlying stability of our bulk business, and so we were able to get some margin improvement there. Although the branded margin looks a little bit benign, that was done in a year where the chilled dairy cabinet actually was reduced in value by nearly 2%. We are actually quite happy with the result given the climate that we operated in the last year. Obviously, net debt down to AUS 126 million, and that was just great focus by Gunther and the team on driving that down, which flowed us through to a leverage ratio of 0.8, which was actually better than our target.
If you think about where the business was five years ago when I first joined it, we were at around 3.5 x leverage. The business has done a terrific job of committing to bringing that leverage down after some aggressive acquisitions. What I would say is I think that with that leverage ratio, we really set ourselves up for an aggressive growth platform into the future, whether it be through organic or inorganic opportunities. I'm incredibly excited about that. Return on funds employed just continues to be a focus of the business. How do we split our assets harder? How do we do more with less? That also plays into our strategy around our optimisation of our sites, but also just that day-to-day grind on line utilisation and working capital utilisation. Very happy with our performance highlights there.
If we skip on to the next page, which is page nine, I'll stop on, which is our 2025 operational highlights. I'll go into those in a little bit more detail. New product launches were really important. Coming out of COVID, it was probably five years of fairly stagnant innovation. It was just a matter of getting through COVID, getting through those significant cost impacts that we saw at the other side of COVID. I think probably a lot of consumer goods companies globally struggled to grow a little bit. We now move onto a growth platform, and we want to drive that through new product innovation and through releasing products that meet our consumer's needs, but also fit the bill around affordability and value. That's why you always need to continue to drive those cost efficiencies below the line. We're really happy with our protein push into milk-based beverages.
We've had some stunning early results that came about in the second half of the year, and we think that will be a real platform for us through 2026 and 2027. We will continue to drive that better for you highlights across milk-based beverages. We've got some real innovation to build into peanut butter after several years. We came out with a wheat product, which helps address more occasions. You'll see some really exciting innovation in the next few months, further innovation in peanut butter as we start to try and more for cross into that treat part of the category, which is the highest growth component. In yogurt, yogurt continues to be such an amazing platform for functional health. Our yogurt volume increases just continue to surprise us, and we think that we can continue to have a really strong growth trajectory across yogurt.
It's an ideal vehicle for protein, and I'm really pleased to say you'll see some good news around our extended protein offering in yogurt over the next couple of weeks, which we think will just continue to drive or accelerate growth in that area. Obviously, we launched our Gut Good yogurt, which we think is probably a little bit ahead of the curve, but very much on trend with some of the things we're seeing coming out of Europe and the U.S., around a healthy gut and how that relates also to not just physical performance, but mental performance as well. We think that that'll be a slightly slower burn, but we're seeing what's happening, particularly in Europe and the U.S. at the moment, and we're excited to be on the front end of the business there. Of course, bringing back some fun around credit with our rotations.
We had a terrific collaboration with Mars into our flight at one second. The, you know, we did in a year where there was constraint around our branded offering, we did actually invest more than AUS 8 million year -on -year in strengthening our share of voice to the customer and wanting to remain front-facing in our customers' decisions on when they're at shelf. We think that that's an investment that will be worth making because it'll help maintain momentum into 2026 and beyond. Our bulk segment continued to recover. As I said, we did a lot of hard work around setting ourselves up for selling higher value items, particularly around the protein offering. Milk protein concentrates went particularly well for us, and we increased our capacity in that area back in 2023.
We're really glad about that decision because in 2025, that increased volume helped drive higher returns into our bulk business. As I said, cream cheese expansion, capability expansion, we see a flow through of our branded business, particularly the international part of that. It will be a real driver for us moving forward. Some good work done there. If I just move on to the next slide, which is slide 10, we continue to refine our branded assets and footprint. Obviously, we made the decision around the Leeton site. We sold that to another business. They filled that site up. We've got an off-take agreement, which is providing us with a cheaper cost per unit on all of our juice.
The big decisions around the consolidation of Strathmerton, which we've come out and said will provide a AUS 30 million earning uplift in 2027, and the sale closure of our two PCA sites, which will reduce a cost impost on our spreads business by about AUS 5 million-AUS 10 million a year. They're big projects. There's a lot of moving pieces in it. Of course, with the Strathmerton site, we will invest AUS 50 million in our sister site at Ridge Street with the same capability. We'll try to actually increase our volume, but at a much cheaper cost per unit. Once again, it's around doing more with less. Despite making those structural differences to our business, we will actually grow the volume or outputs for our business in FY 2026 and FY 2027, and actually, as we did in FY 2025. We continue to optimise our chilled distribution network.
Really pleased with our automation project at Laverton, which is our biggest site, which all of our yogurt flows through, back out to our national network. It is actually going live in the second half of this financial year. I'm very pleased to say that we're actually loading and unloading our first full pallets using our automated equipment, as we speak. The concept has been proven out, and now it's just a matter of scaling that. We did some heavy lifting on our Cost to Serve project. Cost to Serve , throughout FY 2025, we're actually able to drop that. A lot of that was actually enabled by our new digital portal, which enables us to communicate to customers around minimum order values, and also a far better optimisation of drops.
We continue to push through our Cost to Serve and, as I said, reducing our network substantially and utilizing that a lot better, at our logistics network and depot network. Domestic Food Service, the team did a great job of relaunching our range in the domestic food service space, and it meant that we're able to actually pick up a whole lot of new customers. We brought in shift-based selling. We brought in some experts from the food service business from competitors, and we're delighted with the growth of that food service. Our international branded business continues to go well. We expanded our teams and on-the-ground presence in Singapore, Thailand, and Dubai. We're seeing benefits from that as we go, both direct to customer, but also make our distributors a little bit more accountable and are able to push products into those channels a bit more effectively.
We're seeing some great results there. If I just move on to our page slide, which is our market-leading brands, I won't spend long on that except to say that we continue to hold strong positions across all of our key categories, which helps us release both innovation into the marketplace but also drive benefits back into our manufacturing networks and logistics networks, which is obviously helping us to operate at scale and continue to push our efficiencies. I'll move from slide 12 through to slide 15. We'll just have a very quick stop here. Our manufacturing network has gone on a significant transformation over the last couple of years. As you know, we closed the two Bega sites after acquisition. We closed our Canberra site.
We've now announced the closure of our Strathmerton cheese site and our two PCA sites, and we've sold out of our Leeton site. We continue to grow our business. Our volume has grown over that period of time, but we're now doing a more consolidated footprint that allows us to take more aggressive decisions around automation and capital allocation, but sets us up really well to be competitive into the future, both here domestically and globally. We're obviously happy with the way that network's panning out, and we'll continue to optimize that network into the future. If we then quickly move on to the next slide, slide 16, the key point I would say here is that we're seeing realignment of the farm-grade milk price to commodity price.
I've been really pleased with our competitiveness at farm-grade both last year and this year in years where we expect, unfortunately, milk production to decline slightly. We've actually increased our milk acquisition. We've done that by having an extremely dedicated and hardworking farm services team. We've done it because we're able to be very competitive with our farm-grade milk price and still make good returns from that. We're very pleased with that. Slide 17, we have relaunched our sustainability strategy. We'll talk more about that in our sustainability report, which comes out in October. Basically, it will focus around circularity and community collaboration. I will just say that we continue to remain on target to deliver all of our pledges and commitments that we've announced here in the last couple of years. With that, Gunther, I will throw to you on slide 18 around our key financial messages.
Fantastic. Thank you, Pete. As Pete and Barry were reflecting, it was just about two years ago that we unveiled our five-year strategic plan at our Wetherill Park site. We said that when that five-year period is done by FY 2028, we'd have an EBITDA of more than AUS 250 million, and we would lift our return on funds employed from around 4% to over 10%. We come through this year more than on track to achieve those objectives. We've lifted EBITDA from AUS 160 million two years ago to over AUS 200 million, with the biggest part of that increase occurring in the most recent year. We said at the time that one of the most important metrics that we had to drive to get there is that gross margin. Pete talked a bit about that as well.
When we began this journey, our gross margin was just over 19%, and we finished FY 2025 at a 21.5% gross margin. Still not good enough. We have a healthy level of dissatisfaction with that gross margin, but we're very pleased that we've driven over 100 basis points a year over two years and remain on track to continue doing that through the life of our strat plan. As Pete alluded to, cash has come, and it's not just about the earnings increase. It's not just about effective networking capital management. It's about selling assets that don't contribute to the strat plan. Pete touched on Leeton, which was a good sale of a reallocation of capital in the first half. We also sold the Berkeley Vale warehouse. As you think about it, over five years, the Bega Group has sold almost 25% of its warehouse and cool rooms nationwide.
Just like Pete described with the manufacturing facilities, also in our logistics footprint, that leaves us with a more focused footprint, and we can invest and have the right ranges in that more focused group of cool rooms and warehouses, and once again allocate capital. I won't say anything more on this slide other than we're quite pleased to see that step up of 73% in earnings per share to AUS 0.166. It leaves us in great shape as we enter year three of our strategic plan. The next slide is profit and loss. I don't need to go through too much here, but Pete's about to get into some outlook for the upcoming year, and I will signal a couple of things on the profit and loss, both in this year and next, that are important for any analysts on the line who are building their models.
First of all, in CapEx, we invested this year AUS 94.4 million in CapEx. As Pete talked about, some of the things in growth and efficiency and leverage and automation was the biggest one. Next year in FY 2026, we're going to have a fairly consistent investment level. We expect to invest about AUS 95 million in CapEx in FY 2026, so very constant. Our depreciation and amortization next year will be about AUS 92 million, AUS 93 million, which is roughly in line with that investment profile. Our interest rate will begin to improve next year, so we see it dropping to about AUS 32 million. Remember that of that net interest cost next year, about AUS 12 million is lease interest costs on leases that we hold rather than banking facilities. That will begin to drop as rates begin to drop and our cash flow improves.
We also expect next year in FY 2026 to have a normalised tax rate of about 30%. We were a little higher this year, and a few people have noted that in FY 2025, we showed a normalised effective tax rate of 34%. That 4% difference is worth about AUS 3 million. The biggest item within that is a capital gain relative to another warehouse that we sold in Frenchs Forest. We exchanged contracts on that in the FY 2025 year, but the settlement of that occurs at the end of H1 FY 2026. The capital gain on that is the biggest part of that difference that brings us up to a 34% effective tax rate. Some people have asked me, "Shouldn't you normalise that?" Maybe you could normalise that. We do that on settlement, which will occur in November, December of the upcoming year. Model 30% for next year.
When you take all those into account, we should be north of AUS 0.20 normalised in EPS as we go into the next year. I think that's enough on the P&Ls. Key performance measures on the next page. Again, I don't need to talk to this one. We had 8.4% royalty, which is a substantial uplift compared to the prior year. We see the upcoming year getting closer to 9% or so. Is there the opportunity for us to deliver our royalty targets a year early? Yep, we believe there is. I think that's very positive and that we're well ahead of our expectations on return on funds deployed. The next slide is bulk turnaround and branded growth and the segments there. I'm really pleased with that branded growth as Pete and Barry outlined earlier. You know, we started the year FY 2025 with 2.5%- 3% cost inflation.
That inflation was coming from areas like labor and energy and citrus and coffee and cocoa. In a normal year, the model is you try and price close to cost inflation, and it's your innovation and your cost savings that expand your margin. As Pete mentioned, in FY 2025, it was a challenging year for the consumer and for some of our customers. We didn't have the opportunity to price in line with cost inflation. We were somewhat below 1% in our pricing. We really had to focus on cost savings and innovation as the two main levers. We're so pleased that we finished the year with AUS 40 million of cost savings in areas like manufacturing efficiencies within the sites, procurement, logistics, routes, as Pete described.
Not only are we pleased in that performance and cost savings in FY 2025, but we have a strong pipeline of those cost savings in the years ahead. We expect to do at least another AUS 40 million in FY 2026 as we look forward to that year, with some more savings on deck. I think that's good enough. The next page shows sentiment performance. I think we covered most of that. The only comment I'll make here is that in unallocated overheads, you do see a step up there. We do have AUS 3 million- AUS 4 million of restructuring costs in that unallocated overheads, which we didn't normalize. Those ones relate to our back office and our processes. We didn't normalize those because we tend to do them every year. Every year we have a program to recognize the savings through technology and process improvement.
We've left AUS 3 million- AUS 4 million of cost inside that number. There are some project costs, and of course, it is a good year, so employee incentives did well. I think that's enough said on that segment chart. The following slide on 23 is the reconciliation of normalised results. Pete's already called out the main things there. Strathmerton and PCA are both included in there as well as some portfolio rationalization. I don't think we need to say anything more on that slide. The balance sheet on slide 24, I'll let you read for yourselves. The only points I'll note, two points. One, very pleased with that net debt reduction of AUS 36 million. There are some provisions building near the bottom there, a AUS 28 million increase in provisions, and that largely relates to Strathmerton. Most of those will be paid out on a cash basis in FY 2026.
Finally, on the last page, we have cash flow here. You know, so very strong, as Pete said, improvements in leverage and cash flow with our cash flow up, you know, well over AUS 30 million on a like-for-like basis, and our leverage down to 0.8. I think as we get into FY 2026, two things will happen. As I mentioned, we will pay out those provisions for the consolidation of Strathmerton, and we will also see an increase in milk prices. We do expect our leverage will move up a little bit over one at the half year, and then we'll continue to deleverage from that point forward. We finish year two with a gross margin, a profit, and cash flow exceeding our expectations. That leaves the really well positioned to create shareholder value through both organic and inorganic opportunities. Back to you, Pete.
Fantastic. Gunther, thank you for that. If we just hit slide 26, which is our outlook slide. Look, we feel very positive about the outlook for the Bega Group. We think our strategy remains extremely relevant and has the key tenets to deliver our 2028 objectives that we outlined to the market a couple of years ago. We actually think that there's a significant amount of opportunity with the six pillars that we talk about to more than deliver more than those commitments. We have a really strong new product development pipeline that we think is tapped into consumer needs.
Those who have chatted with me will know that I'm very positive about the benefits, the functional benefits that dairy is providing to both Australian consumers and consumers overseas, particularly in the regions in which we trade in, and that they will continue to seek dairy as a vehicle for those functional benefits that they now want to have on a daily basis. We think that we've got some, you know, there's a huge amount of focus on cost management programs. We continue to implement AI initiatives across the business. We continue to develop a better cost to serve. We get better at our demand planning. We get better at our line utilization in our factories. We get better at minimizing waste and overtime, and we're doing things better at our head office level.
Some of the work that Gunther and the team have been doing around robotic process automation, we just see a huge amount of benefits to keep driving our cost management programs across the business. Obviously, we remain very bullish around the international opportunities ahead of us, particularly in the branded space. We've invested in that part of our business, and we'll continue to invest ahead of the curve there. We just see some fantastic opportunities for our products and doing work with new partners in that part of the world. We think that will not only be a significant contribution to our growth over the term of our strategy, but certainly for the 5-1 0 years beyond that. It's really important that we set the business up for that sustained growth into the future.
Obviously, some difficult decisions are being made around the closure of Strathmerton material or in Tolga, but fundamentally, they will provide a step change to our earnings in FY 2027, which would highlight to the market. We are removing, unfortunately, about 450 people from our organization, but we will actually increase the capacity of our business during that time, which alludes to not only the level of efficiency it gives us, but the level of focus it will give us around CapEx and future growth objectives around that. I'm really pleased to say that in doing significant change like that for the business in FY 2025 and some of the optimization that Gunther alluded to around our head office, we've actually been able to improve our engagement scores. That's led to that terrific discretionary effort from our people, and actually improvements around our safety and quality that we're really proud of.
We think that's an important step in moving forward as a business. Successful milk recruitment, we have been able to buck the trend, and acquire more milk over the last year and this year, which we're really pleased about, and which we think helps add stability to our bulk business, which is so important. When we pull all of that together, we actually think we are on track to exceed and we'll be at the target of AUS 250 million by FY 2028. We'll just remain really focused on that trajectory. Therefore, it gives me the pleasure to be able to say that we'll provide guidance, and normalize the EBITDA number of AUS 250 to AUS 220 million in 2026, which I think once again underpins that trajectory, that should give everyone some confidence around that delivery of our strategic outcomes. I'd just really like to thank our team.
I'd like to thank our suppliers and our customers for working with us throughout the year. I'd like to thank our consumers for supporting us and also our shareholders for their tremendous support during the last 12 months.
Thank you, Pete. I think just before we go into questions, I'm sure those on the line that had followed the trajectory of Bega and did, my involvement there. I'm delighted to be able to be part of presenting the FY 2025 figures. For me, it's always been about making sure that we establish really strong foundations for the future and we have the capacity and agility to respond to change. I hope that, through the presentation, you got the sense of the abilities and the capacity and the foundations that have been established over a long period of time that position us well for the future. I will be happy to introduce questions and answers.
Thank you. If you wish to ask your question, please press star one on your phone and wait for your name to be announced. If you wish to cancel your request, you can do so by pressing star two. If you are on a speakerphone, please pick up your handset before asking your question. Your first question today comes from Josh Kannourakis at Barrenjoey . Please go ahead.
Hi guys. Thanks for taking my question. Just a couple of questions to start. Firstly, just on into the FY 2026 guidance. Obviously, pretty strong considering also some of the step-up payments you've made so far. Can you just give us a bit of a breakdown underlying that, how you're thinking about the different divisional outcomes? Maybe just with reference to, you know, you did mention in the 2025 numbers that there were some elevated costs around restructuring and things that were included in the normalised. Maybe just give a bit of context on how we bridge that out into 2026 as well.
Yeah, sure, Josh. I think, let me start with branded, which is a huge focus for us and always will be. You know, we hit AUS 205 million in FY 2025 in our branded business, and we see that re-accelerating. In fact, we kind of see branded going back to its 7%- 8% a year EBITDA growth, right? That could bring us up to something in the neighborhood of AUS 220 million for the branded segment. Now, Pete did talk a little bit about the escalation in milk costs that we have. The majority of that usually sits with the bulk unit. I would see the bulk unit coming down a few million dollars as that higher milk cost comes into the bulk unit. I'd also see overheads coming down a few million.
If you look at it, let's call it AUS 220 million branded, you're talking about something in the AUS 30 millions for the bulk unit and a similar amount for overheads in the AUS 30 millions, and then you get to a range of AUS 215 million- AUS 220 million.
Josh, we're really happy with our innovation and the trajectory of our product innovation, the branded business, in the second half of FY 2025. We think that we're aligned through that into FY 2026, and we're pretty confident around some good volume growth there. The team are doing a terrific job of extracting costs from the business. Gunther was alluding to this before, but whilst inflation has come off, we've still got costs in the business. I think the business has developed some really good muscle memory around, you know, we just attack cost all the time. We're always building in cost initiatives into our runway. You've also got food service continuing to do well, with some good growth, and we still think we can maintain our trajectory in the international business. That's where we sort of get our confidence from around the step into FY 2026.
We're starting to see a little bit of green shoot with the consumers. We would say that the unstructured petrol and convenience, you know, pubs and clubs' space is feeling really dampened over the last 18 months. We're starting to see some green shoots there. We haven't built a lot of that into our result, but that would be nice. With the gold business, it's just really around the hard work the guys have done with that mix. The optimisation around our high-protein concentrate prenatals and in particular our cream cheese and our ability to drive that into our branded business and into our international market. I think it's just the incremental value add or the incremental sort of momentum that we're taking out of FY 2025 that we think will sort of build out in FY 2026. I don't know if that gives you any more clarity.
Yeah. Yeah.
That's great, Pete and Gunther. Very, very helpful. Just with regard to, I guess, the supermarkets as well, obviously, you know, your rate of innovation has increased. You're clearly spending a lot on your own sort of marketing, a lot of new products to market. Maybe in the context of that, plus the context of the higher input costs from milk, does that give you, you know, also a bit more confidence with regard to potential pricing as well as volume? How should we think about it? I know the pricing environment's been extremely subdued over recent years.
Yeah, I think like all suppliers to supermarkets, where we've got genuine cost increase, we go back and talk about that with them and show evidence of that. We go through a fairly well-laid process. You know, Josh, yes, you know, there's price rises going through at the moment across a lot of the dairy players in particular. Certainly, if you're in confectionery last year, we're going to be putting significant price rises through with the cost of cocoa and so forth. It swings around about for the various suppliers into the grocery trade. We work really closely with our big customers on that. We then also try and build in promotional activity that makes sense. We try and build in ranging that makes sense. We've just gone through a range review with both big partners.
It's about getting that balance right, both from a pricing perspective, promotional perspective, ranging perspective, and then margin sharing. We work through that on both of your bucks.
Yeah, got it. Just secondly, obviously great results on the balance sheet, cash flow generation, and that should, you know, obviously continue to deleverage. In the context of that, obviously, you know, the Fonterra process has been very public. I'm interested if there's any comments you can make on that. Second to that, really, like outside of that, with the balance sheet in this shape, can we talk about some of the other potential initiatives or segments that you may be sort of looking at in terms of seeing further growth or different platform potential for the business?
Josh, Barry, I think we found the Fonterra process has been public in terms of speculation, but not public in any other form. I think I didn't know Fonterra's comment the other day that they don't comment on public speculation, and it's probably not appropriate for us to leave on that focus, except that it's obviously ongoing. I think people will probably add to that. As to this, my view on the strong balance sheet is, and I think for those that have observed us over a long period of time, after acquisition, we look to get our balance sheet back into a strong position as quickly as we can. That's because we're always alert to new opportunities, and we always like to have that balance sheet strong, whether it's for internal investment or whether it's for potential acquisition.
I would say that we see great opportunity in both, and we're very comfortable with the opportunities in this business that we can invest in to grow off the great platforms that we've got. We would still see that there are many opportunities out there that we feel that, particularly in the branded space, I might say that we see that we can add to this great portfolio and that we can bring some of the skills that we've developed over the last few years. We remain very alert to opportunities, but I think the right way of putting it, Josh, is we're alert to them. We see that there are a number available to us or will be available to us over time, but we have always sensibly and lowly approached them.
It's great to have a strong balance sheet in the case and I think it goes beyond balance sheet, quite frankly. It goes to the capability of executing M&A and I think, again, the demonstration of what we've been able to do, particularly with the integration of the line business, our aim says that we've got a team that is able to recognize value and create it quickly in the area of M&A. Equally, I think what we have in place now gives us a wonderful growth platform regardless of whether that comes from M&A. Absolutely. Just to reiterate what Barry said, I think we've got a track record with branded acquisitions in particular over the last couple of years. That gives us confidence for the right scenarios to happen within our frameworks, which I would hope are dissimilar. I think they're dissimilar. We would take that opportunity.
Josh, I get really excited by the organic growth that we can get out of the business, and not just around efficiencies. I see what's happening in Asia, or even that investment that we've made in registration. We've got an engineering team, a manufacturing team, a sourcing team, and an R&D team that can close a factory within four or five months, make a decision to close the factory, and then over a 12-month period, close the plant, invest more than AUS 50 million in another factory, and increase its capability significantly. I think that opens us up to huge opportunities both here and in Asia.
This call will be recorded.
I think that there's still lots of things we can do. I think we've got the team to be able to drive real value. We're really excited about some of the internal stuff we can do even as acquisitions start to come along.
Great. Thanks, Pete, Barry, Gunther. Really appreciate your time. Good results. Thank you.
Thank you. Your next question comes from Phil Kimber at E&P Capital. Please go ahead.
Hey, guys. Can I ask a question just around the outlook for the bulk business? What are you sort of thinking in relation to commodity prices from here? Because, you know, I know it's difficult to forecast, but you know that commodity milk value, I think you showed in your chart, has fallen sort of to a level that's basically below farm-grade milk prices at the moment. I just wanted to get a sense of whether you think that that will pick up over the course of the year. Also, as a second part of that question, are there sort of lag effects that we need to consider that actually that chart on slide 16 is based on support prices and maybe there's a 3-6 month lag before those come through your P&L?
Yeah. Phil, that's a good question. We're usually conservative around our second half predictions. We think that the results are probably front-ended with commodity prices. We would say that they may soften a bit in the second half, and we certainly build that into our thought process when we give guidance. That would be the first point. The second point would be that is a basket. That blue line is a basket, which is actually a really good indicative indicator. What the team have been working on is trying to get the optimal mix within that basket. Hopefully, we can outperform it. That basket would probably be weighted by chilies, and as you know, we don't have a massive exposure to chilies.
The work we've been doing around valorising, particularly the protein side of our business and the fat side of our business, fat through cream cheese and a number of products in the protein through protein concentrate and so forth. We think we can hopefully outperform that blue line a little bit. We've been reasonably conservative, but the work we've done, we think places us in a good position to hopefully buffer any decline, significant decline in the second half. If it really fell away, there would be an exposure there. We do try and pre-sell. Where we think commodities will probably fall away in the second half, we try and sell as much as we can. We've probably extended our sell period out. You can't extend it out too much, but you take a bath on price. We've probably gone a little bit longer than three months at the moment.
All of those factors give us confidence around delivering that result, that bulk result in light of we think that commodities will probably come off, in particular chilies.
Yeah. That's great. Thank you for going through that. Can I ask one more just then, on the growth side of things, particularly around, you know, the bigger manufacturing base where you're increasing capacity? There's obviously a lot of things going on in the industry. One area, as you just mentioned, that you don't have strong exposure to is cheese, even though you've got one of the best branded cheese brand names in Australia. If things were to change around that trade market agreement, I don't know, it's all hypothetical. I mean, are you well positioned if anything changes there? Is it a relatively easy exercise if things were to change, that you could potentially take that back internally and put it through your own plants and obviously capture some more earnings as a result?
Yeah, Phil, I'll probably be very conservative in the answer to this question. I don't think it's good for me to engage in any sort of speculation on any of the brand outcomes. I think the one kind of comment I would say is that we are a very accomplished across product dairy manufacturer that knows our business very well. We, and I think probably what this result demonstrates more strongly than any is that our capacity to be agile and make changes where we need to is very well developed. I don't think I should talk about specific specifics.
Yeah, yeah, no, that understood. Thank you. Thanks, guys.
Thank you. Your next question comes from Ajay Mariswamy at Macquarie. Please go ahead.
Hi, morning team. Just a question around the market share that you guys look to have taken in food service. Could you give a bit of color on what the key drivers have been there? Were there any material contract wins we should be aware of that would maybe be difficult to cycle in in the coming years?
Yeah. We had a tiered approach. First of all, we wanted to get the right talent into the business. We sought some excellent talent with really deep food service experience. We were probably a little bit light on there in both level of experience and quantity of people, so we beefed up our team, which is the start. We then developed, with that expertise, a close to full food service offering around pack size and performance, giving us a proper offering that we could go to the market with. We beefed up our sales team with chefs to get back of house. We spent a lot more time with key customers and key accounts, educating them on our products and engaging them through all formats of media. The first piece was to get into the big distributors, and we've done that.
We've actually won some awards this year for the first time with some of those big wholesale distributors, which we've been delighted with, around volume, service, delivery, and performance. We also wrapped out our portal around that as well to enable doing business with us to be a lot easier. Now we're moving out into smaller unstructured accounts, really in areas like hotels and school institutions such as hospitals, which are a lot harder, and that's going really well. I can't talk of significant accounts that are changing the world, but that hopefully gives you a little bit of a flavor, Ajay, of how we're just coming from a lot more focused perspective. Still lots of room to go. As you know, out-of-home meetings account for about AUS 60 billion worth of food spend in Australia. Dairy is the second biggest category in that.
It's more than 20%, I think it's about 22%, 23% of that last time I looked. We've still got lots of room to go in that space. What we do is we continue to support that team. We continue to innovate products that meet our customer needs. As I said, it's often a very different need to that of a consumer shopping through the traditional grocery channels. I think hopefully we are getting better and better at that.
Thank you. Around the international segment, are you able to give us a bit of color around the growth opportunities there in terms of is it growing your product set with your current customers, or is it more of a penetration story that you break into more and more retail outlets and expand your penetration that way?
Yes. We've focused our range down. We really want to, we don't want to try and be everything to everyone. We've come out with a cheese strategy around processed, cream, and natural cheese. Cream cheese and natural cheese, cream cheese being our champion product. We've also got yogurt, which is actually going exceptionally well for us at the moment off a much smaller base, but very well. We have distributors. We realigned all of our distributors 18 months ago. We consolidated them, and we tend to look at our distributors between food service and retail. We're working on selling more into those food service agents. With our beefed-up team on the ground up there in those markets, we're doing a lot more work alongside those agents to drive volume. We've also got a direct-to-direct model where we go direct to retailers.
That's worked particularly well in China and in Thailand, where we're now dealing directly with retailers over there. We've had some excellent wins in [Chongqing] in China. We're doing a lot of work with CP Group in Thailand at the [7-Eleven] and a number of other retailers. It's a bit of a combination of both. What I would say is that every time I go into that market, I try and go up there 3x a year and talk to our key customers up there. Every time I go into that market, the change and evolution of it just never ceases to amaze me.
I think when I look at the size of the addressable customer base and how that's growing, where that'll be over the next 10- 15 years, I think it's a significant opportunity for Bega , well beyond my time, but also just other food companies in Australia. I think it's just going to be, it could be a game changer for us.
Thank you. Just last question, if I may, around consumer sentiment, both domestically and internationally, pointing to it being improving. If you look across your sort of essential and discretionary products that you guys offer, are you seeing sentiment improve across the range? What sort of implications should we think about in terms of good sales and margin across your major categories?
Yeah, that's interesting. A good question. What we, so the data's been, Gunther and I have been watching the data for the last sort of nine months, and it has been heading in the right direction. What I would say is we've probably only just started to notice it, a few bits and pieces probably in the last couple of months, so there's been a little bit of a lag. What we would say is we're starting to see for the first time in about two years, we're starting to see stronger numbers out of P&C. Last month, we had a really nice little growth uplift in petrol and convenience, which was very subdued. I think when people were heading out, they're pulling in and getting half a tank of petrol, but they certainly weren't going and buying a couple of dares or more discretionary spend.
We're seeing down in traffic and down in cross buy in petrol and convenience. We're also seeing out-of-home, you know, pubs and clubs and restaurants and various takeaway stores also being a bit subdued. We're just starting to see those numbers come back. The food service results that we were getting were well ahead of any market growth that we're seeing. We've been really heartened by petrol and convenience and that unstructured trade, cafes, and so forth, starting to come back. We're still seeing a real drive by major retailers to demonstrate a value offering. I'd say that's proving to be a bit more challenging around maintaining margin. That's why we're so happy that we actually grew margin in our branded space and we had exposure to different channels.
That's just the consumer, you know, we're probably seeing strong growth in the discount retailers still, and that's the other large retailers responding. We continue to see margin, I would suspect, fairly low margin growth in that area, and it's predominantly been driven by volume. That's how we're sort of looking at it, which is not too out of step really with our five-year strategy.
Got it. Thanks. Good color. Perfect.
Thank you. Your next question comes from Evan Karatzas at UBS. Please go ahead. Apologies, Evan has disconnected. I will move to the next questioner. This is from Mark Topy at Select Equities. Please go ahead.
Good morning, Kent. My first question is about the dairy protein segment as a, I suppose, a distinct segment. I've seen some headlines that say that dairy protein is the trend of the decade. Some growth statistics, even in Australia, are saying that the segment's growing at plus 20%, 23%. I'm just wondering how you might see that over the next two years, the opportunities in yogurt and milk, and in terms of it becoming very meaningful to the bottom results going forward as a growth category.
I try and I try and stay pretty level-headed about things, Mark, but I wouldn't disagree with that comment about it being the trend of the decade. Protein is a significant driver behind not just dairy, but a lot of food trends at the moment. You know, I think if you think of low fat being a massive trend during the 1980s and 1990s, I think that, you know, protein is just significant. It's changing the way we consume food and our relationship with food. It's tying into so much wellness. Also, what we're seeing around weight loss drugs as well, protein becomes a key enabler of a healthy lifestyle under a weight loss program like that, which is gaining massive momentum. I think protein will be a significant part of any food company's growth platform moving forward.
I think consumers will become more educated about protein and the quality and type of protein they consume, natural versus synthetic versus, you know, various different variants. I think the good news is that dairy proteins play to that piece really well. They're of a very high quality, and they're actually very affordable. I think that becomes a massive trend for us. We were late to protein, if I'm being truly honest. What I think is we've actually, when we've arrived, we've arrived with scale and velocity and a distribution network that can make it happen. I think our sensories come up really well because I think the early inhibitors around protein were around sensory and flavor and taste. I feel really bullish about our protein offers. To be quite frank, the last 12 weeks of data would give me no reason not to maintain that attitude.
I think it will be significant for us. I think we now need to make sure we continue to refine our view of protein and how we continue to appeal to customers because I think they'll become more, a little bit fussier. I think it'll be a key part of our business moving forward. Then the branches out from protein, you know, amino acids, fiber, all those great things that come from dairy, or can be consumed with dairy. I think it will be significant for us.
Would you expect, if we just talked about that segment, growth rate in excess of 20%, is that something we could think about over the next two years?
We've got a lot of our way, but we've got a lot of our branded business that isn't directly in protein type. I think it helps drive and deliver that branded growth. We think our five-year strategy is pretty ambitious. Barry tells me it's maybe not ambitious enough every now and then, but we think that protein just underpins our strategy around what we want to do overseas and what we want to do in our core grocery areas here. I think it will certainly be a tailwind for us. I look at it as an enabler to deliver what's a pretty aggressive 2028 strategic plan.
Right. I suppose on the segment, just on the VIX sort of issue of U.S. tariffs, there is some commentary coming out of China that their preference is swinging to New Zealand and Australia. Are you seeing that, or do you think the tariff thing might play out from Australia to New Zealand's point of view?
I think we'll still wait and see on tariffs. What I would say is that we're seeing the first domestic uptick in China for a little while. We're starting to get some pretty good branded numbers out of China out of the last few months. The data I see would indicate that there's more out-of-home consumption starting to happen again. I don't know what the broad economic data is saying about China, but I would say that we're seeing a little bit more lift in.
China, its demand for protein and for dining out, which helps us. Early days yet, but we're starting to see a few positive things happening in China in the retail and out-of-home space.
Great. Lastly, just on the bulk business, I appreciate the prices have been higher. I'm sort of wondering how long this butter price can be sustained. In terms of the capacity utilization of the Koroit and other plants, can you give us a sense of how much that might have contributed to the improvement in the bulk business as well? What sort of capacity utilization of those plants you might be running at at the moment?
Yes, the team have done a terrific job of realigning our capacity. We've changed shift structures at those sites. We did a lot of that hard work back in 2023-2024 when the commodity prices were really impacting our profitability. Sorry, the commodity price disconnect with the farm-gate milk price really impacted our profitability. The guys did a lot of work around shift structures and capacity. We mothballed a dryer. A lot of that work was done then. We feel pretty good about the volume of milk coming through our sites. We could always put another 50 million L through Koroit. That would be terrific. 100 million L through Koroit. We'd actually end up putting a lot more through both those sites if we wanted to revamp our shift structures. There's still the ability to ramp them right up.
We're actually pretty happy with how we've got the costs aligned with the current capacity.
The flexibility you've perhaps introduced into that sort of...
Yeah, absolutely. Our main focus now is just, you know, for every layer of milk, how do we get it into the best returning revenue stream, which is why we've invested in high milk protein concentrates, why we've invested in increasing cream cheese capacity, increasing lactoferrin capacity. All those things have been done over the last three or four years. We'd love more milk. We could take it on. At the end of the day, it's around getting the right cost structure for the milk we've got today and ensuring that we're just maximizing those returns.
Very good. Just last on that milk supply, do you think it's improved slightly in Victoria, the outlook now? What's your sense that you're getting from farmers as to the spring flush?
Barry could probably talk about this in more detail than me. I think people are still concerned about the rain they need over the next 6-8 weeks to make for a good spring. I think that we've seen some breaking of the weather conditions, particularly in Western Victoria, which has been terribly depressed with the drought. I think that farmers would now say they'd like to see some more rain over the next 6-8 weeks. Therefore, we've seen milk production actually be pretty resilient. Of course, as I said, we've actually been out, and therefore the predictions of milk decline are only still relatively small. We've been happy because we think we've been able to increase our milk procurement from a slightly smaller pool.
I would say that the word I hear from farmers is they would like to see some rain over the next 6-8 weeks, Barry.
Yeah, I think, Mark, it is, it's different by region. There's no question that we would have actually seen milk growth last year in Australia had it not been for the severity of the drought in Southeast , South Australia and Western Victoria, which was very severe. As we come into the year that we're currently in, as Pete said, I guess that's the stress point around when we look across our regions. It's certainly not as stressful as it was. There has been some rain, and it's reasonably set up. If you were, I think if you're an optimist, you would say that there will be a spring, which is the first thing that is a question of how strong that is. I'm sure if we had a Western Victorian farmer online, he would say if we get some rain now, we'll be fine.
There'll be some moisture in the soil. I think I'm not as dire as what we were looking at in the latter half of, in the first half of this calendar year. The other reason is, you know, Western Victoria has been the key. As I said, it's eased, but Peter's right. Peter's 50s are close to the ground, and there's still a little bit of stress in Western Victoria. It has eased. It just depends on what the weather does in the next few weeks. It's raining across much of the field. I think we obviously feel more optimistic than pessimistic around the outlook for this year in terms of production, but always aware of the impact on different regions.
Great. All right. Thank you for your time there.
Thank you. Your next question comes from Paul Jensz from PAC Partners. Please go ahead.
Two quick ones if I can. One to maybe wake up Gunther. With the unallocated overheads, you talked about those reducing from around AUS 41 million down to the AUS 30 million range, maybe only a couple. I note that last year it was AUS 21 million. Can you talk about how you've reallocated perhaps overheads and why it's only coming down a few million in 2026?
Yeah, and you know, as you saw on that first segment chart, that was just over 40, Paul. At 41 for the year, as I said, that's got probably around AUS 4 million of restructuring costs that we left in our core earnings because we do tend to tighten up and focus on process and automation. They can see it from 41- 36, right? There's probably a couple of million dollars of project costs in there. That's sort of what you do. If you strip those things out, then you kind of get down into that mid-30s. That's what I kind of call as a, you know, plus or minus a few million. That mid-30s is what we think it will be in 2026. We talked about the milk costs, and they have gone up a little bit in the upcoming year. Barry and Pete talked about the weather.
Where you're going to have AUS 5 million, AUS 6 million, AUS 7 million of reduction in unallocated overheads, you'll probably also see the bulk business unit come down a little bit. That's how you get to AUS 215 million- AUS 220 million at a group level.
Okay, I suppose the query is why from AUS 21 million up to that mid- AUS 30 million level. That's a AUS 15 million increase on the unallocated overheads from last year. I know there's FX and all sorts of things. Perhaps that's where it is, just the lift from AUS 21 million in 2024 to mid- AUS 30 million in, say, 2026.
Yeah, and I think, you know, one thing we acknowledged over the last couple of years on calls, Paul, is that we do tend to leave our group incentives sitting inside that number as well. A couple of years ago, unfortunately for the team, we didn't get to our objectives and we got zero as a business in incentives. The good thing is as we grow our EPS 73% this year, the outcome is better for our team. A chunk of that difference is really related to the incentives. The important news as you go into FY 2026 and FY 2027 is if we don't hit our underlying targets, then our number will come down in unallocated overheads because we won't get our incentives. It does act as a little backstop and clearly one that we don't want to use, but incentives is a big chunk of that ball.
Okay, we like those. We need to live. That's great. The next one is, you know, the bigger picture to land and expand potentially in offshore markets. I like how Pete's getting up there 3x a year. I'm just wondering, with the discussion with the SAMs groups and all those direct relationships you now have, are there groups now that are saying that perhaps you're a better manager of some of the brands up there and perhaps there's more ways that you can sort of land and expand in other markets and other countries?
Yeah, that's certainly a thought. We're trying to stay pretty focused because we just think the opportunity is so significant within the countries that we've sort of identified. I look at Southeast Asia. Obviously, Malaysia's been a great market for us for some time, but it continues to grow. Thailand, Singapore, Indonesia, and the Philippines. There's sort of several hundred million people there. We've got such small markets here and so much opportunity. Someone comes along here and says, "Oh, geez, Vietnam's going nuts." You spend your time training people or as he thinks you say, "We should be in Vietnam." We've just tried to be really disciplined because we think that those markets are so significant that we actually just want to stay pretty focused and not get too spread out. We really like the Middle East, in particular Saudi, UAE.
Obviously, we've been in the UAE for a little while, but Saudi's really emerging. We tend to, we sort of want to make bets, reasonably limited product range, very focused around countries and markets. I think that's the better way to go at the moment than just trying to be everything to everyone.
Okay, Pete, are there, I suppose, players there that mightn't have that focus on protein and mightn't have your skills back here that would potentially want you to take maybe an Asian-based or a Middle Eastern-based brand and sort of bulk it up with your expertise across the board?
Yeah, potentially we've talked about it. There are certainly a number of players that would like to do arrangements with us, either with our brand or to help them. We're focused on trying to be a branded business up there. We just think that if we can build our own brands up there, then that's the best way forward for Bega and well beyond my time, over the next 20-3 0 years. We'd love to have our own brands established up there. The opportunity is so significant, Paul, and we've got close to 30 people working up there now. There's so much to do that we've just tried to stay really, really disciplined.
I think, Paul, if I was to just add, if it was really strong alignment with the focus that Pete's talking about, we would never be closed minded.
No, but I guess as you can tell by example, we see opportunity that is probably more secure, more reachable now, without the requirement of adding complexity, if you like. Of course, if it was something that was very aligned to that focus, we would be able to find it. We manage a little bit of processed cheese for other brands up there, individually wrapped slices. We do some of that, but our margins are much better on our own branded product.
Yeah, I suppose I see with Kraft and others sort of exiting the Australian market, and you came in and helped out, and you've seen that the next generation of that was South Burton to Ridge Street. Are there multinationals pulling out of those regions? Because certainly, particularly Kraft and others, they're struggling a little bit. Is that something that you could play into?
In Southeast Asia?
Yeah.
Yeah, absolutely. That's something that has certainly crossed my mind. There's a couple of things that have popped up that you'd look at, but I think what would be interesting for us is potentially, you know, going into partnerships, manufacturing with people up there, or JV with people up there on assets that already existed. There is definitely those elements. I think to expand into the traditional trade, which you want to do that to build your brand in the traditional trade, so that as people trade up into what we call modern trade, which is how we think of grocery, they're familiar with your brand. I think that the opportunity to be competitive in that space, to have manufacturing networks in Asia, I think at this stage through relationships is something we're definitely looking at.
Excellent. Looking forward to continuing discussions tomorrow. Thank you.
Thanks, Paul.
Thank you. As we have no further time for the question-and- answer session today, I'd like to hand back to Mr. Irvin for closing remarks. Thank you.
Thank you everyone for listening and thank you for the question. I'd just like to add my thanks to the team and obviously to the Executive Team led by Pete Findlay and Gunther Burghardt and all that work at the Bega Group. As Pete mentioned, also all our customers and suppliers and consumers, and particularly to our shareholders who have supported us as we've transformed and changed this business. Thank you very much for your support over both new shareholders and those that have been with us for an extended period of time. Thank you, and I hope the call was informative for you.
Thank you. That concludes our conference for today. You may now disconnect your line.