Thank you for standing by, and welcome to the Vega Cheese Limited Full Year 2021 Results Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Mr. Barry Urban, Executive Chairman, please go ahead.
Thank you, and hi, everyone. Very nice to join you today and thank you for taking the time to Join this results conference for our 2021 financial year. It was certainly a very busy Year for the company and one with plenty of opportunities and plenty of challenges and I'm delighted To present the result that we've achieved to you today. And for those that are following The slide presentation has been previously released. I will let you know when I'm moving to each slide.
I think so I suppose the key messages from this year is that it has been a very strong financial
Performance by
the company in the context of challenging and changing markets and a major acquisition. Revenue of $2,070,000,000 inclusive of 5 months of line, dairy and drink is yet again another increase on revenue from the previous year. We're very pleased to announce the statutory EBITDA, which Paul Van Herwelten, the CEO, will speak more about later in the presentation of $92,700,000 and a normalized EBITDA of $141,700,000 Importantly, we're seeing the balance sheet Continue to strengthen and we now have a leverage ratio of 2.25. Obviously, there's been a lot of discussion over the last 6 to 9 months as we were first bidding for and then successfully acquired, Line Dairy and Drinks. And we were delighted to complete That acquisition and indeed a successful capital rise back in January.
And that's obviously seen the business then Embark on a strong integration program for LDD. It is worthy of note that from an accounting perspective, LDD has been assessed provisionally as a bargain purchase. So I suppose in a year that has had a lot going on, it is very worthy of mentioning obviously That we continue to manage all the impacts of COVID-nineteen, whether that's operationally within our business or indeed the impacts That are occurring in the market, and those changes in the market obviously occur from time to time, depending on exactly what impact is happening in both the domestic market and the international market. There has been a structural change in the Chinese infant formula market that has been Well documented. And that market and channel, I think, has to be represented as a structural change.
And obviously, we have looked to manage the impact of that on our Nutritionals business. There remains very strong competition for milk and indeed that's relating Translating into strong prices at the farm gate and very strong competition for milk. I'm pleased to say and I'll speak about it a little later that the company has confirmed emissions targets for the business going forward For both 2,030 and 2,050 and indeed embarked on what we think will be a significantly important project around the circular economy and And pilots associated with that being initiated in the Bega Valley. I think importantly, over the last few years, we've had to speak with you around Legal cases both those legal cases have come to a conclusion and we are pleased with the outcome of each of them, which again we will discuss a little later. Moving to the value slide of Vega, I think it is fair to say as I often Talk about that it is the values that drive this company.
I think it's the values that have seen us set a strategy that covers everything From how we behave commercially to indeed our impact on our community and our environment and the approach we take to the business we conduct, it's Very important for us that we continue to have that passion for our customer and our consumer that we grow our people and We invest in our future, which has been very strongly demonstrated this year. And indeed, we support one another across our entire supply chain, Including our dairy farmers, our peanut growers and the farmers of the future, our various juice products. And so we're very pleased with exactly where we are at the moment in terms of both the development of the business, The values that we've looked to maintain and the financial outcomes we're achieving. If I direct you to the next slide, it obviously does tell that story of continuing growth, very careful acquisition to meet a target that A vision to create a great Australian food company that we continue to very carefully and very strategically step through. Each step strengthening the business, seeing us see the benefits of scale and the strength of brands that we now have And I think that's been a it's something that we're very proud of, both not only in terms of how we've managed to grow the company, but the manner in which we've been able to And it is actually all about creating sustainable growth for an integrated supply chain.
And while I move you on to the next slide that talks about our vision and our values, it's probably really important for me to talk about the business enablers that I think Have made the difference within this within our business. And it starts with that deep industry knowledge in dairy and FMCG. So as we strengthened the business, we've always had a core knowledge around dairy, but we've strengthened our knowledge in the supply chain and Implement a strategy that sees us achieve these results today. We have always been very close To our farmers and the core piece of our supply. That means sustainability, sustainable practices, circularity that we're now introducing is very much a part of our DNA and hence why we're very pleased to be able to talk about some of the initiatives we have there.
That careful financial management that I think is beginning to come through as well around capital and Balance sheet is again evident in this year's results as is the fact that we've been able to manage what is a very changing and volatile market And I think our risk management and governance has been very important in the last it's always important, but in the last 12 months to 18 months with the impact of COVID and that Constant changing around the market and supply circumstances and some volatility in international markets have all been very carefully managed because of the And of course, the acquisition of Blind Dairy and Drinks, if I move you to the next Paige has really been very important and a logical next step for the company and we've been delighted To be able to make that acquisition. It does fit with our core capabilities. It is a strategic alignment that's been well documented as we now have the From Farmgate, right through to our end customer, wherever they may be in Australia or around the world To deliver value added products and branded products to the consumer, but also many jam milk in the most effective way.
So each liter of milk can be directed to a product or a customer that maximizes The return that we can generate from that product. Still work to do, obviously, in the integration of LINE and Steve, the opportunities that we identify throughout the business, but certainly we're well down the path around synergy opportunities And we continue to want to invest in our business to improve those returns that we get out of every liter of milk or indeed Peanut or piece of fruit that we process through this business. If I move you to the next slide, we do we are very We're proud of our record around creating that wonderful portfolio of iconic brands. And It's fair to say, it's been a path where we've been acquiring brands and then investing in them and building them and reinforcing some of that Consumer loyalty. Quite frankly, we've been bringing iconic Australian brand tone, whether that's Vegemite, whether that's Their Flavored Milk Farmers Union, the Masters brand in Western Australia, we've been bringing some of Australia's favorite brands Back into Australian ownership and then building on the strength of those brands.
And we're delighted to sort of show that story from Pre-twenty 17 through to today, so in this year, we've gone from pre-twenty 17 to be less than 20% In brands and consumer goods to now in this year with just 5 months of line Under our belt at 73% and we'll expect that to increase to in excess to 80% with a full year of blind dairy and drinks in our portfolio. So ladies and gentlemen, just to move on to the next slide, which I think is very important in the context of All that is occurring in the world today, and that is that it was important for Bega to review It's sustainability and circular economy approach and indeed think about carbon targets and emissions targets for the company. It was the right time, especially given the acquisition of LINE. So we are using a baseline of 2021 in terms of the targets that we For the future, and I'm pleased to announce that we've in terms of emissions intensity, We've announced the goal of a 50% reduction by 2,030 and a 40% reduction in absolute emissions by 2,030. Perhaps to explain that a little more, obviously, we have different products and different facilities in our portfolio that have The different emissions profiles.
By announcing a reduction in emissions intensity, it means that every one of our staff members, every person involved With the operations of Bega Cheese, think about how they can get a 50% reduction in intensity on the product that they are responsible for. So intensity around a particular portfolio of products or a particular size, if everybody is working toward a 50% intensity reduction, That is what we want. And we believe that, that will yield us in absolute emissions terms, 40% reduction by 2,030 and of course a net zero emissions by 2,050. The Board and I and the Senior executive team believe that these are our minimum goals. We would obviously like to achieve better and more than that and we will be working to achieve better and more than that.
And indeed, it's part of Paul's and my performance criteria to make sure that we are meeting these goals around emissions and indeed around circularity in the Vega Valley. And just to dwell a little on circularity, we're very proud that we've been championing along with KPMG and Ryland Bank, an approach to circularity that is community wide in the Vega region. And we are soon to be in a position to launch a non distributing community based cooperative, which Seabigga will support along with many others. That will see us focus on the entire impact of business in our region. We believe this will be a pilot for many, many others to follow.
It will assist us in dealing with our business Across all 20 of our sites, but importantly, it sees the collaboration with government, small and large business, Community organizations, indigenous community to make sure that we are managing our environmental footprint across More than just submissions, but it costs indeed all that we do in our operations. That all said, I'm very pleased I hand over to Paul Van Harewood, our CEO, who will give you his perspective on the performance this year. Thank you, Paul. Over to you.
Thank you, Barry, and thank you to everyone for joining us this morning. As we normally do, Pete and I will take you through A review of the year and if you can turn to Page 12 of the presentation, you will see a list of items, some of which Barry has already touched on And others that we will provide more detail on in the following pages, including the financial performance and the acquisition and integration of the Dairy and Things business. I would like to draw your attention to a few points on this page. Including a couple of years ago, we started talking to the market about the crude lactofuran investment And also the organizational process remains. Both of these initiatives were completed in fiscal 2020, and we benefited from the full year Impact of these two initiatives in FY 2021, which has been a very important contributor to the results.
Also, if I take you back over 4 years ago, we completed a transaction to sell an Interformula dryer And Informa Accounting Plant, dollars 200,000,000 for Mead Johnson, who were subsequently taken over by Rick and Kenny. We also entered into a 10 year access and service agreement, which would approximately provide a further $100,000,000 in earnings over the contract period. Earlier this calendar year, Records, as I am now known, served termination notices on these agreements. And as a result, They're required to provide termination payments to Bega, which Pete will touch on later. While our preference was to continue these contracts, the material payments we will now receive It will allow us to reset this part of our business and position it for further growth and consolidation.
We continue to focus On Safety and Diversity and Inclusion Programs. And finally, from both the Beaker perspective and also a personal perspective, It was very pleasing to see the positive conclusion of the litigation with both the Crafts and Fonterra cases that commenced a few years ago. If you can now refer to Page 13, and I won't dwell too long on this slide. Barry's touched on a couple of these points earlier, but it is worth reflecting for a moment The continued growth of the company over the past 20 years from both acquisitions and business development. And Importantly, again, Barry mentioned this.
You can see from the pie charts on the right hand side that increase in sales in a significant growth environment From our branded business, which will continue to grow into FY 2022 as we see the full year impact from the acquisition of the Dairy and Drinks business. Page 14 provides headline financial numbers and it's certainly pleasing to see our leverage ratio to continue to improve, 2.25 times leverage does not include yet a full 10 months of earnings from the Dairy and Drinks business. And Larry mentioned some of our Earnings and revenue numbers earlier, so I won't draw your attention to all of them, but focus on the profit after tax, The statutory profit after tax was $72,200,000 and also the normalized profit after tax of $39,600,000 both increasing compared to the prior year. I should also point out the EPS numbers reflect only 5 months of earnings from the Vegan Dairy Drinks business. So we'd certainly We expect to see an increase materially as we get into FY 'twenty two.
I'll now pass you over to Pete, who will continue discussion about our segment results, further details on the financial results and also an update on the acquisition and integration before he'll hand it back to me We'll finish off. Thanks, Pete. Terrific. Thanks, Paul.
This next slide, Slide 15, Those of you who followed us last year would be aware that in the results in FY 2020, we introduced our new Vulcan branded segments and moved away from our Traditional view of the business which have been based around legal entities. And what we've just tried to do is So the bulk segment really focuses on the parts of that business That produce bulk product that we sell into that we sell in the markets and would include a plant, Whereas our branded segment actually includes those assets that produce branded products or We'll do secondary processing for branded products that are ready for shelf. And down there, you'll see the core capabilities and how they relate across those segments That Barry touched on before. So this is very much how we're looking at the business and obviously excited by the exposure we're getting to the branded So the branded segment and the margins and extra value that it offers us to be able to add to our materials. We'll just go to the next slide.
We've just got a segment view for the year. You'll see there that Both earnings in branded and bulk increased over the period. Obviously, you got the 5 months The line Gerry and Drinks trading in that result there. And it's worth noting too the in segment elimination of $344,000,000 of revenue, we do actually track That number, that's the amount of product that was sold from our bulk segment into our branded segment to add more value to. So That's a number that we're pleased with and continue to try and add value to those bulk products.
Branded Business, obviously, benefited from the Vega Dairy and Drinks earnings since January. We had really good sales growth in spreads domestically and our cream cheese product in Asia, which was a good result there. And we actually wore some cost of redundancy in those results The transfer of our individually wrapped slices production as it was consolidated into Strathmerton. Obviously, bulk will benefit in Nutritionals from the full 12 months operation of our new lactiferin plantiferoid That was put in place just before the start of the financial year and operated superbly. We produced 30 tons of product out of that facility and that actually More than mitigated some of the headwinds we had in the infant formula part of our nutritional business.
We also had some favorable commodity pricing in some parts of our business there, which was a really good result. Just move on to the next slide. The reconciliation of our normalized results, there was a huge amount of activity obviously With the acquisition of BDD, so we did have quite a few adjustments this year to make to the result. And I'll just walk you through some of the key points from those. So you'll see the statutory EBITDA number of $182,000,000 there on the left hand side, EBITDA of $107,700,000 and Profit for the year of $72,200,000 after income tax expense.
The first key adjustment was transaction costs related to the Lime Dairy Dink Acquisition, just the material numbers there, we have stamp duty of nearly $30,000,000 transition costs $13,000,000 We had redundancies for the line dairy drinks organizational strategy that we put through $6,500,000 and then another $5,000,000 or $6,000,000 of consultancy costs and advisory costs. That was the predominant Numbers there. You'll see that unfortunately, we weren't able to pick up as much deductibility as we would have liked because of the stamp duty cost being nondeductible. Barry touched on it before. We did have a bargain Bargain purchase entry, which is provisional at the moment, but that's due to the difference between the price paid for our For the asset and the provisional balance sheet when we've gone back to do further valuation work And that's $670,000,000 so provisional number, but we're very comfortable with where that is at this stage.
And as Paul mentioned, we had the Termination of fees from McAfee and Keizer. This is the first portion of those that we picked up in the financial year. So just under $30,000,000 The earnings coming through there from that termination, we're showing $40,000,000 in the revenue line and the other $14,000,000 is sitting further down the P and L. That's just the split of treatment between service fees and access fees. We've then got the Craft Legal sentiment.
It was terrific to have that finished. That was for $9,300,000 We've obviously removed that from the results. And then just on the costs, some of those were write off of some SaaS assets we had on the balance sheet. We put in a black line accounting system and a HR system that had to be written off, got the main cost there And just some legal costs for the Ponterra case. Of course, that's to be finalized this coming financial year.
So that gets us to a normalized outcome of $141,700,000 of EBITDA. It's worth noting we did incur just under $10,000,000 of restructuring costs Associated with the IWS transition and also the completion of our organizational process review, which we talked to you about last year, they are in the results in the normalized result. So that just explains the movement between statutory and our normalized earnings. If we just go to the next page, Just around the balance sheet, obviously, a lot of impact to the balance sheet this year with the addition of Align Bear and Drinks. As I said, that number is still provisional.
There was about $600,000,000 of new assets that came across. Obviously, we had the capital raise, but $393,000,000 to fund the acquisition of $528,000,000 which was the ending cost of the acquisition when we netted off our working balance deal after settlement. And net debt increased by $94,000,000 which was The balancing number there. We've also bought approximately $400,000,000 of property into the asset base. So Overall, the balance sheet is in a good position.
We're very happy with where net debt is at the moment. That was one of the objectives when we did the deal To ensure that we have the balance sheet in a position where it could rebound strongly and we're comfortable with that. Just move on to the next slide, which is around cash flow. Operating cash flows were down slightly on last year, It's still a really strong performance. We're happy with that.
We were able to make some really good gains last year with working capital improvements. It was just Difficult to repeat those again this year obviously. We also built a little bit of inventory towards the end of the year. We got some opportunities around some extra milk procurement in the last couple of months And we had a terrific peanut crop up in PCA with the crop exceeding 20,000 tonnes. So that's also added Some inventory there, but we're very happy with the balance sheet.
Obviously, the increase in net debt, but still at 2.25 times, which is an improvement on last year. We have only got the 5 months of earnings in, so we would expect that leverage debt ratio To pull further as we get the full 12 months of BDD earnings into that equation and also As we start to achieve those synergies that we talked about when we did the acquisition. We'll just move on to the next Hi. Just a little bit of an update on the integration of Lymes, Dairy and Drinks. In summary, we're extremely pleased With how that's going and we're very happy that we've purchased a business that is consistent with what we found out during GD.
And so we've implemented 100 day plan and that was really focused around stabilizing the business, Doing a cultural assessment to ensure that we can understand the cultural differences and how we might navigate those so that we could Retain the people that we wanted to retain and keep the people engaged within the Lion Geriatrics business. And then from there, plan our synergies. That's gone particularly well, and we've actually executed on all of the organizational synergies that we wanted to do, And we're well on line to achieving the $36,000,000 cost out program that we said we would be a full year of ownership. And that's flowing into $41,000,000 of annualized Cinchi savings. That's going very well.
TSA agreement, we undertook a TSA agreement for 15 months We bought the business and we're pleased to say that we've moved off payroll, accounting, treasury and tax And the other thing is to Romania's technology infrastructure and that's looking towards completing by January Next year, so we're very happy with that. New capital projects in place. We've already kicked off a couple of significant projects that we think will get help get the business On the growth platform, and that's around the yogurt with some improvements to the Moorwell facility. Then we've also done a significant packaging cost reduction project with blow molding being put on-site of Edgewell Park, which Thanks with our sustainability goals, but also provides us with some strong financial benefit. Earnings performance for the 5 months was very strong.
We saw some good tailwinds with Ambrook based Beverages and Yogurt, which continues to do well. And whilst we've seen A mix change with COVID-nineteen at the moment. Some of our on the go channels It's certainly been reduced and demand for milk based beverage products into those channels has come off. We are seeing A good strong lift in growth rate, particularly around yogurt. So we still feel like there's good momentum in the business.
And our supply chain continues to stand up well In the COVID environment, obviously, having a significant cold change, we've got some flexibility there. And we think that that's particularly good in helping us mitigate risk. I think that's it. Paul, if I'll throw it back to you.
Thanks, Pete. I should thank you also, Pete, for everything you're doing. And the last couple of years has been pretty busy. We've had a lot on and You've been thrown in the deep end and you continue to turn up each day, so that must be a positive sign. But You've presented a great set of results, but I know from Barry my perspective and more broadly the Board Provides a lot for us and makes our life a lot easier.
So thank
you. If I could ask listeners now to turn to Page 21, which is a page that contains a lot of brand logos and a lot of numbers. And it's worth noting that none of these numbers or brand Logos existed within our business over 4 years ago. This is a true transformation, which we're very proud and excited about. Seeing iconic brands like Vegemite sitting alongside Farmers Union, Dairy Farmers and Dairy and also smaller brands like Zooper Duper sitting on the same page As an emerging brand like Bee Honey, we now compete in major food and beverage categories and have a dominant market share position in many of them.
These numbers include structured convenience in grocery channels, but do not include a lot of our route trade business, Which continues to grow and services up to 30,000 customers a day across Australia. So a really Impressive portfolio of brands and a reach across multiple channels in Australia and in international markets, which we're really proud of and look forward to continuing to grow. Turning to Page And I'll just provide a bit of an update over the next couple of pages on various initiatives across the product range. And It's pleasing to see that the significant investment in our brands and new product innovation has continued following the acquisition of the Lion Dairy Drinks business. And throughout FY 2022, we will see some product exciting product launches, that we can present further detail on at a later date.
The integration of the business has also provided a strong platform for further growth, as I mentioned earlier, in international markets, Which is a really important and growing part of our business. As outlined on Page 23, the growth of our spreads business continues with Bee Honey gaining over 10% share in Coles and with increasing distribution across Woolworths and the independents, We'll continue to see this segment growth for us in FY 2022. Vegemite, which is such a wonderful iconic Australian brand, It continues to extend with new packaging formats and also this is the case with the Simply Nuts peanut butter brand that we Launched a few years ago and continues to grow and work very well for us in the market. It's also pleasing to see that we've launched the 180 Nutrition range of Products into the grocery channel and also extended the Happy range of lactobacterium based nutraceutical products Into the pharmacy channel. So really good to see those emerging categories in these new growth areas for us.
Moving on now to operations and the map on Page 24, which Barry touched on earlier, and this provides a real sense of the extent of our manufacturing network across Australia. We now have 20 facilities producing our extended product range and supporting our extensive chilled distribution network across the country. As Barry mentioned earlier, this extended network provides us with scale and flexibility as we continue to optimize and extract value from not only milk, but also now juice And also peanuts and our honey supply chains. Page 25 provides an overview of operations, including a number of initiatives So, they've already been covered by Barry, Pete and I in the presentation. I will point out the synergy program across the entire Supply chain continues to provide opportunities for ongoing savings and efficiencies.
We have a number of targeted capital projects in fiscal year 2022, which will build on the work that we've Starting with the current fiscal year. Moving on to the following page. And COVID Continues to provide challenges and opportunities for the business as stated previously and our priority is the safety of our people and our customers. For almost 18 months now, we have had our crisis management team and our site operations team meeting as required to respond to these challenges. This process So expanded to include the Begga Dairy and Drinks business following the acquisition back in January.
In recent lockdowns, we have seen a negative impact across our route trade This is particularly in Sydney and Melbourne and this will be offset by growth in our grocery trade and also offset with Cost saving initiatives and other growth initiatives across other parts of our business. Moving to Page 27, which Includes a chart which we've been presenting for many years now. And while the proportion of our branded products that we sell continues to increase, We still need to ensure we closely manage our bulk commodity business and the risks associated with commodity and foreign currency volatility Along with the domestic milk pricing, this chart tracks the export commodity index and our Southern region milk price. If I can draw your attention to the gray and green lines just to the left of the shaded light gray area, and you can note that The commodity index at the time we set real prices last year was in rapid decline, which presented challenges that we navigated through During the first half of the financial year and we saw a strong recovery as we got into the second half of the year and supported increases in farm backed milk prices.
And this is carried through to the FY 'twenty two opening milk prices, which are record prices. Our business following the acquisition of Linedere and Drinks is larger, more diversified. And while we are now significantly less exposed to commodities and currencies, Page 28, which includes progress on our CSR targets across our five focus areas. This is a slide again that we've reported in previous years and provides A good update across each of these focus areas. In addition to good progress on our improved nutrition Targets, we have made good progress on diversity inclusion with a number of initiatives, but we still have a lot of work to do in this area.
Barry covered our carbon emission targets earlier, which provides further focus for the business as we address the challenges from climate change. The importance of packaging continues as we grow and increase the proportion of our branded food products across our business, and we are on track 2020 5 Packaging Covenant and more sustainability initiatives across our supply chain have contributed to further improvements in this fit focus area. So that's it for me, Barry. I'll now hand it back to you.
Thanks, Paul. And I think as you mentioned around season, certainly So far to yourself in terms of the work done this year. It's been a heavy workload in a very changing environment. But as I said at the opening of my call, Very pleased with what we've been able to achieve during this period. It is worth reflecting on where all of that work puts us So if I move you to the next slide, I think we're as we've sort of repeatedly said, Very pleased with the work that's done and the progress of all the initiatives that we've put in place, inclusive The point of time we're at with the integration of what we will now refer to as Vega Dairy and Drinks, we've been talking about it In acquisition terms of Lion Dairy and Drinks for a period of time now, but internally it is now known as that division and That work is now known as Bega, Dairy and Drinks and that's what we'll refer to it from this point on as we continue to integrate and we continue to Recognize and invest in new opportunities in that component of the business.
We continue to be pleased with the improving Financial performance that we demonstrated last year and the benefits of scale that we're now achieving given the size of the business. That does include a strengthening of our balance sheet in the year just in the years that's passed. And as Paul demonstrated in his presentation, We now have a strong suite of brands, many in really good growth categories, which obviously will be our focus as we move forward. There is we see in the existing business that we now have, there is good opportunity for further growth and good opportunity for further business improvement. The geographic product and channel diversity that we now have, whether that's in milk Gorman across the country or indeed even in products like peanuts and or it is in our customer base where we are delivering both The major retailers that through a significant, a chilled network helps build the business resilience that we think is required in these changing times.
I should say that, of course, we should never forget that that diversity of markets does include the international markets Where we continue to have a strong presence exporting to approximately 40 countries around the world. So I think the fact that we've got geographic Diversity in procurement, customer diversity, both in terms of who we sell to and the channels in which we sell to them and market diversity in both Australia International helps build that resilience to the business. As Paul mentioned, we have seen again strong farm gate milk price increases. In some cases, competition for milk has seen in some product ranges that be in excess of returns to some of those product streams. Hence, really part of our strategy to make sure that we're focused on the higher value and branded end of business, still work to do there.
That's certainly very competitive circumstances for Farm Gate. Milk prices, but that's returning Good prices for farmers in an environment of good seasonal conditions, which I think is seeing a much more optimism From our pharma base in general. As I mentioned in my opening comments, and I'll just reinforce that, we have a view that there is now a Structural change in infant formula market and channels particularly related to China and that's obviously particularly related to Daigou channels, but also related The consumer preferences in those markets. We have been producing infant formula and for a great many years, it is very A part of our core competency. We are very pleased to still be in that space.
We have been there while we have seen Significant demand increases for infant formula and recognize the opportunity there both in terms of supplying it, but also in terms of realizing Value for some assets. We will look to make sure that we right size and we perform the capability and that we have The right assets to make sure that we are servicing existing customers and no doubt new customers as that segment of the market begin to settle down, but we're just emphasizing that we do see that demand change that has been well documented staying with us, But we also see that we will adjust our footprint and our business accordingly. Paul mentioned the COVID-nineteen lockdowns in particular impacting foodservice and convenience channels, something that we have to manage. Obviously, we understand and Very concerned around community health and I guess reinforce the wish that people would comply with government health orders, But equally something that we will be very pleased as I'm sure the entire community will be to see those lockdowns come off and indeed Vaccination rates go up and those markets return to normal, but that will be that does impact us in some ways.
But as Paul Outlined, that is something that we need to manage and we do see some benefits in other areas. Going to the next slide in terms of our priorities and this is our last Very happy to take questions after it. In terms of our priorities, it should always be emphasized that the safety of Our people and that's all associated with Bega Cheese and their well-being is our number one priority. That of course in recent times has Also included how we've dealt with COVID-nineteen and Paul has outlined that in terms of our teams and It's very senior teams and people out throughout the business that are making sure we are making our environment as safe as possible. We do need to manage the external impacts of COVID-nineteen and it's important for us to continue to focus on realizing the synergies In Vega Dairy and Drinks, which we are as we've outlined on track to do.
We will Increase our investments in brands, markets and capabilities where we see opportunity. We think that There are great opportunities, whether that be in capacity or indeed in delivering to the consumer innovation They are looking for, so we will continue we will make sure that we are building on the quality assets that we have purchased. We think there are further manufacturing optimization projects, which we will continue to work and that's particularly around line, but across our entire integrated network. We do think there are opportunities for further rationalization and business development and that's obviously something that's always on our mind within this business and indeed externally as well. It is important for us and Paul mentioned, we think we've got More work to do around diversity and inclusion, but it's an important initiative in the business that continues to get the full support of the Board and And it's very much part of our priority.
And I think I'll finish with sustainability and the circularity initiatives that I Earlier, very pleased to be announcing our targets today and are particularly proud of the circularity initiative That we've only spoken briefly about. We will have more detail obviously in our sustainability report that will be out Very soon. We would expect in the next couple of months. And but certainly pleased As you would expect from a company with the DNA of Vega where we have those close links right back to the farm And right through manufacturing and in regional communities, those initiatives, it's nice to formalize them, but they have always So So look, thank you everybody. Very, very pleased to have presented this result to you today and happy to take questions.
Thank Your first question comes from Michael Peat with Goldman Sachs. Please go ahead.
Good morning, Barry, Paul and Pete. Just first question on the Vega Dairy and Drinks business. Could you just give us a sense of you mentioned that it outperformed a bit in the 1st 5 months. I'm just trying to get a sense of what contribution that did make in the 2021 year?
So we obviously, we reported the segments the way we reported them, Michael, and haven't split out the Performance of BDD, obviously, we had a pro form a P and L for what our expectation was of BDD and D, but it Pete, Paul, I'm not sure whether we want to go into too many specifics around the outperformance. It was a pleasing outperformance, but I wouldn't say that it was What's the right word? Overly excessive to what we actually predicted in our initial I
think that covers the sentiment Barry and it's worthwhile. Michael just pointed out too that It's off the back of some good growth in both grocery and also in the route trade channel. And no doubt, we've got a good boost too with the Australian ownership and that sentiment coming through actually was very positive, particularly in that route trade. And that provided some of the impetus for that improvement in And that's momentum that we're carrying into FY 2022 as well. So just pleased to be on that side of the ledger and then we can come through with these cost synergies that I mentioned earlier that will allow us to achieve these targets that we've set ourselves.
I think You've mentioned the 36, I think, synergies this year and maybe 41 in FY 'twenty three, but were there many synergies banked in the 'twenty one year?
We had some, but there's also the cost of executing those synergies, which I think And Pete, correct me if I'm wrong, but the cost of executing a lot of the synergies, which is in the normalized result, were offset Within that 5 month period, Michael?
So, Michael, we went into the 100 day plan and didn't We really executed probably in the last 15 months of the year. A lot of those organizational changes and so forth. If you do the math, we were looking to achieve, we want to
enter the U. S. Of $2,000,000
to $3,000,000 of run rate
per month.
And we have But that's happened really in the last couple of months. We bought at the end of January, did our planning around February March and then sort of really executed over So there wasn't a lot.
And just going forward, we should that earnings split For BDD, it's sort of eightytwenty at the EBITDA line is what we should be factoring in. Sorry, earnings between The seasonality split between first half, second half.
Yes, still very strong. So we Obviously, didn't have that impetus in the results. So the profitability of the business looks significantly between now and Christmas.
All right. Just a final one from me. You've got Barry, you've got sort of over $400,000,000 of land and buildings on the balance sheet now. I'm just wondering Strong property markets out there. You've got opportunities in front of you for either selling property outright or rationalizing your footprint Slash maybe sell and leasebacks, just wondering how that might pan out over the year.
So Michael, obviously, we are Happy with the sort of progress, like strengthening the balance sheet through the operational performance that we're getting out of the business. It is very good to have that soft property portfolio. It does present us with options. I think the right way I would put it is The properties that we see as long term required for running this business, we're very pleased to own them. There are other opportunities that we'll obviously consider them.
I think it's good to be in a position to have options. It's not Something that we're feeling that we urgently need to do, but it does present an option for us. That we would Probably take the philosophy with quite some time now that core assets required for the business we like to own, but some that we might identify as non Core or non long term, we would consider other options on.
Great. Thank you very much.
Your next question comes from Phil Kimber with Evans and Partners. Please go ahead.
Hi, guys. First question, the debt Situation was very pleasing and a lot better than what I thought it would be. But I just wanted to check At the time of the acquisition, you'd mentioned, I think the numbers were $21,000,000 of upfront integration cash costs and then $60,000,000 of Transaction separation cash costs, I just wanted to know if many of them were incurred in the second half or are they more likely to fall in FY 'twenty two.
Yes. So Phil, the net tick from the pro form a that we put out when we did the listing It's obviously considerably higher than where we ended. I guess the big swings there were that when we were doing that pro form a, There was about $80,000,000 of debt like items on the balance sheet of LDD and that related to leases And in negotiating the final bank agreements with the banks, they we negotiated that we Didn't have to include leases in net debt, and so that was removed. And so that's one of the reasons why the net debt is lower. It was about $80,000,000 And then we just had better cash benefits.
So we didn't have the RB settlement payments built into the numbers. We've got the we didn't have the Craft settlement built into the numbers. We've under spent a little bit on CapEx towards the end of last year. So it's been a raft of That have helped our cash build. We're not that far off.
We're pretty much on target with our spend. So obviously, There was about $60,000,000 of transaction related costs around stamp duty and so forth. And we're pretty much on target with that. So the reasons for the net debt benefit were what I sort of alluded to Just a second.
Okay. So there's not there isn't some I know you've taken restructuring costs through the P and L, but I just wanted to Stan, if there's the cash payment of those costs, is there a material amount to come through in FY 2022? No. No. Okay.
Cool. And then my second question, perhaps to Barry, was
Twofold.
1, the
farm gate milk prices seem to come as a bit of a surprise. They started off rational in Early June and then sort of got a bit crazy towards the end of June there. Maybe I'd just be interested in your thoughts from as a Dairy industry person, what might have driven that? And then the second part of the question is just around I'm just trying to understand the risk for the remainder of FY 2020. So what would happen if commodity prices were to come off from here?
Because I don't think you can change farm gate milk prices now until next season. So just wanted to understand how you're thinking about that?
Look, Phil, I think your summary is pretty good. I think we were very comfortable with where they When farm gate milk prices started during those initial announcements and we were very comfortable with the announcement we were able to make, which needed to include A harmonization of prices between what were traditional line farmers and the official vega farmers. Look, the reality was we had a couple of new entrants in the milk procurement market that added some additional pressure, Which probably also saw that we hadn't seen a lot of milk growth despite a good season and reasonably good prices. So companies were all in a position where they didn't really want to lose milk. So that meant that, I guess, We found our competitors pushing themselves reasonably hard to make sure that they retain the supply they got in a very heated competitive environment.
We thought we had to be there to ensure that our suppliers were receiving a competitive price. From my perspective, Phil, and I get that Graph that Paul puts up, it's not the first time that we've seen pricing in commodity in farm gate prices Push above commodity pricing as people have wanted to secure throughput and indeed secure the milk So yes, it got very willing, but it then settled down and we did lose a little milk through that because we couldn't Supply aren't going any further in the pricing, but we did but in the end, we now manage our milk supplies across our network, which is one of the advantages That we obviously have through the new acquisition. So yes, very, very, very heated competition. And I suppose the other thing I should say is that, that also probably still reflects the position where there is overcapacity in the industry. It's still not fully rationalized And that causes companies to need to keep those factories operating if you like and therefore the competition naturally follows.
My perspective is that we will manage that. Obviously, as we think about pricing, as we set pricing, We said it with a very close eye and a lot of experience around what we think the international commodity markets will do and indeed what currency will do. So and obviously in terms of the pricing that we ended Settling on or not moving any further was where we thought that our risk tolerance was as much as we were willing to take, but we will now manage The rest of the year, it is notable that we've seen some downturn in global commodity prices, but that's also Being aligned with some downturn in currency as well. So all part of what we're very used to managing and we will continue Do that throughout the year. So, yes, very competitive environment, but something that we've experienced in the past and managed in the past.
Sure. And last one, if I can quickly. Just CapEx outlook for FY 2022, sorry if I've missed it in the presentation somewhere, but Can you give us a sort of forward steer on what we should be thinking from a CapEx point
of view?
I might throw to Paul for that. We were a little down on what Our normal run rate on CapEx would be this year, which obviously also in terms of where our debt landed terms of cash flow and whatever that did help, but I think we will see a return to more normal CapEx. But Paul, I might
Thanks, Barry, and good day, Phil. So as Barry said, we'll see capital Much more broadly aligned with our depreciation rates in the FY 2022. So and Pete referred to before when he talked about Cash flow and debt that in the second half of last year, we did have some of that sort of an underspend on capital Understood, Julie, with a range of other initiatives and some COVID disruptions delayed some of our capital projects. So we'll catch up on that. But we've also Recently approved significant projects across the business, which have well and truly kicked off now.
And they'll see us We fully expect to hit that target capital expenditure in that depreciation range for FY 'twenty two. Great. Thanks guys.
Thank you. Your next question comes from Josh Kanarkis with Berenjawi. Please go ahead.
Hi, Barry, Paul and Pete. Thanks for taking my question. Just first one just around the branded segment, some good growth there. Just keen if you can give us A little bit more context around that platform, when you think about how mature maybe some of the new branded products could be And also just some context around the existing ones in terms of any repricing opportunities there. Thanks.
Paul, are you happy to take that question?
Absolutely. And just bear with me, Josh. I'm just trying to operate about 4 screens at once here and getting my slides back up in order to Go to the slide that actually covers off the I think of losses only to bring it up here in Just bear with me, Dick. But it's worth noting And Josh, can you just provide us some clarity on your question regarding pricing? Just what you're asking?
Yes, sure.
So the first part was Just around how material some of the new brands can be and how material you think that can get to over time of that segment? And the second pricing question was just with regard In terms of selling into the retailers, whether you see any potential for inflationary or pricing adjustments that you might be able to put through Across any of the branded products?
Yes. Look, we certainly on the second point, we are seeing certainly seeing across multiple channels Some upward pressure on pricing with the milk pricing increasing into the year and that was subject to Joel's earlier question too. So we are That across multiple channels starting to flow through and also seeing that. That's a bit of a trend that's been increasing over the last sort of 18 to 24 months where we've seen a fair bit of Soft commodity price increase across the globe, but also domestically seeing food price inflation Through the major retailers. So that's certainly seen that where we see much stronger value growth in our Core brands and we do volume growth.
We're actually seeing that that's over indexing. So we're certainly seeing that flow through. In terms of Where we look for opportunities for further growth in these categories and how we're thinking about them. A lot of them are operating I think about yogurts and flavored milk, in particular, Good solid growth categories. I mean, these are categories, Josh, that are growing at around 5% a year.
So and If we maintain our market share and pick up that growth, that's a very good outcome. But our plans are in place through product innovation and increased to exceed those market growth rates in those core categories. And as we bring the businesses together, the ability to sell more products Off the back of the truck into more customers is also going to help with that. So certainly very excited about how that will progress. And a lot of those initiatives have already kicked off in the last 6 months or so.
So it's pleasing. And Pricing will be part of that, but we've got some pretty good margin products here and volume is going to drive the bottom line in many cases A lot more than pricing, no.
Got it. And just in terms of the first one around some of the new branded products, you mentioned Bee Honey and a few others. Just interested in terms of how you're thinking about new product rollout or potential bolt ons within that segment.
In which segment? In the Spread segment? Across
the broader branded segment. Yes, absolutely.
Yes. Look, certainly there's look, it's always hard to just come up with a new brand and how do you actually differentiate into what is often either mature categories or particularly competitive markets. So Bee Honey has been a real success story from us in that It's worth just reflecting on that for the moment. The point of differentiation around the Purple Heart project and the work the team has done there to establish that Integrated supply chain has really served us well as we've seen that growth. I mean, we've picked up in just over 12 months 10.5% In that particular way, Tyler.
So that's been a reasonably a very pleasing progress. I mean brands like Happy And 180 Nutrition in those sort of emerging and high growing markets are also good. But In the more mature categories, bringing in new brands is certainly a challenge. So that's where we look to the product innovation As I mentioned earlier, it is worth while noting though, Josh, that distribution network that we have, the Daily contact with 30,000 plus customers, the systems that we've got in place and of course the actual physical network Does allow us to look at opportunities to either license or manage 3rd party brands as well, Which provides other revenues for growth, particularly where we're talking about complementary products to our product mix, which is something also that Pete and the team are looking at.
Great. Well, yes, you answered part of my next question just around some of the synergy potential within line. So that's on the chilled distribution network. In terms of some of the other areas outside of that initial synergy estimate, you've obviously had the business for a little while now. Would you be able to talk us through just to give a bit of context around some of the other areas you're looking at that you see some more medium term potential for opportunities both revenue and cost.
Look, on the revenue side, certainly the international market, again, Very complementary product mix with a number of the Flesh branded products in the dairy and drinks portfolio with our more predominantly Food service product, but also consumer products in the previous Bega Cheese business. So with the acquisition, Josh, we've got Strong representation in market with our people now, particularly in Southeast Asia. So being able to consolidate those businesses And start selling some of our cheese products, for example, through those channels and through those customers that are served by the Dairy Grinch business It's been something that we're able to turn on and exploit reasonably quickly. So good opportunities in the export market. I think in the domestic market, as you mentioned, I Possibly answered that question in my earlier response.
On the cost side, a lot of that's been outlined. We are seeing I would say This picks up on Phil's question earlier on capital. We are seeing opportunities for capital projects That we're not on our radar screen. And I think it would be it's fair to say that the result of a backlog of Projects that have built up over the last couple of years while the dairy industry's business has been in the sale process. So there's some good operational improvement capital projects That has been servicing in recent months.
But if we don't get to them next year, we'll certainly be getting to them into FY2023 And they'll be able to provide some of those further cost efficiencies ongoing for us.
Right. And there's sort of a similar returns on invested capital that you've How could it in terms of your previous hurdle rates?
Certainly, I would say they're better than our hurdle rates, some of these projects. And I've put it in the category, Josh, of multiple small to medium sized projects. So they tend to suck up a lot of resources and you can never really sort of exploit them as quickly as you may like to. But we're certainly building up The plans around those projects and as I said, we'll get into those partway through next financial year, but also extend those into the following And their projects, they can provide 2 or 3 year payback some of these projects. So we're certainly exporting those.
Okay, great. Thanks, Paul.
Thank you. Your next question comes from Jonathan Snape with Bell Potter. Please go ahead.
Yes, thanks. Hi, guys. Just a couple of questions if I can. First of all, just around milk supply. Can you be able to quantify what your milk supply did, I think firstly, this year on the traditional vegan business.
And then I think, Barry, you made a comment that Gillette's and Milk go Into next year, how are you guys seeing your milk supply growth year on year into 2022?
So across the combined business, Jonathan, we'll be down a little in terms of year on year comparison. We'll be down a little this year compared to what would have been the combined businesses in the previous year. But as I've said, I think we've got to be pretty responsible about how we manage milk pricing. So we're comfortable. Whilst we don't sort of express exactly, it's pretty competitively sensitive how much milk is moving around the countryside at any given time and who it's with.
But we've had a small reduction Overall supply that we will manage within our network. Okay.
And look, can I just ask, because when I looked at your What's the market for this year? You guys had some volumes that you're looking for in LDD or the old LBD, but looked lower than what they traditionally would have taken in. So it looks like there was some milk substitution going on where you were Maybe moving milk from your existing supply base into line. I know you've put your cost numbers Synergies and you say you're on track, but if memory serves, you didn't factor in a lot for optimization milk pools back at the time of the acquisition. And certainly, it looks like that's far more advanced than maybe where you were at that point.
Is that a fair comment?
Well, I think we're probably around about where we expected to be around and it was around that milk management side, Jonathan. So it wasn't so much about milk pricing. It was about how we manage milk Across the network and the products in which we sent them to, I think the 2 things I would say is that where we saw the particular competitive pressure, if you like, was Within the Southern States in that Southern we actually gained some milk in the marketplace online, drink areas, if you like, which obviously That's just in terms of even though it's more expensive milk, it does exist in terms of freight and milk movement. So it was really in that Victorian region where we saw that really heavy competition for milk. Elsewhere, we were comfortable with where it ended up.
And as I said, we've added a little bit. But I would sort of rather turn that we are Where we expect it to be, cost of management synergies. And Paul might have something to add to that.
Good day, Jonathan. And just picking up a question that was asked. I feel it's worth noting that Southern region was very We had and this has been well publicized. We have told us extending their reach in the market and buying milk directly for their cheese business and that was previously So through one of the processes. So that did cause a fair bit of switching going on with milk supply, but that also intensified a lot of that competition.
But I know you track Global and Oceania commodity pricing pretty closely and it's worth just making a couple of other points. And First, we are seeing a much wider spread in product mix returns Between what you might call your base commodity returns, which is fundamentally skin and butter and then cheddar and whole milk powder is the 3 core Based commodity product, which returns. If you have a look at the returns on those 3, Jonathan, and then compare them with What drives a lot of our returns on our manufacturing business and the product return, which is fundamentally around high fat cream cheese and high value protein products, That spread has increased reasonably significantly over the last 12 months, which for me when you look at commodity markets over the last Particularly dairy over the last 10 to 15 years, normally when you see high dairy prices or high commodity prices, that spread It actually narrows, but it's actually increased, which is sort of quite interesting. So what we have seen is If you were to apply the more expensive liter of milk that you might be able to get on by in the market and apply that to that lower returning Base commodity price.
There's hardly a dollar in it. So we're at the point saying that's where we're at. We don't need more milk. We'll let others take that milk and if they can make a dollar out of it in that commodity market, then good luck. And we'll just sort of sit back and Focus on other parts of their business.
So that's fundamentally what we've sort of seen going in this market. It will be interesting to see how that plays out Last 12 months over the next 12 months, sorry. All right.
It's good color. Look, another thing, can I just pick up, maybe this is one for Pete around All these redundancies and IWS costs that you took above the line in the normalized result, which think you said it was $10,000,000 I don't know if you quantified what the redundancy number was, so Richard talked and I was just trying to get a sense If you could provide that? But the other question was around some of the movements in the balance sheet, particularly in the provisions and bad debt expenses. It looked like that bad debt provision was up about $9,000,000 and it looked like there are a bunch of other provisions that jumped about $25,000,000 if I have a look at it Outside of the employee components. And I guess I'm just trying to figure out those movements, how much of that is simply the acquisition accounting The BDD business in terms of things coming over from one balance sheet to another Relative to maybe other provisions restructuring provisions that's the thing that you push through the P and L as well And whether any of that was in normalized number?
Good day, Jonathan.
So if I go to the first question,
The redundancy payments were for the organizational review that we stated last year. There was about $4,000,000 of those In this year's result and that related to the work that we commenced Around getting our costs globally competitive in 2020. And then there was about another $4,000,000 $5,000,000 of Costs, we removed about 60 to 70 heads from the Biga from the Rig Straight Biga plant During last financial year FY 'twenty one, when we consolidated the individual wraps last line down to Strathminton. So those were the 2 sets of redundancy costs that we've got in the normalized result. And just with provision, so fundamentally the balance sheet, BCL balance sheet didn't really change, but all of The changes were due to the new balance sheet that we're reporting.
Just on receivables, Wineberry Drinks does have a higher provision for doubtful bits because it has that exposure to all of smaller customers through its Coal Chain Network. So that would be the change there. But most of those provision increases would be due to the new balance sheet coming across.
Okay. So if I'm thinking of those one offs that I think you called out, all those redundancies and integration costs, I think it was IWS. Is that the term? Yes. The right catch that line
that we took down to That is Scott Merton. So those costs won't reoccur next year.
Okay. But is there other ones that we should be thinking fill the void because you guys are constantly Looking at your cost structure and making changes and obviously your operational footprint is changing Every other by the sound of things?
Not that we've got in our numbers for FY 'twenty two, Jonathan. It will mostly be around Yes, we've done the big organizational piece now. 90% of that work would be complete. It will really be around we're looking at rapid procurement around packaging services. So that's where most benefits will come from FY 2022.
So there's no provisions or balance sheet on it in there for us.
Great. And just on your operating cash flow, I noticed again that you reduced Use of the warehousing facilities in this result. And I think it looked like it was about a $16,000,000 Cash outflow in this result. And I think you reduced it as well last year. So by the underlying What was that for, Joe?
Are those inventory receivables warehousing facilities that you use, the off balance sheet funding? It looked like it came down from like $153,000,000 to $137,000,000 So it's about a $16,000,000 drain. I guess it's been a feature of the last 2 years that you guys have reduced the use of those off balance sheet facilities. How should I be thinking about that going forward? Because obviously, you had a great Cash flow result, but it was probably been even better if you kept utilizing those facilities.
So I'm just trying to figure out how I should be thinking about Your use of those off balance sheet vehicles into 2022, 2023?
So that would be I have to go into that in a little bit of detail for you, but nothing has fundamentally changed there. That's just the that's just the way just the flow of Transactions or sales, so nothing's fundamentally changed. I would assume certainly, I think in our modeling we would have that as being consistent Through the FY 2022. Cool. And look, I just want to pick up
on the CapEx as well. I mean, you made a comment it would be similar to D and A This year in the second half, it looked like your D and A stepped up quite a bit, which is obviously with the BDD business coming on. When you look into 2022, it looks like you're heading towards a number close to 105,000,000 boxes of D and A. Is that far off the mark? At this stage, you're probably
below that. So we've probably got 75 to 80 Locked in and then there's a couple of other projects that have come across the table around Restructuring our footprint at Tatura with Arbor, which Barry talked about. So there's a A couple of other projects, but it will be somewhere between sort of $75,000,000 to $95,000,000 obviously.
Okay. And should I be
thinking D and A then is going to be heading up towards that $100,000,000 to $105,000,000 just annualized in the second half on BDD?
Wouldn't have thought it was quite that high.
Thank you. Your next question comes from Mark Topey with Select Equities. Please go ahead.
Good morning, gents. First question is just around the commodity pricing in global markets and sort of bouncing around and then you factor in Australian dollar. I'm just wondering and looking at the chart to May 21, I'm just wondering how you're seeing things and time demands were very strong over the last 12 months. Just in terms of the forward demand, how are you seeing things globally?
So Mark, obviously, we watch this very carefully. I might throw to Paul to comment, but I would probably Reinforce what I said earlier, we are seeing that we are seeing those commodity prices ease a little bit, but we're also very pleased to see the So at this stage, we're not seeing any outside the perspective we took as we were initially.
Paul wants to
add any more to that.
Yes. Good day, Mark. Yes, look, it's Always a challenge with a crystal ball on this one, but we have seen prices have sort of been tracking down since around about mid March. And as Barry said a couple of times, the exchange rates certainly offsetting a lot of that decline that has occurred. And we've got to remember that that's come off some fairly strong highs Over recent times.
So still very strong pricing. And up until about, I reckon about 4 to 6 weeks ago, really underpinned by strong demand that Continuing out of China, we saw them sort of step out of the market a bit more recently and that's been picked up with And a bit of demand out of the Middle East and other parts of Asia. So that's reasonably stable. What's more interesting is on the Supply side and what we're seeing there and just a bit of pressure across both Europe and the U. S.
On the supply side. And We've seen a little bit of growth in New Zealand, but we're not seeing the sort of growth in New Zealand in the last 2 or 3 years that have really fueled the growth of that market Over the preceding sort of 15, 20 years. So that's New Zealand's interest in this sort of reflect on some of the challenges that we've There are environmental runoff carbon similar to in Australia with issues with labor On farm and your billings will actually get milk production up. So we are seeing on the supply side, it's just It's really sort of starting to get any momentum, which is also keeping those prices where they currently are. So look, we'll continue.
I don't see any major changes into the next I don't see any major changes in the next 4 to 5 months unless there's any significant geopolitical events Let me see, particularly in the region. And then as we get into the second half, again, we immediately look at the Northern Hemisphere Supply, particularly Europe and see what's coming through there. But there's nothing at this stage that's pointing to any sort of major corrections if we see it.
Right. And so when I see look at some additional force now, and I suppose going back in time, we might have a better rate on What the level of exports was? Is it fair to assume that, that bulk is predominantly exports? And I'm just looking at the 2021 margin on bulk Compared to 2020, is that do you think that margin is sustainable in terms of the bulk space going forward? And Maybe talk to some of the split of the products there like cream cheese and they're in that category as well.
Yes. I Covered that briefly in regard to Jonathan's question too just in terms of that spread of mixes. So we are seeing that I mean, the Japanese market, just briefly, they are still dealing with A bit of overhang of inventory. Just with COVID, there's been, for example, less stores' milk programs. So more of their domestic Production is going into skin milk powder and butter, so they're importing less of that.
They've also had an overhang The ingredients that built up in the games and that's still sort of, believe we're not playing through the market as So really sort of soft demand out of that market, which is having a bit of downward pressure on those prices. But fundamentally, they still remain very strong. I'm talking about the fat based Well, that's there in high fat and cream cheese. If you have a look at those internal sales That, Pete mentioned on the segment report. So that's basically bulk product that's going to our value added business.
So if you look at the delta between that and The bulk sales, you're spot on. A lot of that is finding itself into the export markets. But interestingly, we're seeing The continued growth in Southeast Asia from one of those bulk commodities, particularly out of crude, a lot of the value added powders and increasing some of the fat Products too that are going in that market. So that's also providing us with a good level of diversification. And importantly, In those numbers also types of the lack of fairing volumes that don't go to branded products, they sit in that part of the ledger.
Great. Thanks. I'm not that far in good. Just early just on you did talk about the cold chain at the time of the acquisition and I guess Slow to tad, but does this give you an opportunity to sit back and think through the growth opportunities in that cold chain going forward? And What are your thoughts around that now?
Well, we never sit back as you know, Mark. I don't know if that was a trick question. But we We do see good opportunities to, as I said earlier, to sell more products through there Of our own product range and across the entire range of products, but also some of these third party opportunities that we might be able to exploit. Pete's got a focus in that area on areas around automation and consolidation. So there's some further opportunities there just to get our cost And get more efficient in that space.
But we are looking at what other opportunities are there for us to Do more with our customers in that supply chain sense, including other opportunities outside the distribution network, we might want to have a look at who else can we partner with to really sort of strengthen and reinforce that part of the business. So A lot of opportunities there and a lot of activity going on at an operational level too that is keeping us busy.
Okay. Thanks. And just lastly, when
I sit back
and think about the plant footprints with the number of plants you've got now, How should we think about the optimization? Like I think about the Chatura plant might get some additional supply through in terms of milk this year, I'm kind of assuming, but can you just talk us through the way of optimizing again, just to remind us on that point, how you optimize Corrid,
Yes, sure. And so when we talk about and Barry touched on this before when we were talking about The synergies on milk optimization, which represents about a quarter of that $40,000,000 target that we talk about. And a lot of that's around Solids optimization, also how we deal with spring milk peak in our fresh business and how we might supplement that with supply during The shareholders are doing more particularly during winter when milk production is down. So how do we sort of optimize that across that network? More specifically, we're talking about Victoria into South Australia and Southern New South Wales in terms of where that optimization.
We can reach a little bit into the In the Southeast Queensland, but the majority of our focus on optimization is around that network. Tatura, as you know, over recent years following the acquisition of Caroitte, one of the key initiatives driven there is around Just basically exporting cream out of the Western District into Northern Victoria as we've seen our milk volumes drop off. And those milk volumes, as you know, Mark, have dropped off Through that drought period, but also as milk supply in Queensland and New South Wales has dropped down, Fresh players have come into Northern Victoria to make up a difference. And now as a fresh player, we get to participate in that process, which is a really important aspect Strategically for us in terms of how we play the milk market. So that ability to actually move milk around And Tatura plays a pretty important role in that based up in Northern Victoria.
That's going to increase. It will be interesting to see how that evolves Over the coming years, though. But yes, a lot of opportunities there. It's everything from flight swaps to The solid optimization around sort of cream movements, for example, if we have a look at the Linedairy and Drinks business, There's a nice clean business within our Linedairy Drinks business. A lot of that cream is surplus cream from our fresh milk plants That is shipped down to Chelsea where we process the cream.
We can do that a lot more efficiently now with the broader network in terms of how we manage that In terms of how we manage that clean complex, for example. Okay. So we can take a lot of freight costs out and we can provide a lot more Stability, we'll have a better term to how we operate that business. So rather than being forced to process the cream when it's available, we can manage that a lot Net earnings Network. One of the fundamentals just to finish off that you'll see just by the very nature of the consolidation of the milk supply across the 2 businesses Is we will see through that seasonality, we will see a bit more milk shifting through Croix and Tatura during the high peak milk periods around spring.
And similarly, we'll see a bit of milk drop off in the winter months as we do that. Whereas previously, Lime would smooth that out by Selling a bit of milk in spring and buying a bit of milk in winter, we'll manage that internally. And so as a result, we'll see less Less milk at times of the year through our own facilities and more milk during spring through those plants, which they've got the capacity to handle.
And I suppose ultimately in terms of the formula then, IMS, when it kicks back to have some options available or the options might Come along the track in terms of what your plant use there as well?
Yes. And we can be a little bit philosophical and maybe we can take some time to sit back and think about that one because probably got a bit of time because it's going to take a while and Barry alluded to this earlier, if I can wait for those channels and those markets to correct themselves. But we've had the benefit of Derisking our investment in that part of the business back in January 2017 when we sold those assets. And we got out of the good time and we got out with a big paycheck. And 4 years later, we get another payday And we're working we're well down the path of working out how we get back in and have those Manufacturing capabilities in our own network available to support what business we have there and then set ourselves up for What could potentially be in the coming years further consolidation on processing assets in this country And also just good growth with customers not necessarily solely reliant on that Chinese market.
So it will take a little bit of time, Mark, to build that business right back up again. Will it get back to where it was in 2015 2016 for us? I'm not too sure. But Certainly, we see some good opportunities for growth, but we just need to show a bit of patience as we work through them.
Great. Okay. Thank you for that.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Ervin for closing remarks.
Well, thank you everybody. And thank you for the comprehensive questions from the people who have asked the questions. Obviously, as I said, we're very pleased with the position that the company has built itself into the I think I mentioned maybe somewhat emotively that we're very proud to be bringing some of these iconic brands home to Australian ownership and we're very pleased with progress of the integration of Linedarian Drink and the performance of the overall business, it's good to report a healthy position around balance sheet, a healthy position around market share and financial performance at a level that we would expect it to be at. So thank you all for taking the time to listen to the call. Just on a personal note, I apologize if there were some strange noises occasionally Coming through the conference call line, I'm sure you all appreciate the some of the challenges of working from home and I'll be candid and say I think many on I have an autistic son who occasionally make himself heard at times that are not the most convenient.
So I apologize if anybody was getting some of There are noises through the phone, but I thank you for joining the conference and look forward to catching up with a number of you soon, if not in person