Earnings Call: H2 2021

Sep 26, 2021

Good morning, everyone, and welcome to Finlay's Full Year Results Conference Call. We know that many of you will be dialing into this call from your homes as lockdowns continue in certain parts of New Zealand and Australia. We hope you are keeping safe and well during these times. On our call today, we have Finlay's Chair, Graeme Mill Finlay's Co Founder, Director and Current CEO, John Pino and Finlay's CFO, Rob Stoll. John will open the call and then hand to Graeme for an update on Grant Watson's appointment as CEO and our proposed governance changes announced today. Rob will then cover off our financial performance and hand back to John for an update on our strategy, operational performance and FY 'twenty two outlook. Graeme, John and Rob will be available for questions at the end of the presentation. Please keep questions to 2 per person. If you have any follow ups, please reach out to me afterwards. Over to you, John. All right. Good morning, everybody. Good to be on the call. Look, we've got a comprehensive slide deck that we put out this morning. And on this call, we don't intend to cover every point in each slide, but are assuming that you've had a moment to have a look. We'll cover the key points and then move to questions and answers ahead of some more calls that we have with some of you in the coming days and weeks. Look, clearly FY 'twenty two 'twenty one proved to be very challenging for Synlay. And after 9th straight year to profit, we really are barely disappointed to post our largest ever financial loss and the only loss we've ever posted as a listed company. That loss is $28,500,000 on an NPAT basis and is $102,800,000 delta from our NPAT last year. It's no secret to anyone that the shape of the business changed dramatically in December following a very large forecast reduction from A2 and that means that our inventory levels and demand and our outlook needed to be substantially reset. And then during the final quarter of the year, the Board and management worked together to build a really comprehensive picture, not just of the last 12 months, but the last 5 years, how the business had developed as we look to build a robust plan, a comprehensive plan to move the business from where it had got itself to back to a position of financial strength and pursuing our strategy. And we do hope that today's plan or this announcement today will give investors in particular and our shareholders and our suppliers confidence in our path forward. You'll hear 5 parts of that plan. Firstly, we reviewed the strategy and we remain very confident, but execution clearly needs to improve. We've aligned our structure to our strategy and then Grant have appointed a CEO who we believe is really well suited not just to the strategy, but to the way that we have structured the business and is used to working with businesses in the structure and we think we'll be able to drive the results we're looking for. Early in the process, we had to reset our banking arrangements and we had a very strong relationship with that bank and a strong plan to get ourselves to where we need to be and long talk to that. Important to that is making changes to release cash from our inventory and improve our working capital management and we'll talk to those things. But most importantly, we've built a robust plan to return to profitability over the next 2 years. And so with that quick summary, I'm going to hand to Graeme to introduce the new CEO and also talk about governance changes that we had proposed. So Graeme Melton? Yes. Thanks very much, John. Certainly been a difficult year for us. So turning to today's announcements. Firstly, I'm very pleased to announce our new CEO will be Grant Watson. Grant has most recently been the CEO of Meeraka Dairy Company. And before that, he was at Fonterra for 10 years. He had various roles there, including hitting up the Global Food Service. And he worked in Frontera Brands and he was at one stage the Managing Director of Tip Top prior to its sale. Prior to that, he worked for McDonald's actually for approximately 15 years and he became the COO for New Zealand. Grant will start with Synlait early in the New Year, and he brings a wealth of dairy sector experience plus a proven track record of success and materially transforming businesses and achieving sustainable results. So it's a great pleasure to welcome Grant to lead our Sunlight team. Secondly, I'd like to turn to our Board and announce some changes designed to refresh and strengthen our governance. As announced in 2018, actually, I will stand down from chairing Sonle after 17 years in the role. So that allows room for new talent, but at the same time, the Board has asked me to stay on as an advisor for a period of about 1 year. So I'll step down when Grant starts and our new Chair will be John Pena. So John's ideally placed to be our new Chair, while we go through the recovery phase and to assist directly embedding in the new CEO. So our constitution requires that the Board Chair be independent, which John, by way of being a recent CEO, is not. And therefore, there will need to be a temporary change to the constitution. And we do see independence as best practice and therefore John's appointment will be for a relatively short period, something like 1 to 2 years. And finally, filling my position as a new Independent Director on the Board will be Paul McGillivray. Paul also brings strong sector experience to the table. Paul has been an international had an international career in dairy. In fact, he reported to me at one stage in London and before he returned to New Zealand. And then he became the CEO of Hort Research, which is now Crop and Food. And then the CEO of Tartu, which is certainly the most successful dairy company in New Zealand, dairy co op at least in New Zealand. And for the last 6 years in his career, he's been in governance. So in summary, during the next period, we will retain the experience of John and myself whilst bringing it on the new skills of Crownton Pool. So for those of you that have got the slide in front of you, you'll see how the Board will look next year with John as the Chair and then 3 very strong independent directors in Simon Robertson, Sam Knowles and of course, Paul McGillivray. And they're complemented by the bright directors being Richardson and the 3 directors from Shanghai. So I'm happy to take any questions at the end, but would like to hand over to Rob Stoll. And please note that Rob is no longer the Interim CFO. Rob stepped up at short notice into the role in May and has done a great job in difficult times. So the Board was more than happy to confirm him into the permanent role last Friday. So congratulations, Rob, and over to you. Thanks, Graham, and good morning, everyone. I'm just on Slide 7. Bob, firstly, obviously, as John and Graham have mentioned, it's been a very challenging year for Sydney. And you could say that COVID hit Sydney late and hit it very hard. The graph is right. I mean, it shows supply chain consumable effect. That's exactly what happened to us. As we were moving into FY 'twenty one, we expected to have almost double or a big increase in sales to what we had the previous year. And we set ourselves up through buying raw materials, manning our plants, producing base powder. And through the next few months, our consumer product sales dropped around 35%. So that was a big impact that we saw in FY 2021. And most of the reason that our result was down. However, as Adusto, we did do a discovery piece of work in the last quarter, and we found that there was other underperformance issues in the company. And we'll talk a little bit about that in the coming slides. Look, the actions taken in the last quarter will strengthen the fundamentals of the business and we'll set it up for success in the future. So the loss was 28,500,000 dollars and that was within guidance range. Just flip to Slide 8. We've got the key metrics there. So revenue up to $1,400,000,000 up $55,000,000 That was mainly due to the 12 months of results from Dairy Works up from 4 months the previous year. The EBITDA was down $132,000,000 to $37,300,000 The operating cash flows were down 85 percent of just $16,000,000 And our capital expenditure was $140,000,000 That was down from the previous year as we wind down our capital program. Look, there was some good news in this. Our net debt was down just under $480,000,000 We had expected to be at $5,000,000 in front of it. So that was a little bit better than we anticipated. And our milk price, the total average milk price is $7.82 is our 2nd highest and our base milk price is our 3rd highest in history. So there's some good news within that slide. Moving on to Slide number 9. What we've tried to do here is demonstrate how the result dropped by $102,800,000 from $74,000,000 profit last year to $28,500,000 And I won't go through this in immense amount of detail, but I want to point out a few key areas here. Our infant formative volumes dropped considerably, 35%. And with that, all the production recoveries from that product and costs, made the impact was $55,700,000 We'll split out the stock rebalancing within the next part of $33,000,000 What that is, is in FY 'twenty, we've reduced around 60,000 tons of infant based powder. And due to the demand downgrade, we had to unwind that back to around 19,000 metric tons. So it basically says here we made a little bit too much base powder in FY 'twenty and we didn't and we had to account for that in FY 'twenty one and that hurt us. So those 2 big those bars obviously the big impact and through the rest of the bridge there, you can see is a little bit down. That was due to a little bit more volume, but the price is softening. Ingredient volumes was up 8,400,000 when we stopped making infant based powder in FY 2021, that milk was diverted to ingredient products. So that's their whole milk powder, skim milk powder and AME products. And so that saw a recovery in our profitability on that side. And then the next part, which is the ingredients performance, so that's down $20,000,000 So this is after tax. So that $20,000,000 is made up of a number of factors, some of which are external factors, so such as the fact that we don't produce butter. So butter prices were very strong in FY 2021. So that's squeezed down margins against the milk price. But also getting all those ingredients products coming through, we just went and set up for it. So that affected the sales volume and our mix. And ultimately, our delivery at the end of the year is combined with the shipping constraints. We ended up finishing the year with 13,000 metric tons of products, which normally we would sold through in that year. So moving forward, liquid is a little bit down. That's due to the fact that pantry stocking of milk products was higher in FY 'twenty than rather than FY 'twenty one. And we also commissioned the UHT cream line in this financial year. So that was a little bit down. We expect that to bounce back next year. Consumer Foods contributed to $9,400,000 That's essentially the Dairy Works and Talbot Forest business. That was a little bit down on what we expected. And that was due to butter margins being squeezed with some new entrants to the market. Also a little bit of profitability drag from Talbot Forest Cheese and some inventory write downs. Again, some of these items are one off. We don't expect them to not appear again next year. So that essentially takes us through to the $28,500,000 impact. Now for FY 'twenty two, we do see us getting back to robust profitability. And what that means is it's going to take us a couple of years to get back up to the sorts of profitability that we experienced leading up into FY 2021. And some of the reasons that we feel we're going to bounce back reasonably strongly in FY 2022 is because ingredients margin performance will come back to some of those issues that we encountered in FY 2021, we see it's being one off and will bounce back on that side. Ingredients volumes, so the 13,000 metric tons of product that was sitting in inventory at the end of FY 2021. That will come through in FY 2022. Our infant based powder production will increase even on service of volumes, aging volumes and infant volumes that will bounce back. We'll have increased lactoferrin volumes next year as well. We're going to have improved dairy waste contribution. So that will bounce back pretty much stronger next year as the expectation there. Significant operational cost savings there. We have looked hard at both the Synlait business and also the Dairy Works business. And there's a range of initiatives in there which are happening. And last one there is our sale and leaseback of our Richard Pest Drive site in Auburn, which is a canning and blending site. That was a major release we did a couple of weeks ago. That delivers $30,000,000 which we can place against debt and also will deliver a one off gain on sale of approximately $17,000,000 So that's a very quick flyover bridge to last year and also some snippets of why we think FY 'twenty two is going to be a lot more positive. Moving forward into Page 10. Look, this is some production and inventory points. So as noted, our production of consumer packaging and infant reduced in FY 'twenty one. There was a big reducing of trends in prior years. Our infant based powder was down, milk directed to homewell powder, skimewell powder and AMF. And this resulted in a lot of this unplanned ingredient volume. So that's all in here. Now the key point from this slide to take is that ending inventories in FY 2021, around 30,000 metric tons are very high. We expect them to come down quite a bit in FY 'twenty two. So there's some guidance here, at least 15,000 tons next year. Moving on to Slide 11. We've tried to align our business unit performance reporting to the new matrix structure, which we'll talk through shortly. This is a step towards trying to be more transparent, both externally and internally on how business units are performing to give greater clarity. So for each area, you can see we've got revenue and sales volume and gross profit per metric ton. And I see and across nutritionals and ingredients, you can see there that our gross profit per metric ton has come back down quite a bit in FY 2021. Slide 12, same thing. You've got the liquids business unit is running at a loss and also the consumer foods, which includes dairy works and some commentary around what we saw happen there last year. Slide 13, operating costs. Look, the key point here is we are actually holding our costs static against last year. There is an increase that's essentially DairyWorks full year effect. And the other thing to note here is the recent news of our reorganizational restructuring work. We expect savings of between $10,000,000 $12,000,000 per annum. We expect around $7,000,000 in FY 'twenty two. That's all mostly up against the gross margin line. Slide 14, cash flow and capital spend. So our operating cash flow were obviously low in FY 2021 of $16,000,000 That was mainly due to the less consumer packaged infant formula volumes coming through and also the fact that we didn't sell down that 13,000 tons of ingredient product. We do expect with the work that we've been doing for cash flows to come back strongly in FY 2022. We normally have around $100,000,000 in operating cash flows per annum. We expect it to be a lot stronger than that this year. We also see our capital spend winding down considerably. We still have spend on projects such as ERP system project, the multinational customer, the work that's going on in Pocono and some other operational CapEx, but essentially that build up phase is phasing down each year. So that's positive and will allow us to pay down some debt this year. On Page 15, coming to net debt and bank refinancing, Doug, this is a big focus for us over the last couple of months. Our net debt was down to $479,000,000 That's still a lot of debt. We obviously received the equity raise proceeds across this year. We will receive the $30,000,000 proceeds from the sale of our Auckland premises in October this year. So that will help to reduce debt. Our government level debt EBITDA total debt EBITDA level is 4.5 for FY 2022. We expect to be well below this in FY 2022. We're tracking really well in that regard so far. And we expect our balance sheet to return to normal metrics within the next 2 years. We obviously we did a refinancing big refinancing this year in the last few months and that's allowed us to have some really good robust facilities out for the next 2 years. So the working capital that extends for 1 year, and we renew that and then we'll have the other facilities that go out for 1st October 2023. That's a really secure platform for the business. It gives us increased certainty and look really positive and constructive relationships with the bank. We've banked with AMD and BMD for a very long time now. And those relationships were really important as we work through that phase. And I just want to thank the banks for their support over the last couple of months. And that's me. So I'll hand back over to John to talk around strategy. All right. Thanks, Rob. And again, that's a quick skim through a lot of detailed information. We are trying to make sure that we are providing everybody with lots of information about the company as we build that plan to go forward. The strategy, one of the key things we've done in the last quarter is review again our strategy and making sure it remains fit for where we're heading. The strategy has matured and it starts from us having a very clear advantage of being a small part of a big and important industry here in New Zealand and an even smaller part of a very important global industry. And over the life of the company, we have looked to position ourselves within that under our purpose of doing milk differently for a healthier world. And I hope that people will see as we work our way through and head into discussion, the work we've done over a very long period of time, positioning our company with respect to leadership and environmental issues, animal welfare issues, which are at the heart of the production end of our dairy industry, we think has set us up very well for the time that the company finds itself in now. And I'll talk a little bit to how we're looking to take advantage of that positioning that we have built up over a long period of time. We remain a growth company and we remain focused on growing our revenue out to $2,000,000,000 to get the scale that we need, but also because we see each of the growth opportunities as profitable in their own right, albeit that we need to make changes to drive those financial outcomes that we need to achieve and we will talk to that. You'll hear us increasingly talking about the business in 4 parts as we grow towards that $2,000,000,000 in revenue. Ingredients is a very important part of the business. It's where we started and our early profitability was carved out in the ingredient space. So that's our whole milk powder, skim milk powder and AMF that we manufacture to high specifications for key customers. A very small part of the global industry, but something that we can and should do very well and very efficiently here at our Dunsandle site and on our nutritional dryers when they're not being used for base powder. Our nutritional business is at the heart of our business today where we've built a world class nutritionals business with everything from product development, the technical capabilities that be making world class products all the way from ingredient sourcing to delivering final packaged consumer products and what is the most heavily regulated and sensitive product group globally. And we'll talk about both A2 and customer S in terms of the importance of that will continue to play for a long time going forward. Our liquids business is quite different. That is new. It is a new area of business for us that strategically we think is very important to develop because it is the new opportunities and technologies that are being used and increasingly demanded by the markets that are openly accessible to us that have developed economically very quickly in the last 30 years. And so we need to be in consumer packed dairy products and food service products to be in the premium end of dairy in those markets. And so this is something we've invested both in R and D and implant and increasingly in business development opportunities and we continue to believe this will be a very important part of our future. And then finally moving to branded product, learning to work directly with consumers, first in the New Zealand market with a very clear eye on international opportunities alongside the other elements of the Finlay business, potentially with some of the customers that we have in our B2B business, but also other opportunities that we see developing over time. And that started with the Dairy Works acquisition and we are increasingly thinking about how we integrate that into our overall operations. So if we think about the year that's been, Page 18 gives a little more detail on some of the numbers in behind Rob's earlier explanation of what happened to the business as we dealt with a very large turndown on the forecast outlook for the A2 business when we were preparing for growth in that part of the business and the impact that they had on the financials of the company in FY 2021. But that event caused us to look further. As they say, when the tide goes out, the rock starts showing and we did identify we took the opportunity to take a very deep look at the way the company had developed. And we ran what we call a discovery project inside where we looked back across all of the metrics, financial and physical, through the company over a 5 year period. And what became clear was, firstly, the business had been slower to develop than we had planned, while the year reinforced the importance of diversifying both within our nutritionals business and also building high earning categories away from our nutritionals business for the future, it was clear that we built in costs faster than we had developed that business. And the third thing that was clear was that our use of capital had become suboptimal. Now some of that is tied up in the same problem that our large capital projects were completed delivering capacity well ahead of their ability to onboard. But we made some choices where we held that manufacturing capacity in reserve high value opportunities when perhaps we could have got the plants up and running with lower value products and then grown into higher value opportunities over time, which had traditionally been our strategy. Beyond that though, our maintenance CapEx has been too high for what is essentially new plant end to end through the business. Our oldest pieces of plants are only 13 years old, and we have many parts of the business that are only 5 years old or less. The second area or and the third area that we were using too much capital was simply in our accumulation of stock. And again, in Rob's presentation, we talk that we give visibility to the accumulation of stock over some years and our plan to bring that stock back to what we see as much more normal levels, which will release cash to allow us to finish out our capital projects in the next 12 months and see significant debt repayment well beyond net earnings after tax. So I guess the key question that we grappled with in the last quarter is why did it take us to be to figure all this out. And I think that where we landed was that our structure had not kept pace with our strategy. And so we've gone through quite a big design exercise where we are moving to a matrix structure where we're aligning all elements of the business to the customers that we serve. We've broken it into 4 parts being nutritionals, ingredients, liquid and then our consumer business, which is DairyWorks. And acknowledging that each part of that business needs a strategy of its own, not just for status quo, but to deliver highest and best results. So for example, our ingredients business needs to be efficient, focused on yield, cost, quality and throughput and must have a simple sales strategy designed to optimize product mix where we can optimize plant throughput and keep our cost structures low. Our nutritionals business on the other hand must be very quality focused and will bring a much higher cost structure because of the demanding nature of those products. Those big enough to stand on its own and to have a management structure from manufacturing and supply chain all the way through that is focused on those customers and on that part of the business to avoid costs moving into unnecessarily moving into other parts of the business. And then our liquids business, which is brand new and is all about R and D and new customer development and business development again needs quite a different approach to make sure that that reaches its potential. Adam Grant, we've chosen someone who not only has deep experience in some of the areas that we have underperformed to the greatest level, he's used to working in these structures. He had led end to end processes as he has developed the international food service business of Frontera, which has really been one of the big business success stories out of New Zealand in recent years. He understands what it is to make different parts of the business, gain the advantages from working as part of a whole, but with the focus on outcomes that each area needs. And that's how we believe we will see significant improvement and performance over time. So if I go to the just a quick update on these four areas. Firstly, our ingredients business, as Rob said, we undersold last year. We had some issues both in price and phasing as we had some quite large changes to plan that flowed from a big change in plan mid year to make much less base power. And therefore, we had milk flowing to ingredients. Our plan is to grow our ingredients business a little bit. We can we see there are some plant efficiencies we can achieve. And with Pocono coming on stream and San Diego D3, which is our 3rd nutritional dryer here, we can retire D2, our 2nd dryer to ingredients and save some costs and gain some efficiency and over time process more milk to manufacture more ingredients. And the marginal returns for extra product coming through the system are very high. We're also very focused on our Made With Better Milk program. This was launched in the last 12 months with an explicit aim of helping of developing the opportunity that we have built over many years working with our farmers to be using leading practice around environmental management, animal welfare, the way they work with their people on farm and of course the quality of their product. And what we see from our large multinational customers in particular are some very bold promises that they're making their consumers in terms of the way they will work in the world and down through supply chains. And we see ourselves as extremely well positioned to partner with them in terms of delivering products with known and authentic traceability back to farm practice that is better for people and better for planet. And we see that turning into some quite significant financial opportunities for us. If we go to our Nutritionals business, the A2 Milk Company remains our most important customer and we expect that to be the case for some time. We are continuing to work with them on new product opportunities. But of course, the most important thing probably in our whole company is making sure that we achieve the regulatory authorities from China to continue building this business in partnership with Aytu supporting them as they build their brand going forward. We're working very closely with Aytu on that process. We've provided some visibility to the timelines required to move our way through the regulatory process. And I can confirm that we're well prepared and we're confident in achieving a good outcome there over the next 12 months. If we go to Page 24, we want to give just a little bit more visibility to our 2nd major customer for our Nutritionals business. During the last 12 months, we in November 2020, we signed an agreement. We can't name this customer for they're a listed company. They some of the confidentiality arrangements we have with them is that at this point, we are unable to name them. But what we can say is that they are a major international multinational and a global leader globally, but especially in the Asia Pacific region. Their product grouping has been growing very quickly in the last few years and we are working with them on what is what we expect to be a very long term relationship to manufacture a group of consumer packed nutritional products. And that will be stated on the Pocono plant. We would expect we're working you'll see from the timeline there that there's quite a lot of work and I would note a slightly higher CapEx requirement than we had earlier indicated being $85,000,000 as we refit not only the coconut plant, but also our blending and canning operation at RPD and build a flexible sachet filling line, a high quality sachet filling line, which will be built on the Pocono site in the next 12 months. And once that all comes on, we would expect to see our consumer pack volumes increase between 35% 40% at that time. So there's a customer that will bring significant volume from start up and then we see opportunity to continue to grow that business from that point. On Page 25, we're making what we are seeing is in the same way that we saw base powder volumes going down, 3rd party base powder, the volumes that we had got used to manufacturing for 3rd party customers, particularly multinational slip away. And it's being driven by quite a big change in the Chinese domestic market. Over the past 2 years, the top 10 local brands have grown significantly in terms of their market share and that's been at the expense of the multinationals. What we're seeing is new demand coming from China for base power manufactured to some of those multinationals, the products that we can send there under the current set of regulatory under the current regulatory regime. And we see that as quite promising and we are engaged with some customers that we would expect to turn into significant volume. On Page 26, I talk to our liquid business. This is new. It is a small part of the business. It started up with fresh milk supply to food stuffs in the South Island. You'll see there we're about to launch what we see is quite an innovative product that we'll be working on for some time, which is a swapper bottle, which we are trying in the coming weeks with food stuff out of Ireland. We expect to be it's all going to plan. We expect to roll that out. That is a high margin product. It is a product that has a very low environmental footprint with a container that has become the benchmark in terms of food quality in stainless steel and one that we see having a very life a long shelf life that's backed by a big social media marketing program where people can watch the life of the bottle, how many times it's been returned. And we're looking for the change that people have gone through as we've got used to not carrying plastic bags at the supermarket, but taking our bags back to the supermarket is sort of a major cultural shift. We think we've seen this happening in offshore markets. We think that will happen here. So very important positioning point for Finlay going forward. You will also see a UHT product a UHT whipping cream product there where we're deep in negotiations with a key distributor for the Chinese market and something that, of course, coming CEO will bring a huge depth of experience in terms of developing that important and high opportunity or high potential opportunity. Consumer Foods, Dairy Works. Dairy Works has underperformed in the last 12 months for a specific reason and that is that our Torbit Forest Cheese operation has not been operating profitably. It has been operating significantly at a significant loss. And we have made the choice to close that factory for 2 years while we go through some changes that we need to make to bring it back in profitably involving recovery of way here at the Dunsandle plant. So we're making a significant cost saving in the next 2 years and then expect to bring it back to production in a profitable way. I'm going to turn now briefly to Page 29 and talk to full year guidance. So we're not putting a number on this, but what we are saying is that we expect to return to robust profitability in FY 'twenty two. And what that's based on is, firstly, return to normal trading conditions and tighter management of our ingredients business. As Rob said, we will also have higher volumes flowing into that business, which is product that was not sold or shipped in the last 12 months as we bring down inventory. The second is that we expect improved infant formula based powder volumes and that is even when our key if we don't have growth in our IF in our finished infant formula business, we're still going to see improved base powder volumes and we do see potential for growth into the Chinese market inside this financial year. We see a growing contribution from our liquids and consumer foods business over the next 12 months. And there are significant and targeted cost savings. And these are coming from Simile Dairy Works and Tolbrook Forest Cheese. In the media, you will have seen us that in this week, we're talking about the cost savings that are flowing from Simley, but we are also seeing cost savings and release of inventory providing cash from the Dairy Works business and the Talbot Forest Cheese businesses as well. We see that profit continuing to build through FY 'twenty three as we ramp up new customer at the Pocono site and ongoing growth, which we expect to see from liquids and consumer foods and bringing the cheese business back into 2024. As Rob explained and hopefully we've provided sufficient detail that you'll be able to work out how big the numbers are, but we're planning significant reductions in inventory here at Synlait that's already started and hence slightly lower net debt than we were projecting back in May at year end. But that will continue right through the year and we expect to close at significantly less inventory both here at Sunlight and at Dairy Works at the end of this financial year. That will release cash well in excess of our earnings and enable us to finish our CapEx and bring debt down with a view to bringing debt down to ratios that we feel comfortable with over a 2 year period. So in short, to summarize, we are confident in our immediate outlook. We have reviewed the strategy and I'm very happy to take questions on that, but we've divided up the strategy into its path to improve focus on execution. We've reset the organization with quite a big change process that we're continuing to work our way through, but the results we confirmed with staff our plans on Friday. We appointed the CEO who we believe not only is the right CEO to lead the company forward, we believe he's the right person to change the way that we work with a greater focus on results and to help us run a more complex organization really well into the future. Now Rob did a great job of getting our banking arrangements reset and we've got a strong relationship with the bank. We continue to review operating performance relative to the expectations. And as Rob said, we've started the year reasonably well. We're making changes to release cash and improve our working capital. And most importantly, we have a plan to return to robust profitability as soon as we can. Look, I know that is quite a long presentation and there's a lot more material we didn't cover. But at that point, I'd like to hand over for questions that might be there from the listeners. Thank you. Your first question color on volumes and the uplift. I guess what I'm trying to understand is the volume uplift, I mean, what growth is that implying or assumed over the coming years before they actually transition to you? Is there any growth assumed or is it all existing business that's coming to get to those levels? And then secondly, existing business that's coming to get to those levels? And then secondly, the margin on that volume, should we be thinking about it at a similar level to what you're achieving in that segment today? Or is there something that we need to be aware of with that? I'll get Rob to answer the margin question. Look, it's quite a different business than we've worked with in the past. A very large they have a large position in various markets around the world. And then as part of their own long term planning, they have a very small number of third party arrangements that they put in place from time to time. And then they tend to work with those parties over long periods. So we're not it's not reliant on them growing those markets. We have a very good relationship with them where we're constantly looking at the markets that we are preparing to serve with them. And we're looking at their numbers with them month to month to month. It's already sort of getting those sort of sales and operational planning processes between us are already up and running. The numbers that we're talking about are pretty much where they are now. They could be higher and they are based on existing products and existing markets, not products that we need to grow to get to those volumes. I'll hand over to Rob to talk to margins. Hi, Chelsea. Look, obviously, there's some commercial sensitivities around this, but what I will say is they are a hell of a lot higher than our ingredient products and a little bit lower than what our current nutritional products are priced at. So good really good value added business. It's slightly different business though and that they bring more to the partnership than we're used to. So they will it's not exactly like for like for I think we're doing. So in terms of there's various things in the supply chain that we are that make it a little different. Okay. Helpful color. And just second question on Dairy Works. So I appreciate you've called out a few one offs and things are going to change going forward. I mean, is there a if you took out the Talbot's loss and the inventory write down, what's the go forward EBITDA that you would have had in FY 2021 as sort of a baseline for us to understand thinking into FY22? So the how big is the drag in top of forest cheese that's been in the consolidated into the Dairy Waste number? Yes. I'm asking the question to Rob. Yes. Okay. Look, I think it's not usually material and that's part of it, Chelsea. I think we were giving guidance around that business being between $15,000,000 20,000,000 dollars EBITDA previously. Obviously, we haven't got there this year, but we expect the value well within side that range going forward and with the measure that we've taken in the last few months. Got it. No, that's helpful. Thank you. Yes. And just to add to that, I'll point to in the guidance, we talk about significant cost savings, not just here at Dunsandil, which are the ones that we've been a little more about, but also within the Gear Works business and that Talbot Forest. So there's been significant cost savings achieved in both of those businesses in recent months. Thank you. Your next question comes from Adrian Oldbourne from Jarden. Please go ahead. Good morning, John and Rob. Just the first question around the Nutritionals guidance for FY 'twenty two. Like if you sort of take the various factors on year end inventory and the uptake that you sort of signaled on the manufacturing side of the production volumes, Is it fair to say like the sort of the continued tax volumes are sort of assumed to be sort of flat year within that? Or is there some other sort of change in both installations with A2 that's a bit of a mix? I presume getting that the volumes are a lot more sort of skewed to Chinese label. We our outstands option for our existing finished hemp formula business is reasonably conservative. We need to make sure that we're able to meet any uplift or growth in demand that might come through. But it's probably fair to say internally we're being a little bit more conservative than the market is at the moment. But I don't think that's because we have a better view of where the market might go. And actually, we have growing confidence in the way that to managing their business and developing the market and the way that they're thinking about it. I think that we're quite positive about that. But we had felt that it's prudent to make sure that we manage our business pretty conservatively and base our financial projections around a pretty conservative set of numbers given the year that we just had. So we're not when we talk about returning to robust profitability, it is not expecting any significant increase in the volumes on the last 12 months. Just to sort of clarify on that, just in terms of the inventory reduction that you sort of pointed at that space for the financial 'twenty two year, is that attained in the way that you do business with them? Or is it just for a fictional level of the sell out volumes to sort of flattish even though you've got a benefaction uplift? No, it's generally it's just this bullwhip effect that we've been talking about now for quite a few months. We're in our business to get manufacturing efficiencies, we have been building up quite large volumes of work in progress of base powder, which is there to be blended into final products as a second step. And with the current outlook, we don't need it we don't need anything like as much as we turned out. We don't need as much as we had on hand. It's not financially as efficient to have so much on hand. And so we've run that right. We're running that down. And that's part of the story. But if you look at the there's a detailed graph in here that had begun through FY 2021. So through FY 2021, we've really started to run those base charges down. That's what had quite a big impact on our fixed cost recoveries or lack thereof. And when we talk about fixed cost recoveries, these are genuine costs that have sat in the business and that we're only now releasing through the restructuring that we're just undertaking or that we're in the throes of undertaking. So we've maintained a cost structure that's been high enough to do much more product. We're taking that out of the business. It's really internal planning and processes. It's not a new agreement with A2. We're able to meet our agreement and obligations and they provide in some ways, it's probably better providing them with fresher beta product than we have been able to in the past. And I agree If we did see a recovery in AC volumes, we definitely got the capability to ramp up base gas production very quickly still. Okay. That's good. Thank you. And maybe the same question, maybe for you, Rob. Are you able to sort of just in terms of the better than expected net debt, are you able to sort of process? Is it mostly just the fact that you sold a little bit more of the excess ingredient pulling than you're expecting? And then just related to that, can you give us sort of an indication of the CapEx for the year ahead? And then post the review of the maintenance CapEx being sort of too high, what should be the sort of level of maintenance CapEx going forward? Yes, sure. Adrian, look, I'll do the capital expenditure 1 first. Our capital expenditure for next year is going to be circa $90,000,000 to $100,000,000 So again, another step down on this year. We've still got the Pocono multinational customer project to finish off. We still got the Timu project to finish off and a couple of other things. The operational CapEx for the business, if you include both Sinle and Deerwood, should really be sitting under $20,000,000 per annum. We'd like to see a little bit lower than that if possible. But year on year around $20,000,000 We still will have and have to invest in technology and stuff like that going forward, so the contents of that. With regards to the net debt, the main reason that we came in a little bit low was 2 or 3 factors actually. So our capital spending phased more into FY 'twenty, so we've got a bit of a mix of receivable silent customers coming through in the end of the year, so we've got a little bit extra money there. And there's some really good working capital practices that even did us a little bit better than what we anticipated a couple of months earlier. Okay. Thank you, guys. Thank you. Your next question comes from Nick Ma from Macquarie. Please go ahead. Hey, guys. Just a kind of big picture question. Previously, there was a chart in talking about a $200,000,000 kind of value opportunity across the business. Where do you guys kind of step on the view on that going forward? Sorry, just to repeat that. I didn't quite understand that. Yes. So it was previously a kind of chart looking at the kind of opportunity to increase earnings through kind of value across your asset base. So kind of extracting premium margins and kind of shifting mix and the number was around $200,000,000 of long term upside. What's the kind of view whether that's still a kind of relevant long term number? Yes. No, I understand that. Yes, we've done we think that that number is still robust. We've probably got a slightly different view on how to deliver it. More on the there's more opportunity around cost savings and efficiency out of their underlying business. We're probably it's fair to say that we are a little more if you line up that chart, which I've just now flicked through to, many of the same things are at work. We're just advancing them and giving them a little more visibility. So things like the foodservice creams made with better milk, bringing the multinational customer on Pokemon, moving to branded products, formulated liquid nutrition type products, capturing all of the value of milk components that we use with Talbot. So the same themes are there. We're seeing the same just getting much more focused on how do we deliver them efficiently and how do we do that with while minimizing capital spend. So we've got we've spent enough capital we think to get through that $2,000,000,000 in revenue. A lot of these projects, some of them need a little bit more capital and so it's about emphasis and priority. We're certainly prioritizing projects that can be delivered from existing customer systems and processes without any more capital and while making out create an opportunity to make the business more efficient. And what we need to do we've also got more focus on what we need to do in the parts. But what we need to do in terms of made with better milk, which is essentially built on our ingredient platform and our lead with pride milk supply base is simply develop the customer relationships. We can do that while increasing throughput and efficiency of our ingredients operations. The customer at Pocono, that's been very much about building the relationship with that customer, searching for future opportunities and growth while investing the capital. And then the liquid part of the business, things like liquid and formula and some of the liquid branded products that we have, that's really about picking up the R and D that we've already invested in and developing the market opportunities and something that we think that Grant Watson is going to make an enormous contribution to in his time with us. So it's not a U-turn on that at all. It's just how do we deliver it to it quickly and how do we get and without increasing cost structures and particularly without spending any more capital than we need to. Okay. Great. And then in terms of Michelle's question on the 35% to 40% uplift from the multinational customer, is that against the current level of expected production in your business? Or is that against your FY 'twenty four expectations if that customer wasn't there? That's against our FY 'twenty four expectations. So we've taken a reason to consider the view in terms of our way to here. What is yes, so we've got a conservative outlook for other customers. It's but it is against where we expect to be in FY 2024. Okay. Thank you. Thank you. And just to be clear, we expect the slow build from other customers, not a decline. Thank you. Your next question comes from Stephen Ridgewell from Craig's Investment Partners. Please go ahead. Good morning or actually good afternoon, I should say. The first question is for John. I just wanted to clarify that with the debt structure refresh and the outlook provided today, the Board doesn't see the need for additional equity to fund the company's operation and CapEx plans over the next couple of years, so it hasn't been referenced explicitly? No, good question. No, we don't. So I'm sure that as you work your way into the detail provided and look at the magnitude of unwind that we can get out of inventory that you'll spend the cash flows that we expect in the next 12 months that you'll feel comfortable with that. We've got to hit our numbers, but we've set up reasonably conservative set of numbers to hit and we're on track. So no, we don't expect to raise capital in the next 12 months. That's helpful. Thanks, John. And then if the company was to raise capital down the track, I mean, what would be the potential uses of that capital? And just sort of in light of the trend in the last few years of kind of diversifying operations away from the A2 relationship, what would be the kind of primary uses? Well, it's not on the plan at the moment. So we this is a plan to make sure we deliver the opportunity down the capital that we've already spent. And that is in 3 places. That's in plants and equipment. That's in business that's in product and business development. And of course, quite important tool this is our underlying ERP system where we're moving to a SAP based system that's been quite a large investment that is going to be put in place in December. So we see significant growth in the categories that we've laid out ahead of us without the need to spend more capital. So we don't have a plan to raise capital at any point because we see debt coming down reasonably quickly, while we grow out these other areas of business and for the next for the foreseeable future anyway, our focus is going to be on delivering from the capital and the strategy that has been spent rather than hitting into new areas of business. That's great. And maybe just one last one for me and just also on the kind of medium term kind of outlook. Is the 20% return on capital kind of still a realistic target for us to think about, John? Or was the Board in the strategic review suggesting returns a bit lower than that? And can you just share your thinking about with us where you think certainly what returns can earn on a medium term basis relative to its industry and peers? I'll hand it to Rob. That's Steve. Hello. Look, we would definitely be wanting to get close to that number. We obviously, any new business that we come across will be at that. But actually, obviously, we need to kind of work back into that sort of range. If we go to a high level, the company is well positioned in terms of the high value opportunities in the industry. And we're a very small part of a very large industry. And so just as we got used to showing early in the life of the company very good returns to the capital that we invested, we do think that we're well positioned to get back to there, whether it's through improving the ingredients business by capitalizing on the investment that we've made and the quality of the supply chain, the amount we're investing with farmers in terms of their lead with pride programs and the other differentiated milk programs that we have in place. Our nutritionals business we think has a strong future and we the mere fact that we've landed customer is points to the fact that these days we're recognized as one of the global leaders in terms of manufacturing these products. We're very proud to be sitting alongside the rather third party manufacturers globally. And we would these are all the other companies that that number in the companies that we've aspired to be, but a limited number of third party manufacturers that that customer chooses to work with. And in our liquids business, we think that there's a very exciting future there as we build perhaps our own future and some of the very exciting products that we have developed. So if you look across the space, we're not in the low return categories of the industry. We're in high return categories of our industry and it's over to us to make those investments by building the company in the 1st place and in the way that we've set it up to make those work. And we think that we can. Great. Thank you. Thank you. Your next question comes from Marcus Curley from UBS. Please go ahead. Good afternoon. I just wondered if you could talk to what you think normal returns look like maybe at a gross margin per tonne in ingredients. Obviously, that's obviously the reference in terms of where the business could be heading this year? I'll get Rob to talk to him. But the graph there is that where we sort of disclose some of our products per ton in historic terms. But if I there's certainly a big pull down, big decline on FY on the previous year in FY 'twenty one. But I guess the point that we're trying to make is that in our discovery work, it's pretty clear that even by FY 'twenty, we had a cost structure coming into that part of the business that was higher than it needed to be. And so we would see I would like to think that we'll see a rebuild back to where we've been historically and with made with better milk potentially further. Yes. I mean, I think that's pretty good explanation from John. There's a lot of moving parts in here, Marcus, around how well we utilize the plants. We've got plans to fill up our plants further, all the cost efficiency that we're working on at the moment. And yield efficiencies will mean that we'll get back to what we've been used to in the past. We have much more robust returns for ingredients. So I think there's a lot of one offs in FY 'twenty one that you'll see explained in the back. Do you think potential inventory cost headwinds are a problem for the ingredients business, particularly in the first half? What do you mean by inventory cost, Marcus? Well, I suppose Fonterra talked to the fact that the last quarter of the year was particularly high. Milk price fell sharply. I think it's reasonable to assume that you've got high cost inventory heading into the first half. Do you think that's a is that a material impact for you in terms of the expectations for the ingredients business this year? Look, to be honest, yes, the way you explain it, that is fair. It is high cost products, Marcus, as we head into the year. I mean, most of that product that we held at year end has been sold through already. And as we move through the whole of FY 'twenty two, that product will be relatively immaterial. It's probably about 10%. Okay. And could you secondly, could you talk to the performance of lactoferrin? Obviously, with the new consolidation, you can't see the lactoferrin result. I just wondered if you could talk at least directionally to what happened on gross margin per tonne within that category in the last 12 months? Yes, look, yes, sure. So the lab procurement business is still really successful and really strong. We volume wise, we added another 3 tons onto what we sold the previous year, so that was good. However, we did see some softening in pricing, which means that our margins actually came back a little bit. And you can kind of see that on the bridge and within the pack. So look, the Ligatrarian business will continue to be really important for us in 2022 and beyond, Marcus. Are you seeing that stabilize on a gross margin per ton basis? Yes. I think it's fair to say we are. There's been a lot of talk about large lactoferrin capacity coming to the market, but there's more and more lactoferrin being built into product and it should be. It's a great product and actually it brings infinforming close to the mother's milk and that's the aim. Our lactoferrin is widely recognized now as one of the leaders. We would like to think it's the leading product in the market. And so we're seeing prices are actually a little firmer than we were expecting right at the moment. Okay. Thank you. Thank you. That does conclude our time for questions. I'll now hand back to Doctor. Panay for closing remarks. Thank you very much. Firstly, let me thank everybody for their patience. There's a number of investors on this call who have stayed with us through what has been a difficult year. So I acknowledge that and I thank you, particularly those who invested in capital raising, who participated in our capital raising and who have debt with us. So we're very mindful of that. And we're equally mindful that during the year things turned in a way that we weren't expected. I do hope that through this pack and in the days and weeks that come, people will say that we both Board and management are very focused on bringing the company through this period, returning it quickly to financial strength. And then getting back to the business of growing a great New Zealand company. That is what we are looking to do. That is what we firmly believe is there for us. And I thank everybody for their patience as we work through this and look forward to the various conversations to come. Thanks everybody for participating. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.