Thank you for standing by, and welcome to the Bega Cheese Limited full year 2022 results conference call. 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 hello, everyone. I'm very pleased to be presenting you the results for Bega Cheese for the FY 2022 year. What a year it's been really. I think a year of extraordinary volatility and upheaval, and we're very pleased to be able to present these results to you and particularly pleased with the achievements that the company have made over the past year. For those of you following the results presentation, I will guide you to the pages as we go through, but you know, I guess our key messages which are on page 3 are important.
We are pleased to present this, what we would describe as a solid financial performance in what was a very challenging environment, which we'll talk about a little more in the body of the presentation. It is the first time that the company has exceeded AUD 3 billion in revenue, which is obviously a milestone for the organization and, you know, a testimony to the growth and acquisitions that the company have made over the past decade. A normalized EBITDA of AUD 180.1 million and a statutory EBITDA of AUD 149.9 million, I think in the environment that we've been operating in is a pleasing achievement.
Particularly pleasing is the strong operating cash generation of AUD 158 million in the FY 2022 year, which of course then allowed us to reduce debt and make further investments in the business. We have reduced debt by AUD 60-odd million, meaning that our leverage ratio has dropped below 2 to 1.8. We have obviously now owned Lion Dairy & Drinks for a little over 18 months and so you know, very pleased to have this as the first year where we've reported Lion as a whole for the full financial year.
The Lion Dairy and Drinks business which we now refer to as Bega Dairy & Drinks, the integration has gone well, and, you know, pleasingly the synergies that we expected to achieve have been achieved. Importantly, it does represent some of the strategy around that further transition to a branded company and indeed some of the brands that we now have in the portfolio which Paul van Heerwaarden will discuss a little later, are truly iconic in the Australian market and indeed, many are number one or number two brands. In the year just past, we've seen, you know, a very strong rise in global dairy commodities, and they remain relatively strong.
That obviously with a business the size of Bega Cheese has meant that we've been able to take advantage of some of those strong commodity prices in the year just past. We talk regularly about our sustainability programs, and we continue to implement them as a priority as we work towards ensuring that we have as light a footprint as possible as we produce the food that is so much needed by our customers here and around the world. Obviously, I've touched a little on some of the disruption in my opening comments that obviously there was significant COVID-19 costs in the year just past, which we'll outline in a little more detail in the presentation.
There was also some knock-on effects from the COVID-19 disruption that meant that other disruptions were more difficult to handle, particularly, things like, the extreme weather events and the floods. Farmgate milk price competition continues to be very robust. We continue to be competitive in that marketplace and pleasingly we've secured the milk we require for the coming year. Leading you to the next page, you will see that we've done some rebranding for the company. We now refer to the company as Bega Group.
We're of course very proud of our origins and Bega and of course Bega Cheese is and Bega region remains the heart of the company. But of course the company now encompasses brands like Vegemite and Dairy Farmers and Dare and many other iconic brands such as Farmers Union and Juice Brothers. We thought it was more appropriate to now refer to the company as Bega Group, recognizing the expansion and growth of the company, but still remembering where the home of the company is. We've done a little bit of corporate rebranding. It's only corporate rebranding now referring to the company as the Bega Group. Talking about our purpose being to create great food for a better future, which we think is very appropriate for the times that we're living in.
If I move you to page five of the results presentation, I touch on the performance highlights, which we'll go into more detail. As I mentioned, exceeding AUD 3 billion revenue for the first time with branded sales now representing 82% or the branded segment representing 82% and our dairy ingredients and nutritionals segment representing 18% of our revenue. Our normalized profit is AUD 46.3 million with our statutory profit of AUD 24.2 million. We were pleased to announce to complete our year with a strong announcement around dividend and that will be issued shortly. Moving to page six.
I think this is a slide that many people have seen around the transformation of the company. I think, you know, in a volatile environment, the path that we've gone down in terms of acquiring some of those brands that I've mentioned, making sure that we are a diversified and balanced business that can service both Australian and international companies, can participate in both the branded segments of food and particularly dairy, and also the commodity sector of dairy ingredients is a key feature of our organization.
What that really goes to is that it allows us to manage risk and manage volatility very effectively even in difficult times, such as the time that we have just been through. Moving to page seven. We have spoken regularly about our sustainability programs and indeed our progress on the circular economy projects that BGT has been leading. I think importantly, we have made announcements around our commitments and carbon targets for emission. Working on the programs for those reductions has been a priority for this year. We will have more information on how we think that we will indeed achieve those 50% reduction in emissions intensity by 2030 for our Scope 1 and Scope 2 emissions.
This year we will be focusing on compiling data and information on Scope 3 and, of course, the circularity project will be part of what informs us in terms of how we deal with and manage Scope 3 emissions into the future. I just wanted to really give a little bit of an overview in terms of where the company's at and how it's performed. I think as I said in my opening comments, we're very pleased that in a very challenging environment, we've been able to achieve most of our key strategic objectives, which Paul and Pete Findlay will speak about in a moment, while still delivering unacceptable financial results and reducing debt.
That said, I might just hand over to CEO Paul van Heerwaarden, who will take you through in more detail the results, and I'll come back and talk to you at the end of Paul and Pete's presentation. Paul, over to you.
Great. Good morning, everyone. We'll provide a summary of major initiatives and operations before handing over to Pete who will provide further details on the financial results. Following Pete, I will cover the commercial and market overview for the company. Page nine, which outlines the major initiatives during FY22. From my perspective, it was very pleasing to see the ongoing progress during a very challenging year in terms of disruption and unavailability of internal and external resources. Our key focus coming to FY22 was to ensure that we realized the synergies from the acquisition of the dairy drinks business, which we did, but there was also other sizable projects, in particular, the transition from the Lion Group IT infrastructure to our own cloud-based network, which was completed ahead of schedule and with minimal disruption to our operations.
We're also investing in our digital platform and network infrastructure with ongoing automation and rationalization projects to continuing to reduce our cost to serve and improve our service and delivery performance. The termination of the Reckitt agreements in our last financial year were finalized during FY 2022 with a reset of our fixed cost base and arrangements put in place for third-party canning to support our reformed health business, which has stabilized following the market disruptions we've seen in the China market in the last couple of years. The rationalization of some of our processed cheese manufacturing lines has provided increased efficiencies, and this business continues to grow, particularly in export markets. We also see opportunities in the domestic market where processed cheese provides a lower retail price point compared to natural cheese in an inflationary environment.
I should also note that our processed cheese manufacturing and technical capability support the development of our launch of plant-based cheese products, which while in small volumes, will provide good growth in the coming years. I'll cover the various sustainability initiatives later in the presentation and note that we remain on schedule with major capital projects across our manufacturing logistics network. This includes large investments in packaging sustainability across our flavored milk business and also growth into new farm and growing platform into the yogurt business. Moving on to page ten.
In the commercial overview, it's fair to say that the growth and new product innovation that we're very proud of through the year has been overshadowed by the impact of COVID-19, devastating floods across South Australia earlier this year in New South Wales and Queensland in March, as well as global supply chain issues that we continue to closely manage. Each of the points on this slide will be covered in further detail throughout the presentation. Page 11 outlines our business model and the two segments that we report on. While we focus on growing and developing our core branded segment, our bulk segment continues to perform a critical role in supporting the branded segment with ingredients on a flexible basis throughout the year.
As an example, during periods of channel disruption in the branded segment caused by the Omicron variant, we were able to immediately divert milk from our fresh milk plant into our commodity plants and take advantage of stronger national prices. This allowed us to maintain a profit focus for the upstream bulk segment, which remains an important part of how we manage and report the financial performance of the business, which Pete will now take us through. Thanks, Pete.
Pardon me, ladies and gentlemen, we have just lost Pete's line.
Thanks for that, Paul. I'm just joining through Paul's phone. My line's just dropped out. If I just start with the segments. The branded segment had obviously strong revenue growth and earnings growth off the back of our acquisition of the Bega Dairy & Drinks business. However, we were pleased to note that we did have good underlying revenue growth in all of our categories in the BDD business, with particularly strong growth in yogurt, juice and dairy, which were all around the 3% growth rates. Our spreads business continued to perform very strongly, both in retail sales with Vegemite and peanut butter up nearly AUD 10 million in sales. We got very good growth in our natural cheese and processed cheese through our contract manufacturing business.
A little bit challenging in our cream cheese international business as we start to hit price points that were quite hot for local Asian markets, so there was a bit of a decrease there. Obviously significant impact of the COVID costs, which I'll speak to in a couple of slides at time. We began to see the start of significant commodity cost increases through the back half of the year that actually gained momentum into FY23. The bulk business down a little bit in revenue and earnings. That was really off the back of mainly volume declines with our milk. We were able to change or shift that around.
We got good, strong commodity prices, particularly in cream cheese and powders. But our volume was down a little bit, which ended up impacting our infant formula business and also our lactoferrin business, just through volumes of processing. The unallocated overheads were favorable by nearly AUD 7 million. That was as we recycled some restructuring costs that were in the prior year numbers, and we lowered our employee incentives for the year. That gives you hopefully a breakdown of our segment results. We move to the next slide, which is a reconciliation of our normalized result. You'll see there that the two significant items were the termination of the Reckitt's contract and the continued LDD transaction costs.
We picked up 25.7 million dollars in income from the termination of Reckitt's. That was netted off against just under 6 million dollars of redundancies and restructuring costs. The team have done an excellent job to pull out a lot of that fixed cost overhead that was attributable to that earning stream, which was about 10 million dollars a year. Project King, we incurred 43 million dollars in IT-related costs and another 6 million in consulting and legal. We did get a stamp duty credit of 3 million dollars in the year, which was from the prior year.
Those IT-related costs were mostly around our transaction services agreement and shifting onto our Bega infrastructure, which was completed on time and to budget, and was a significant project. Other costs incurred are around transition for Workday and BlackLine and a new source to pay system which was software as a service implementations and they will be non-recurring. If we move on to the next slide, which is around the balance sheet. I guess the key call-outs here was despite our earnings being hampered by significant COVID cost increases, we were still able to reduce our reduction in net debt down by 18%.
Our leverage ratio, as Barry alluded to, has come down from 2.3 times in the prior year to 1.8 times this year, and down from a peak of about 3 times a couple of years ago. We're really happy with the direction that's taken. It's also worth noting that we've pushed out our tenor and increased our syndicate from 2 banks to 4, so very pleased with where our net debt is heading. We have actually got our Port Melbourne property held for sale. It's worth about AUD 60 million on our books, but should deliver more cash than that, and that will also continue to improve our leverage ratio significantly and probably get us down to just over 1 times if that transaction goes ahead.
We're not doing that transaction necessarily to reduce debt. We're very comfortable with our current position, but it obviously shows the strength of that balance sheet. Really good working capital management. We got a AUD 73 million benefit in receivables. About 20 of that was due to an increase in our trade receivables facility and about AUD 40 million of that due to the receivables from Reckitt, but there's a genuine AUD 20 million improvement there. Our inventory was about AUD 27 million lower as we pushed hard on sales to take advantage of the strong commodity pricing. Payables was up a little bit, around AUD 30 million just to do the timing.
You note there that we have got still an extensive property portfolio. It's about AUD 430 million, including the Vegemite Way property or Port Melbourne property. It's still about AUD 370 million without that. We think that the market value could be significantly higher than that. Still a really strong property portfolio underpinning that balance sheet. Very happy with the way the balance sheet is heading. Could we move on to the next slide, just with the cash flow there. Operating cash flow was up by AUD 158 million, once again off the back of some really good work with our working capital. We spent AUD 72 million on CapEx.
That comes out at a number a little bit below that, around AUD 64 million, but was offset by about AUD 7 million of property sales as we continue to clean up some of our property portfolio. Those properties related to our cold chain distribution network and the small warehouses that we sold off as we continue to consolidate and optimize that cost structure. We paid back AUD 83 million of debt, so net debt reduced by just over AUD 50 million. Obviously, there's the dividend payment there of about AUD 29 million. A really strong cash flow result and we're very happy with where that's heading. Could we move on to the next slide, just around COVID-related costs.
We've spoken quite a bit to that at the half year and during market updates. With the COVID, we had some significant direct COVID cost impacts, particularly in the second half of the year and particularly around our branded business. Absenteeism, as we saw the Omicron virus spread, sort of peaked at around 30%, which put huge pressure on our factories. We had a direct absenteeism cost predominantly across our branded business of about AUD 6 million. We had additional RAT testing of close to AUD 3 million. We had shutdowns in our plant worth about AUD 7.5 million-AUD 8 million, where we just couldn't open plants and had to stop lines.
We had materials not turning up, which also caused stoppages, and we had a number of customers ring up and cancel orders at the last minute because they were unable to staff their venues. Overall, a little bit more than AUD 40 million worth of direct COVID costs related predominantly to around that period, and most of that sitting in the branded business. It would be fair to say that we anticipate that those direct costs will not be repeatable at this stage of the year and we'll start to see some benefit from those costs flowing through in the next year. Also, significant challenges created by floods.
During the second half, we saw floods in South Australia that cut off rail lines into WA and floods across Queensland and New South Wales which cut off access into our northern markets out of Victoria, and particularly impacted our yogurt sales. Because of the shortage of truck drivers in Australia, those problems were exacerbated and we saw a significant spike in logistics costs which we haven't included in that COVID cost breakdown that I just gave you. I might hand back to Paul now as he talks about our strategy.
Thank you, Pete. Apologies for the slight delay there. As part of our cost-saving measures, Pete and I are sharing a phone today, which we've had a couple of technical difficulties. Just moving to page 17, which details our transition from 2017 as a commodity processor and contract packer to today, where we are positioned as a diverse and growing multi-channel integrated branded business operating across both international and domestic markets. You won't have seen this slide before. Just prepared this to provide an overview of the process that we have gone over the past 5 years.
I won't go into the detail on the slide, but would like to draw your attention to the box on the left-hand side of the page and note that for many years the profitability of Bega was driven by major long-term third-party packing contracts and an export dairy commodity business. Significant headwinds across both of these businesses required a change in our vision, which was to become a great Australian food company with a strategy focused on building a multi-channel branded business. The middle box lists the various acquisitions and other major initiatives that we've been executing over the past five years. These acquisitions and initiatives are all about diversifying and growing the brand of business and addressing the major headwinds we were facing in terms of pre-2017.
The divestment of some non-core assets in 2017 and the closure of the Coburg Cheese facility a few years ago were also necessary to right-size our manufacturing network, and align with market opportunities. Today, we are one of Australia's largest branded food and beverage companies. It's fair to say that we've had to navigate a number of challenges as we've made this transition, including the impact of drought, bushfire and floods. We commenced calendar year 2021 with a mouse plague and we finished the year with a rat shortage. Of course, the impact of COVID and the current global geopolitical issues are causing ongoing challenges for us.
I'll talk about the outlook for FY23 later in the presentation, but note the recent material spike in input costs that has provided further challenges will impact us in the short term but doesn't lessen the opportunity for future growth. Moving on to page 18, which includes our longer-term sales growth chart. It shows an approximate 30-fold increase in sales from approximately AUD 100 million 20 years ago to AUD 3 billion in FY22. The pie charts on the right-hand side of the page provide the increase in the proportion of branded sales over the past couple of years, as we reflect the full year impact of the acquisition of the Dairy & Drinks business. Page 19 includes the growth in market share of our portfolio of brands. As you can see, we're experiencing strong growth in most of our categories to maintain our market-leading positions.
Yogurt continues to be a highly competitive category, with each of our brands playing a key role in the overall portfolio. Our leading milk-based beverage brands led by Dare continue to grow, as has Vegemite and our peanut butter range with new innovations, which are covered on the next page. Investment in our core brands increased during FY22 with a number of activations across all categories, new product variations and pack formats, such as the new Squeezy Simply Nuts innovation. The launch of lactose-free option for Pura White Yoghurt and our famous Farmers Union Iced Coffee in South Australia have performed very well in market. Over the page on the slide 21. I've mentioned the disruption we've seen in our market channels, and this page provides an indication of what impact this has had on volumes in some of our product categories.
The top chart is an index of the volume of white milk sold nationally through the grocery and non-grocery channels over the last three financial years. The shaded areas cover the periods of significant disruption and are further explained in the text on the right-hand side of the page, which you can read for yourself. You can see that during the periods of disruption, we saw a lift in volume through grocery and a fall in the volumes through non-grocery. Within FY22, you can see the drop in volumes for the non-grocery from the Delta lockdowns and the Omicron outbreak. During the Omicron outbreak, the shortage of labor across our manufacturing and logistics network, but also importantly for our customers, resulting in a sharp decline, which has continued to recover as we progress into quarter one of the new financial year.
We saw a similar story with Dare Iced Coffee, which is covered in the bottom chart. You'll also notice the vertical dashed line, which is the date that Bega completed the acquisition of the Dairy and Drinks business. It was very pleasing to see that despite the channel disruption, there continues to be strong underlying growth across our key product categories. Moving to page 22, which shows our manufacturing network, which is provided on previous investor presentations, but it's worth revisiting for a moment. Our national network of manufacturing sites along with our extensive chilled distribution network continues to support the growth for both our national accounts, but also very importantly, our local business. We continue to see opportunities for rationalization and optimization across our network and indeed across the industry.
Page 23 includes the Dairy Export Trend Index, which is the red line, and our Southern Farm Gate Milk Price Trend which is the green line. As expected, these two lines are highly correlated, and they're also highly variable. You can see the low point of the Dairy Export Trend Index in the middle of the slide around May 2016, and the doubling of the index over the next four years until COVID emerged. The index quickly plummeted by 40%, only to rebound to new highs about six months ago. We've now included an additional index, the blue line, which represents the private label milk price index for the major grocers.
This line is basically the AUD 1 per liter milk that was introduced in January 2011, which remained flat for over 7 years until the AUD 0.10 per liter drought relief payment was introduced. A subsequent increase last year, followed by the more recent increase to AUD 1.55 per liter based on a 2-liter bottle, has seen a cumulative 40% increase in private label milk prices since we acquired the Lion Dairy & Drinks business in January last year. I would say that this is a really important development that we've seen since the acquisition, which really does position us well as we will see a change in the cycle in the coming years with the dairy commodity pricing.
The rapid increase in global dairy commodity prices since the start of FY22 saw a 40% increase in the index. These immediately benefited our commodity business, notwithstanding the increase in farm gate milk price, which caused margin pressure in our branded business, which was unable to quickly pass through the quantum of these cost increases. This pressure has continued as we enter FY23, which I'll cover in our earnings guidance. Moving to page 24, which provides key highlights across our five focus areas for corporate social responsibility. We continue to progress the improvement in the nutrition of our products, aiming to reduce salt and sugar content as examples. A number of initiatives across diversity and inclusion, which is a personal passion for me, includes becoming a signatory to the 40:40 Vision.
We're on track to achieve our target of reduction in Scope 1 and Scope 2 carbon emissions by 2030, and have commenced measuring our Scope 2 emissions, which represent a material component of our overall carbon footprint, and being dealt with as part of the sustainability reserve for our economy initiatives that Darren is leading. Packaging targets are also on track as we approach 2025 and our commitment to the Australian Packaging Covenant. Our water sustainability and the reduction of water usage across our manufacturing sites is also on track to achieve the 2030 targets that we've set. Before I hand back to Darren, I'll cover the earnings guidance for FY 2023, which was provided early last month to the market with normalized EBITDA in the range of AUD 160-AUD 190 million.
As outlined in the guidance note, we would initially expect an increase in the Victorian farm gate milk price in the range of 15%-20% over FY22 closing prices. Strong competition for milk through June and July resulted in further increases in pricing, which were approximately 30% higher than the closing FY22 farm gate milk price. Along with other cost increases, for example, with oil, resin, packaging, and coffee and sugar, we've seen a significant year-on-year increase in costs. It will be partly offset by accelerating some cost-saving efficiency programs and increased returns from international dairy commodities. The overall net increase in costs is estimated at AUD 350 million-AUD 400 million or about AUD 30 million-AUD 35 million per month.
During the first quarter, we have phased in price increases in market to cover these increased costs, and these prices should be normalized by quarter two. The timing of this phasing of pricing in the first quarter is impacted by a number of factors, including the 13-week notice period with grocers for price increases. Farmgate milk pricing was still lifting during July, but is backdated to commence from July 1. Ongoing monitoring of competitive pricing in the market and the consumer response to ensure that we're not dealing with a drop in volumes. Thank you, Barry. I'll now pass the baton to you to take us home.
Thank you, Paul. Always good to have some memorable quotes from the CEO. Thank you very much for that. Look, ladies and gentlemen, I'll take you to the last phase of the presentation, which quite frankly, just outlines where we are today. I have to say that, in a year where the challenges were many and the projects were many, I feel very comfortable with what we've been able to achieve and what the team's been able to achieve.
Frankly, I think it's a testament to the knowledge, experience, and capacity and capability, both from a people point of view and an infrastructure point of view and a business point of view that has allowed us to navigate what has been one of the most volatile periods, I think in recent history.
As Paul has outlined, we continue on that transition to a branded food company, and the balance of the business we now have where we can take advantage of commodity pricing and global demand when that is there, but also have the comfort of the greater stability that ultimately a branded business will bring us, I think, puts us in a great position to manage any headwinds or risks or geopolitical changes or whatever it might be, in terms of where this business is positioned as compared to our competitors and indeed, as compared to the industry dynamics, both domestically and globally. As Paul outlined, we've got
We've now got strong underlying brand growth in a number of our key brands, and seeing the market settle and seeing a return to post-COVID conditions, if you like, where there's that we're seeing a more settled market and seeing that come through in brand growth is very pleasing. I think it is very important to note that the inelasticity of pricing around white milk has now been changed in recent times, and we are seeing movements in white milk better reflecting both the cost of production for farmers and the alternate returns. I think that's a very important thing as we move forward.
There were indeed significant cost increases late in the financial year 2022, which we have discussed, and Paul just alluded to them, but we are managing them through the business with some impacts on, from a timing point of view. We do still see that there are a great many further opportunities in business efficiency and cost-out programs. While we've been very happy with the integration of Lion Dairy & Drinks or now Bega Dairy & Drinks and very happy with how the businesses are coming together with a fresh dairy capacity and a manufacturing capacity as far as dairy is concerned, and then those other key brands that we have in the portfolio also adding strength to the business.
We do see there are greater opportunities and there are more stages of improvement in our business and improvement in that integration. We're very comfortable that there is more to be done, although we're very comfortable with what's already been achieved. As I mentioned, we are seeing prices increase, price increases being realized in the market, with timing impacting some of the realization of those price increases in quarter one. We are
I mentioned it earlier, we are very much an integrated dairy commodity business, providing flexibility and risk mitigation in this very competitive environment for milk and indeed an environment where we have continued to see a reduction in overall milk supply in the industry. We've been able to secure the milk that we require for the year ahead and very confident about securing that beyond the year ahead. I think the reality of our long-term relationship with our farmers and a deep understanding of the issues that our dairy farmer suppliers manage assists us greatly in securing that supply.
We continue to execute our sustainability and circularity initiatives, and they are something that, as Paul mentioned, I particularly in the circularity space, I continue to lead and have a direct involvement in. Of course, there has been a lot of discussion around both geopolitical risk and biosecurity risk, particularly foot-and-mouth disease, and we work closely with government and industry in that space to make sure that we're having our input and also are aware of and trying to forward-think any particular risks that may emerge across the business.
Ladies and gentlemen, if I were to summarize where we are today and our feelings about moving forward, we are, you know, a very diversified business, well-positioned to respond to the various market scenarios, much of which have been demonstrated in FY 2022 and we certainly think will continue to be demonstrated in FY 2023. But we can be very comfortable that the infrastructure, the capability, the knowledge that I mentioned earlier, is what is required and indeed what we are able to manage very well to create value for our shareholders and other stakeholders. I think perhaps on that note, I'm really happy to hand back to the operator and take any questions which I'm sure Paul and Pete will assist me with.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Michael Peet from Goldman Sachs. Please go ahead.
Oh, good morning, Barry, Paul, and Pete. Thanks for the detail. I think, Paul, you probably answered part of this with those comments on the cost increases. I'm just looking at the guidance for this year, AUD 160-AUD 190, and wondering if you could give us a little bit more color on what the sort of swing factors between the bottom end and the top end. I mean, are you factoring in any further increase in the farm gate price at the bottom or any further disruption or inflation in your costs over and above what we see today and timing of those price rises at retail? Is that still uncertain? Thanks.
Michael, I might show to Paul on the market side, but I think on the farm gate side, I think everybody would recognize that they're very full prices and what we're really seeing in farm gate these days is that those price increases that once happened throughout the year as the market unfolded, you know, that's really now been pushed very much to the beginning of the year unless you saw major market changes in things like commodities, which, you know, at the moment we're not seeing that. Paul.
Thanks, Barry and Michael, thanks for your question. It's worth noting. I mean, there's a number of swing factors and it's obviously still early in the year. The interplay between the commodity price and milk price that is a factor of our you know. It was interesting to note overnight, Fonterra have decreased their milk price forecast in New Zealand, which is often a very good bellwether, obviously for the commodity price outlook. We're sort of seeing that in our own business. But we've also got a very keen eye to a part of this, which I mentioned, which is around volumes and what sort of response we see in market to these price increases.
A lot of the price increases, a significant portion of the price increases in both grocery and non-grocery have been put in market in the first quarter, Michael. You will start to see them come through across all categories, including spreads and obviously in drinks categories in market. I think that answers your question.
Just to clarify, it's probably a little bit of uncertainty over sort of what sort of elasticity of demand there is with those price rises coming through. Is that fair to say?
Look, it is. It's feedback and we saw this a little with the Coles and Woolworths announcements and their outlook. We don't have any immediate concerns with what's happened on consumer demand. There seems to be you know, discretionary spending impact which is one of the categories that we're participating in, and a little decline in out-of-home dining. Grocery remains pretty robust. We'll see how that plays out over the next six months. Of course, we've got very low unemployment rates, so, and reasonably good levels of savings at a household level.
Overall, we're not we don't have any cause for concerns as we start to see these prices roll through in the first quarter, which is really pleasing. We're more concerned about in non-grocery how we sort of tactically play that across our various markets and also just understanding what the competitive responses are in the market, which of course we do at all times, Michael, but it's particularly active at this time. Let's put it that way.
Oh, that's great. Thanks for the color.
Thank you. The next question comes from Phil Kimber from E&P Capital. Please go ahead.
Hey, guys. I just had a question. If you go to slide 23, and thanks for putting the new blue line on there with the private label milk prices. The only thing I did notice on that dairy commodity chart is that, you know, they have come off and you just mentioned then about Fonterra in New Zealand. How does it work now that your farm gate prices for fiscal 2023 are essentially locked in? They might not go up, but it's very hard to take them down. Are you exposed in FY 2023 if there is a continued fall in dairy commodity prices? I know that's fantastic for FY 2024, but I guess I'm just worried about FY 2023 and the risk of commodity prices coming off.
Yeah. Phil, look, I mean, it is, I mean, it's a constant part of our business, right? You know, you can partly answer that question by looking back over the last 10 years and just seeing the various dips and troughs. What's interesting is over the last 4 years, if you have a look at that slide, that index has just continued to rise. We've seen a number of our competitors in the market who have come into the market during that period or expanded their business in that period, have not necessarily had to deal with any significant longer term decline in commodity prices. That's gonna cause.
A few challenges across with we see as we see it with some of our competitors. We're reasonably well covered into the first half. As you know, we have peak milk in that first half as well, so a lot more, a disproportionate amount of our volumes in the first half, and that's where we've got the strong cover. A bit of exposure in the second half, which we did factor into our numbers. It's fair to say that they might come through a little softer in the second half, and we'll put a little bit of downward pressure on that result there. We do see other opportunities elsewhere to be able to pick that up.
All right. Can I ask another one? Just one of the businesses that you picked up in that what was the Lion Dairy & Drinks business was you know a pretty amazing route business. I know you were taking the time to better understand it. Maybe the COVID period has made it hard to get a full read on that business. But is there you know are there significant opportunities over the medium to longer term to further develop that business? I think there was a comment somewhere in that presentation 40,000 orders a week I think.
Yeah. Yeah.
Yeah, can you give a bit of color around that? That'd be great.
Phil, I'll again, yeah, I think you're right to identify and we did indeed identify that we now own the largest chilled distribution network in Australia. We do see that as a great opportunity, particularly in those food service and convenience channels and beyond. Obviously, they've also been the channels that were very affected by COVID. You know, probably slowed our plans there a little, but we indeed have, you know, still remain very enthusiastic around what we think we can achieve in those channels. Pete's been championing some of the work there, so I might show to Pete, unless Paul's got some other comments that he might like to add.
Just to add in there, Phil, as you said, the COVID disruption, a lot of the people in that who work across that chilled distribution network, both in logistics, planning, customer service, and then our in-field sales teams, really inhibited in terms of being able to progress a lot of our development work in this space during the year. Just in terms of the additional attention they needed to put in place to just get product on the way, get product to the customers, get orders processed. During that period through Christmas into January, you know, our teams there were dealing with you know, those 40,000 orders.
There was a very high incidence of orders being canceled on short notices when restaurants and cafes had to close down because they didn't have people to work in there. Really disruptive period. Through the floods as well, particularly for the logistics teams who did a tremendous job. Just getting traction with our people, being able to focus on some of these growth initiatives, has been, let's just say, a little frustrating in terms of the priorities that we had for them in the business. You will have noticed a couple of months ago, we announced Pete moving into a COO role, as we're recruiting a new CFO.
Pete's focus, which I might ask him to talk about for a few moments, is really on driving and accelerating all of those growth opportunities that you're asking about. Pete?
Yeah. Thanks, Paul. Thanks, Phil. We've got growth in that route or cold chain network happening this year, which is terrific. We're back in growth. Then there's sort of a few key areas that we're focusing on. We are in the process of buying back a lot of those franchise agreements that we had, and controlling that full end-to-end value chain and customer experience. You know, as we do that, we're sort of attacking it from a couple of different angles. Obviously with the actual cost to serve. We're streamlining and trying to automate where possible, from the end of the line and how we get the best cost to serve there for our customers.
We're doing a fair bit of work around that, and we've got some capital planned for that over the next couple of years. We're also reconsolidating our DC network, which I sort of talked about previously with the sale of some of those networks, but continuing to compress that to get better efficiencies out to our customers. That's from a cost point of view. Then from the customer experience piece, we've just done a fairly significant work where we've mapped out all of our customer touch points and pain points. Now that we've done that, we're looking to invest in our digital offering to streamline that, a lot of that and increase our you know our customer experience and make that far more frictionless.
The way we're structuring our sales team. We look at that across national accounts, but also what we would call unstructured accounts. We're just doing some work with our sales team to create dedicated territory managers and to really focus on servicing our existing customers better, but also building up our new customer base. That's really the main focus across FY23. We're still very optimistic about that channel and the differentiation it gives us against a lot of FMCG players in this country. We think that there's significant benefit we can drive through it.
Great. Thanks for that.
Thank you. The next question comes from Evan Karatzas from UBS. Please go ahead.
Good morning, Barry, Paul, and Pete. Thanks for taking my questions. Two from me. Just firstly on the cash conversion, I mean, that's a very sort of impressive result at around 88% there. I take it there was around sort of AUD 40 million, I guess, one-off receivables benefits you had there. But I'm just interested, now you've sort of bedded down Lion Dairy & Drinks, is this the level of conversion we should expect going forward? And I guess if not, can you give some color on what conversion rate we should sort of expect going forward, please?
Evan, we did a fair bit of work on receivables. When we bought the BDD business, there was a large sum of outstanding receivables that had been managed offshore. The existing management had literally just done a terrific job of just setting it up back in Australia. It was fair to say that there's still a fair bit of opportunity there. We've put a fair bit of RPA or robotic process automation into our receivables function, and we've streamlined a lot of that and worked really hard with our customers on streamlining a lot of that and getting our money in quicker. It'd be fair to say that that's probably a little bit of a one-off kicker.
You know, I think there's about AUD 15 million or AUD 20 million there. Then the inventory and IPDs amounts were really us just driving hard into our inventory numbers and taking advantage of some really strong commodity prices, particularly around butter and skim. That's an issue we'll continue to take. It's probably all the, you know, a really good result when you look at particularly some of the shipping issues that we had in the last quarter with the shutdown of Beijing and China. You know, we'll continue to try and drive that. It'll be somewhere in between where we were previously and that result. You know, cash realization is obviously really important to us.
We wanted to drive down our debt. We wanted to be very efficient with our cash in a time of uncertainty. We've been having, you know, fairly significant hits with COVID.
Yeah. No, that's super helpful. Yeah, it's, you've done a really good job there. Just finally, the second question. I'm just interested just to get an idea maybe for Barry or Paul, what you're hearing from some of your peers or competitors regarding sort of industry processing capacity. Have you started seeing or hearing, you know, any capacity potentially coming out of the market? Just to, I guess, move more in line with what is, you know, unfortunately a declining milk pool in Australia at the moment.
I'll have a bit of a go, Evan, and then get Paul to add. What we are hearing is that people are reviewing their capacities and I think indeed we're I think which is normally the case when you hit these sort of highly competitive circumstances in the Australian dairy industry, we're hearing that there's a number of pieces of capacity on the market and some of that is rumor, you know. We're not entirely clear on that, but I think we would. Obviously, what we would like to see is capacity reduced rather than just moved around, for the want of a better way of putting it.
Yeah.
I think we are seeing some of that pressure. Perhaps to go back to the question Phil asked earlier, you know, I think those that are entirely exposed to commodity, while it's been, you know, quite good on the upward swing of the cycle, it does give a very big exposure, should they come off. I think that's where we've positioned our company very well to deal with that occurrence. That may well be, you know, that will be no doubt part of the trigger that could see some capacity rationalization. It's more sort of speculation and rumor at the moment, Evan, but it probably wouldn't.
It doesn't surprise me that speculation and rumor is around and some of it will have some substance. Paul, I don't know whether you've got anything to add to that.
I think that pretty much covers it, Barry. We are seeing this across in New Zealand as well. We're seeing sort of milk volumes down and there's a fair bit of pressure, Evan, if you look across a number of listed dairy companies and just profit performance. You're just seeing some a fair bit of red ink actually. For some of them, I'm surprised because they should have been making money with the higher commodity prices. Just on the commodity prices for a moment and you know up until about I'd say 2 months ago the story for the previous sort of 6 or 12 months has very much been on the supply side.
We've seen the largest 12 dairy exporting countries rather, in that sort of January to June period, year-on-year milk production is down about 1.8%-2%.
Yeah.
That's been pretty constant. It is also the case in Australia across from New Zealand. In the last couple of months, we're just starting to see a bit more coming through on the demand side, which is what's suppressing the prices. That's out of China. We've seen a bit of demand decline in China with the lockdowns. We've seen a bit of an increase in milk production in China, and we're also seeing a reducing of their stock levels because they normally sit on about sort of three or four months worth of stock, and we're seeing that reduce. You've got a market there, Evan, with about 45 billion liters of milk. About two-thirds of that's domestic production, a third's imported.
You get a couple of percent increase in domestic production and a couple of percent decline in demand and then you drag your inventory holdings from sort of 4-5 months down to 3-4 months, you can quickly get about a 20%-30% reduction in imports in that market, and we're starting to see that flow through, and that's the, well, that's the activity we're seeing in the GDT. We're very conscious of as we sort of get into Christmas, just seeing if that demand and some of the inflationary pressure we're seeing in some markets, which is suppressing demand also across Southeast Asia. Middle East is pretty strong, but Southeast Asia is certainly under a bit of pressure.
Just seeing if we get a bit of a reset and some recovery in the second half. If we see further declines, I think we're gonna start to see a number of companies who are coming off the back of one or two tough years, really start to show the pressure. Whether that manifests itself in plant closures or just another set of cheap assets which someone else comes in and picks up remains to be seen. That's why we think our strategy, which really focused on that growth in the branded business and getting the interplay between the branded and the bulk business working properly. Then the growth opportunities that Pete spoke about in that now frame.
If we're continuing to just drive hard on those, we continue to expose ourselves less and less to that dynamic, which is really important.
Yeah, that's super, yeah, helpful sort of color there. Maybe I just one quick follow-up if I can. I take it that your comments, especially maybe Barry, you're not super interested in sort of acquiring some of that capacity that could come on market. Is that the message that you sort of tried to leave, I guess, with your comment?
I think, you know, you would always. There's always lots of factors that come into what we might think about. You know, we would want to make sure they were, you know, acquiring them was part of the capacity rationalization, might be the right way of putting it. If it was, you know, if you're getting, you know, a really good outcome for the business and you're getting capacity rationalization, maybe the two things that would probably drive us to think about it. I think, and look, I've probably said this a little bit before, we always remain alert to opportunities.
You know, we're really comfortable with the assets that we have under our control at the moment and the flexibility that they give us. You know, so I would never say never, but I'd certainly be leaning more towards saying we would be motivated by rationalization more than rationalization, of course, you know, business opportunities and efficiencies and those sorts of things. That would be what would be our driver.
Yeah. Perfect. No, super helpful. Thanks for your time.
Thanks.
Thank you. The next question is from Paul Jens from PAC Partners. Please go ahead.
Thank you. First question, maybe for you, Barry, on the international side. There's usually some data as to the sales internationally. Could you make some comment about that and how that's progressing, particularly the branded sales internationally?
Sure. Look, I might throw that to Paul. He
Okay.
Obviously be a bit closer to it. Paul, I might get you to talk about it. Obviously, there's been some interruption in the international market as we've seen in the Australian market around COVID. I'll get Paul to maybe add some more color.
Well, Pete might have those numbers at hand.
Yeah.
If that's okay.
Yeah. No, no, that's all good.
G'day, Paul.
GoodDay.
Look, our bulk sales, we're sort of split between obviously the bulk and the branded sales. Branded sales were a little bit down year on year, and that was particularly around our cream cheese into Southeast Asia, just as we started to hit price points that were probably a little bit high. That was not really our product, that was more market forces. That was probably the main piece with our export business. As Paul alluded to, still strong in processed cheese everywhere and in particular Southeast Asia and the Middle East.
The branded business did take a bit of a hit around cream cheese and a little bit around mozzarella, but predominantly cream cheese was the biggest hit there. The bulk business, our volume was just down a little bit. We saw that impacted our cream cheese sales were actually up in the bulk business, substantially up, and we get really good returns from that. We're down a little bit in our powders, mainly through volume. We actually had a little bit of a price premium there, but we were down in volumes in our powders. The lactoferrin business was down a little bit in volumes, mainly because of our milk processing volumes were down, and that was also down a little bit in price.
We remain very bullish about lactoferrin into the future and the strength of that market. That's why, you know, we're really happy with our annual volumes as they're playing out this year and the fact that we've stabilized them this year.
I suppose it might be a bit more strategic here, but what sort of value do you think is going to be in that international business? Is it going to be a sort of 30% of the previous business going forward, or do you think that that could climb, you know, up or down from there?
Volatile. I think there's a number of factors going on there. If we talk about the branded business, the first instance, Paul would say that that's, you know, that's got a lot of opportunity for further growth and that's not a part of the business that's necessarily going to soak up a lot of milk. The ability to actually support growth there is really positive. The bulk business is really going to be dependent on how much demand we have for milk into that domestic market and how that grows. Then just in the longer term, what takes place with sort of milk supply and that question that Evan was asking earlier about plant capacities and competition and so on.
I was just with some Japanese customers yesterday who were in Australia and long-term Japanese customers, and they're certainly under a fair bit of pressure sort of longer term for high-quality dairy products, which we've been providing to that market for a number of years, as do a number of our competitors. There's an oversupply, as we see today, for various reasons. I do see good opportunity still for the higher value commodities into the export market. We may over the next 5 or 10 years see an increasing supply of sort of everyday products like cheddar cheese, mozzarella and butter out of New Zealand.
I think that's something that we started to see in the market over the course of the last five or so years more and more, and I think that will be an increasing trend. As we position ourselves with the higher value powders and the higher value base products, we do service the domestic market, but we can get better premiums into export and see that replacement coming through with some of those base commodity products out of New Zealand into particularly the food service market. I think that's a trend that will continue, which I think plays well into where our strengths are in that bulk business.
One final question is around, I suppose, goodwill, which might come back to Pete. The audit is highlighted as one of the key audit matters, as they usually do. But you would think that with business by earnings going forward, that discussion might have been a bit more reasonably robust this time. If you could give some insight there on goodwill and I suppose the runway you have, Pete, Barry or Paul.
I'll just add without prolonging it for the last question, Paul. Obviously, in terms of our international business and what Paul's talking about there, it's there is a bit of a cascading impact, if you like, because and this probably will lead to another question. Obviously, depending on what farm gate volumes do in Australia, that does impact our export business as well. One of the great flexibilities we have is that if there is growth in supply, we've got the ability to deliver that supply into a variety of products and market destinations. You know, you cascade the value according to the milk that we receive.
Equally because we do have that wide range of products, if you like, and wide range of markets, when milk contracts, we can obviously focus on the markets that return us and products that return us the best returns. Which probably does go a little bit into the conversation, the question that you were just asking, which I'll probably throw to Pete to talk about around how we see goodwill.
Sure, Paul. We've got about AUD 350 million of goodwill on the balance sheet and about AUD 180 million of brand. If we sort of look at the goodwill across sort of three chunks of our business, you've got the, you know, the spreads business, which is in terrific shape, and we're very happy with where that's heading. You've got our branded business which we've just acquired. Despite a really tough COVID year, you know, we think we've got good growth in that business and we're starting to see more and more of that flow down to earnings as we pick up synergies and optimize our network.
You've got the bulk business at which, you know, the things that impact that goodwill are really the arbitrage between obviously farm gate price and commodity prices, which can flow in and out of balance a bit. It'd be fair to say that, you know, that's sort of hard to look at on a year-to-year basis, but it's remained reasonably consistent and obviously milk volumes. We saw a decline in milk volumes last year. We're really pleased to say that that's flattened out this year. We continue to see opportunities in that bulk area to add value around our streams of revenue, like lactoferrin, like infant formula powders and going up the value chain.
If you look at that bulk business, it's really about that arbitrage between farm gate commodity prices and do they start to sort of, you know, after tightening this year, do they sort of re-correct themselves next year? Do we start to see a turn in volume? And are we able to keep investing in value add or high-value products like cream cheese and lactoferrin and infant formula powder. At this stage, they're the sorts of things we look at when we look at impairment. We feel that, you know, with the tightening of that gap in farm gate pricing and in the commodity prices and in the reduction in volume, that they were things that we did look into and assess carefully.
You know, it led to us thinking that those assets have still got good value and still support that good will that we've got put against them. If those things were to continue to tighten over the next couple of years, we would have to reevaluate. Although, it's interesting, our assets are becoming more and more integrated.
Mm.
Particularly as we start to see, you know, optimization between our branded and bulk business, you know, with excess proteins and fats and how we can shift milk around. There is a high level of integration. They're the things we continue to look at, as a business, that arbitrage.
Yeah.
to commodity farm gate prices and with volumes, and the ability to keep realizing, you know, high-value streams.
Consolidation point that I think Barry and others were talking about, that diversity is helping you in that discussion. Whereas obviously others mightn't have that diversity, which
Yeah, if you're a one-trick pony, and you're specializing in two or three commodity streams, I think you have a fair bit of risk there potentially. The fact that we, you know, the team over a number of years have broadened that exposure, and in particular to some fairly high-value, value-add sort of commodities, I think definitely gives us a pretty good defense.
Thank you. Talk next week.
See you, Paul.
Thank you. The next question comes from Mark Topy from Select Equities. Please go ahead.
Oh, hello again, gents. Just my first question, just to follow up on that, the milk supply and the volumes, I think stayed 1.4 billion in FY22. I suppose my question is, the outlook as Pete referred to is sort of flat, but whether you've seen any pickup from Bega relative to some of the other players who did chase milk going back in time and who might be collateral damage in this market. Whether you've got the ability to pick up some of that milk now that you might have lost in recent years.
It's obviously a little bit tempting, Mark, but I think it is fair to say that, as you say, in the previous year, we had been a bit of a target and lost some milk. I think that we were more battle ready this year and, you know, very pleased with what we achieved around, well, what we would call a stable supply. I'm really pleased that, you know, we've stopped that trend. We would.
We're always careful, Mark, that where we go, we also. I think our history is that we're commercially sensible around milk procurement, which means that we keep in mind what the returns are and how far we can stretch before we say, "That is just too high risk," in terms of the price we pay for milk. I think, which is a little bit more what we were alluding to in the previous question. I think we've done very well in terms of what we've been able to procure and do, then looking to flow that the sort of step change in milk price increase through to the market.
The reality would be that in an event where that really highly competitive or really robust international market were indeed to change in the Australian dollar, will put us in a very strong competitive position in the future in terms of the returns that we can get for our products, versus what Pete and I were alluding to earlier around those that might have a more limited range of products they can deliver to. I think one of the challenges of being big is that you do tend to be a target when people are looking for supply.
I'm pleased with this year's outcome and I think what this year's outcome indicates for us in terms of our competitive capacity into the future around milk procurement at farm gate.
I guess you won't give us a number, but should we be thinking AUD 1.5 billion-AUD 1.6 billion? Is that
Oh, I think.
You know, like.
No, look, I think you should think that we're in a similar position to last year. Yeah, so.
It hasn't been quite as wet in Victoria. In some sense that some of the milk supply will come back on organically if you like?
Well, it's a little early to tell, Mark, but obviously we've seen a significant step change in farm gate milk pricing. We would think that that would stimulate supply. Obviously the way we would like to see supply improve is by your farmers growing rather than, you know, the roundabout of taking milk from other companies, et cetera, et cetera. It's a little early to tell, but you would have to say that generally farming conditions are still pretty positive. Now they've got, you know, stronger pricing. Obviously most of our dairy farmers are pretty pleased with the pricing this year.
Even last year they were still saying it's still pretty tight for them. Now this year I think they've got, even though they have experienced a number of price rises in some of their key inputs, it's still a very strong price for them.
Just to touch on the milk allocation in this last year, how did it change? Can you give us any sense? Like, it sounds almost like there's some milk directed away from export markets into more domestic, given the low sales in the cream cheese.
I might throw to Paul, but it really does vary from product to product, but return to return. I'll throw to Paul to maybe add some more color.
Yeah, that, if you look across the year, you'll get some seasonal impacts. You know, it was pretty dry during quarter three. We were sort of moving milk around a fair bit during that period, as our sort of forecast milk didn't sort of achieve the levels. If you had to think about what happened with milk supply across FY22, and these will be very Australian numbers. They'll be roughly right. We came into the year with, you know, 2 or 3% down. By the time we got to Christmas, that had decreased down to about a 2% reduction. We were feeling, you know, a few headwinds on milk supply, but overall looking reasonably robust.
We hit January and February, and we were seeing national milk production decreasing of 6%-7%. Really got smashed as an industry in that second half. It was a really big mad scramble. That impact, which impacted all competitors, all processors, would have had more of an impact for us this year. In other years, there's a whole range of business, different circumstances that come in and you know, what's really pleasing, which I touched on earlier with regards to how we position now as a business, is the ability to actually just move that milk around reasonably quickly and you know, be able to make decisions on that basis.
Our retail business and particularly our grocery and convenience stores gets prioritization around milk. Typically, you know, that's going to be our brand, it's gonna be high returning products. Quite a good portion of our food service business, Mark, has just got strong returns in that route business. Then we do have a tail of contracts, predominantly in white milk that are, you know, got lower returns and that's where we see decisions being made around optimizing milk for our white milk plants, for the utilization of them and our trucks or do we switch into a commodity.
We've got a portion of that milk in the middle, Mark, that sits there with the ability to actually make those calls, you know, during the year in as to where we'll get the best returns. Over the course of the last sort of period from, say, August last year to around about May, we were seeing returns in commodities better than some of those lower returning white milk parts of our business, and we were able to sort of move some of that without disrupting our brand presence or customer relationships. There was ability to actually switch into that.
I suspect as we get into FY23 proper and we start to see those higher consumer and food service prices flowing through in a potentially declining, further declining commodity market, we might see us making the decisions on the other side of that equation and that shift. It's a bit of detail there, Mark, but it's hard to really come to any categorization for any particular period because they are all different and it's testament to the strength of the business to be able to actually sit there and pull a few levers. You know, as Pete said, we've got some of our competitors, and indeed this is where we were through 2017. We only had one or two levers.
We didn't have, you know, four or five.
Yeah. You've talked about the global, just talk about commodities again, but on the supply side of dairy globally, obviously what happens in New Zealand, whether that they come back in terms of their supply and it's clearly drought situation in the Northern Hemisphere. I'm just wondering how that feeds into the supply situation on the milk side and whether that will underpin global pricing.
Look, I touched on this earlier. It has been the main topic on the global supply and demand complex up until a couple of months ago. More recently, just the inflationary pressure that, you know, obviously in dairy products inflationary pressure, but more broadly an inflationary pressure, particularly in developing countries across Asia. We're seeing that demand response is actually what's pushing the prices down. Suppliers not having the same pressure, which is what was causing the prices to go up in the first place. We'll keep a close eye on that.
As I said earlier, Christmas, you know, as we start to get into the end of the calendar year, we'll start to see whether we get a bit of a demand response, a positive demand response in some of these markets as things settle down a bit or are we gonna see some sort of continued pressure there? That's more than likely gonna be more of the discussion around what's happening with prices and suppliers. I think the market's, you know, prepared itself and is actually structured around those declines in supply really. That's been sort of well socialized, and I think there's been a fair adjustment across the supply chain to respond to that.
Right. Just lastly, just on CapEx, just reading the trade press, obviously, there's been some expansions, perhaps in yogurt at Warragul and Rhinosol and some other expansions. Can you talk through the CapEx and in terms of production capacity in line with the business opportunities?
Yes. We've got a large project underway at the moment around our patch capability, which is performing really well in market. That'll come online towards the end of this coming financial year.
We're excited about that. We've put in an interim line late last financial year, which is now full. We've got a small amount of overflow being done by third-party contract packers. I think we'll spend close to AUD 15 million on a new line that will provide a lot of additional capacity, and that'll give us a good lift in FY24. That's where we sit with yogurt at the moment.
Any other major CapEx sort of production projects? Can you give us any insight into that?
Yes. We're still finishing off our blow molding project at Wetherill Park, which will help us with cost efficiencies, but also our packaging covenant. That's a significant project. We're continuing to do milk optimization projects. We're optimizing our proteins across all of our sites and maximizing our value of milk there, which is great. We're sort of bolting that into the BDD business, but it flows back into our bulk business. We've got some work planned around our digital space with our customer experience and the cold chain network coming up shortly.
We've got some automation of our DCs happening, which is another project, and we're looking at some capability around further sort of expansion into lucrative bulk revenue streams.
All right. Sorry, the total CapEx for 23 again, what was that, the number or?
2023 will be about AUD 75 million. Similar to 2022.
All right. Terrific. All right. That's terrific. Thanks for that.
Thank you. The next question is from Jonathan Snape from Bell Potter. Please go ahead.
Yeah, thanks, guys. A couple of questions, if I can. Just first of all, around the milk supply numbers, I think you've quoted the 1.4 this year, and it was 1.12, I think, from memory last year. Obviously pro forma'd the timeline with LDD. It looks like you've probably lost somewhere between 200-250 million liters of milk, on a pro forma basis. Is that about right?
Look, that would be over a few years, Jonathan. You know, it's certainly been highly competitive in terms of that milk procurement. We took a bit last year but stabilized it this year.
Okay. If we were looking forward, I'm just trying to get my head around farm gate moves, international ingredient moves. Obviously, it seems that that part of the business or the pricing's gone one way since the farm gate opened. If I looked at that ingredients business, it's probably got, what, AUD 0.15 a liter up on its farm gate costs. I think ingredient prices, if I took them where they're at now and futures pricing, are probably off AUD 0.04 or AUD 0.05 a liter now year-on-year, which is quite a material headwind. If that's kind of where it sticks, does the ingredients business actually make money next year? I guess following on from that, how would we think about farm gate pricing for 2024?
I mean, perversely enough, ingredients going backwards is probably a precursor to a farm gate going backwards. Is that how I kinda should be thinking about it, that if I'm-
I think you've almost answered your own question, Jonathan. I think to the point that Paul made earlier, obviously in terms of this year, FY23, so we generally lock in the first half or get pretty good coverage on the first half and then, you know, are reasonably conservative on what we think the second half might look like. There are some headwinds there that I think Paul mentioned earlier, you know, we while we see headwinds in some parts of the business, which is normally we see opportunities in other. You know, as you know, a big part of our commodities are in the first half, around when the volumes come in.
To your second question, as demonstrated this year, when that commodity curve moves, farm gate milk prices tend to move and that, you know, as has always been the case, tends to be the foundation for what farm gate pricing is in Australia. Obviously as supply has tightened, it's become slightly less so, but that's still the foundation. You're right. If you saw those global commodities coming down, you would see a traditional impact on farm gate milk pricing, which are at record highs at the moment. I think the thing. Sorry, you know, Jonathan, how I just
Yeah.
We do make money in our bulk business, and it's actually reasonably consistent for everything that Barry just said, and we anticipate that to be the case. You look at commodity prices coming down, some commodities have actually stayed reasonably strong, cheese, lactoferrin. That's where the exposure to those streams comes in, different streams come in. That helps alleviate a little bit of what we talked about. We always factor in a conservative view in the second half. Barry's right. We're able to take out a lot of contracts in the first half at the high rate. Then you've obviously got a little bit of X in there which floats around. Which has also come off in the last couple of months.
You know, we absolutely intend on making money out of our bulk business next year.
Okay. Look, while I've got you, Pete, I know you're moving off your CFO role, but a couple of numbers questions, if I can. The D&A costs in the second half dropped AUD 6 million relative to the first half. Is there anything in particular that kinda drove that?
I think it was a finalization of the acquisition accounting, Jonathan. I'd have to go back and have a look, but just where our acquisition accounting spilled out at, you know, billions of certain things. I can get back to you on that offline, but I'm pretty sure that's what caused that.
Okay. Vegemite Way, I mean, obviously, you flagged it's an asset held for sale. How do I think about all the moving parts that are gonna happen below D&A as the transaction kinda plays forward? I mean, obviously, you get an interest saving from a cash interest point of view, but then you're gonna start paying leases, which is gonna impact D&A and interest expenses. Have you done any preliminary work on what you think the settlement of that sale cycle, if it's done for AUD 100 million or something like that, would do to your P&L below the EBITDA line?
Yeah, we have. There's quite a bit of work done on it. We're not keen too much to talk about those numbers because that's still in process. That process is still in play. Basically, you know, if you think about sort of the market yield of sort of 4 or 5%, starts to give you a little bit of an idea of what that rent might be, over sort of, you know, a long-term period, sort of 15 to 15 years with optionality built in around it.
Because that probably starts to give you a bit of an idea of the sort of underlying here of that interest and liability piece against what would be a depreciation rate of, you know, 20 years over AUD 60 million. I mean that's sort of spelling it out. Hopefully, that sort of gives you something to back solve against.
I'll give it a go. Maybe I'll just wait for your tell.
Are you keen on buying it, Jonathan? Is that why you got interested? We'd love you to step up to the plate, mate.
You gonna lend me AUD 66 million?
Have you got an RFC?
No. Thanks.
Thank you. The next question is from Josh Kannourakis from Barrenjoey. Please go ahead.
Hey, Barry, Paul, and Pete. Hope you're all well. Apologies if this question has been asked before. I got on a little late. Just on the Nutritionals business, obviously, a few strategic moves over this period, market conditions improving. Maybe just would be keen to hear how you guys are thinking about your strategy and any sort of future investment in that space.
GoodDay , Josh. It's obviously a part of our business that's doesn't have the sort of size and shape that it did back in sort of 2015, 2016 when we're sort of at the peak and you know, a lot of volume flowing through with the likes of Bellamy's and then obviously with Mead Johnson acquisition a few back around about then too. A very different business, but one that's still got a really important role to play in our business in terms of profit contribution and also potential. How we're looking at this is that we have been doing this for the last two years.
These opportunities have really come under a lot of pressure in the China market. Usually, that's a number of the customers that we deal with. We've seen right across that processing market in Australia, a number of canning facilities, and also New Zealand, by the way, really starting to operate at suboptimal levels. So a lot of pressure there across them and you know plenty of rumors about canning plants being decommissioned or you know just being taken out of the market. Because if you wanna maintain high quality infant formula canning plants, you need to have the people, you need to make sure you maintain quality of product, quality of your facilities, and there's a lot that goes into producing a canning infant formula.
We're really pleased that we've still maintained a reasonably good scale in our business. Our drive's full, our infant formula drive. As I mentioned during the presentation, we've got a third-party canning arrangement in place, which is working well for us. We are looking to better secure that canning capacity over the course of the next year or so. We'll continue to just incrementally invest in that space, Josh, as we see those opportunities. Remains a good business. We've seen some of those smaller volumes from some of the other canners, probably finding a home with us at some point.
That'll be nice to be back into a growth phase in that business after it's sort of stabilized over the last couple of years.
Yeah, perfect. I might just wrap it up there. Otherwise, you guys will be here all day. Cheers.
Thank you. There are no further questions at this time. I'll now hand back for closing remarks.
Well, thank you, everyone. I think and thanks to the comprehensive questioning as well. I think that's all that's helpful in rounding up the presentation. As I mentioned, despite the challenges of the year just passed and indeed some of the challenges going forward, we're really comfortable with the strategic positioning of the business. I think we've got a good runway in front of us and appreciate the support of our shareholders and look to execute FY23 and beyond in a manner that would meet your expectations. Thank you very much for your call, and I look forward to catching up with many of you soon. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.