Good day everyone. My name is Ronnie and I will be your conference operator today. At this time, I would like to welcome you to the Synlait FY 2026 results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, and if you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. At this time, I would like to turn the call over to George Adams, Synlait Chair.
Thank you. Good morning, everyone. I am George Adams, Chair of Synlait, and it is my pleasure to welcome you to our FY 2026 full-year results conference call. Joining me on the call is our Acting CEO, Leon Fung, and our CFO, Andy Liu. They will take you through the results in detail shortly. First, I want to acknowledge that financially, this has been another difficult year for Synlait, and I appreciate that for our shareholders, that is challenging news to hear. However, we have delivered a major operational recovery in the second half, and just like the repairs to the company's liquidity, milk supply, and balance sheet over previous years, this is critical to our future. Synlait is now stronger and more focused than before and well-positioned to progress for recovery.
That is real progress, and I want to thank Synlait's team for delivering that, including Hendrik and Rueben, who you can see on the front of our investor presentation and annual report. There have been many long hours worked, and the board and I are grateful for that. I will now hand you over to Leon and Andy, and there will be Q&A after the presentation. Thank you. Leon.
Thank you, George. Good morning, everyone. Thank you for joining us for Synlait's full year 2026 results call. FY 2026 was a difficult year financially. It was also a year of real progress in our recovery. In the second half, operations stabilized, and this resulted in a strong improvement in financial performance. Today, Andy and I will cover the progress, the work still ahead, and how we will work to ensure Synlait's recovery continues. We will start by looking at our first half performance, as this is what has driven the overall result for FY 2026. The half-year result was impacted by three main issues: m anufacturing plan adjustments, lower ingredients returns, and deferred tax assets. The financial impact was significant. We posted a first-half EBITDA loss of NZD 34.7 million and an overall net loss after tax of NZD 80.6 million. Synlait responded with a clear recovery roadmap.
It has three interconnected horizons: s tabilize the business by fixing the fundamentals, simplify by focusing on Dunsandel, and finally, scale, creating a strategy to drive future growth. I am pleased to say we have made real progress on the first two horizons, stabilize and simplify. This slide shows some of the work we have done. This is the deep work that has involved resetting the fundamentals across four areas: operations and assets, quality, people, and revenue. In operations, we strengthened frontline leadership. We are investing in our assets, have improved production planning, and completed major projects to support long-term stability. In quality, we strengthened protocols and processes to align with new regulatory expectations in the key markets, including China. We also introduced new product checks and improvements and embedded a company-wide food safety culture.
For people, we developed our frontline and senior leaders, uplifted engagement, drove a new performance framework, and launched a new health, safety, and wellbeing strategy. We reset our revenue function with a strengthened business development team, broadened our infant formula customer base, progressed adult nutrition opportunities, and tightened pricing discipline. Together, these actions have built a strong foundation for recovery. Our key achievement for the year has been operational recovery. Manufactured in spec improved from 88% in FY 2025 to 93% in FY 2026. Production plan attainment rose year-on-year from nearly 92% to 95.5%. That is a huge achievement, thanks to our frontline teams. I am pleased to say that manufactured in spec was 99% for August. We are focused on delivering that consistently to reach that level of operational excellence we are aiming for.
You can see on slide five that operational improvement translated into a much stronger second-half financial performance. Reported EBITDA improved by NZD 77.5 million, u nderlying EBITDA improved by NZD 38.1 million, r eported net profit after tax improved by NZD 85.8 million, and underlying net profit after tax improved by NZD 33 million. These results show the benefit of a more stable business. However, the full-year result reflects the difficult first half. My final slide for you shows the overall results. The total group revenue for the year has increased to NZD 1.93 billion. Reported group EBITDA was NZD 8.1 million. Underlying group EBITDA was NZD 46.3 million. We have reported a net loss after tax of NZD 75.4 million, with an underlying net loss after tax of NZD 21.6 million. Net debt reduced by 14% to NZD 215 million. Operating cash flow was - NZD 183.3 million.
This reflects weaker operating performance and higher working capital needs. The good news is for our farmers. Synlait is confirming its second highest milk price in our history at NZD 10.07/ kgMS. This includes the incentives we pay our farmers above the base milk price. I will now hand over to Andy.
Good morning, everyone. Thanks for joining us. I will begin with the main drivers of FY 2026 result, followed with business unit performance, the North Island discontinued operations, cash flow, and net debt. Move to page eight. Let me start with the main drivers. Improved second half operations kept Synlait's recovery on track, although the full-year results still reflected significant first half impacts. The main point on the bridge is that volume was not the issue. Consumer and food service growth contributed NZD 2.3 million into bottom line, but that benefit was more than offset by price, mix, and cost. Price and mix reduced impact by NZD 7.3 million, reflecting higher portion of relatively lower margin products in advanced nutrition, and an unfavorable ingredients product mix, partly offset by stronger food service and butter price. Costs were the biggest challenge, reducing impact by NZD 39.8 million.
Operational disruption reduced fixed cost recovery and increased manufacturing, quality, and milk transport costs. Milk premiums also increased the costs. These impacts moderated in the second half. Other margin and income were mainly affected by unrealized foreign exchange losses at year-end. This was partly offset by Abbott TSA income. SG&A provided a NZD 1.6 million benefit. This come from closing Palmerston North office, lean our leadership and commercial structure, and tighter spending controls. We achieved these savings despite inflation and oil-related cost pressures. At the same time, we continued to invest in our people, systems, and core capabilities. Financing was a clear benefit. Despite negative operating cash flow, financing costs improved by NZD 22.2 million. This reflected improved banking pricing, better base rates, debt reduction follow the North Island sale, and more cost-effective CNH funding. After adjusting for one-off items, underlying impact was a NZD 21.6 million loss in FY 2026.
Go to page nine. I will show how these drivers came through across business units. The portfolio result was mixed. Consumer and food service delivered growth and stronger margins, while advanced nutrition and ingredients were affected by operation disruption, capacity constraints, and weaker stream returns. Advanced nutrition revenue was broadly flat, but gross profit declined 78%. The key issue was manufacturing efficiency with operational disruption, product plan changes, and increased cost from production catch-up. Lower lactoferrin sales also reduced the contribution. Ingredients revenue declined 15%, with gross profit down 26%. Lower volumes and constrained product mix forced us to produce more whole milk powder and sold into lower price markets in the first half. The mix improved later in the year, especially through skim milk powder and AMF. Consumer revenue increased 32%, with gross profit at NZD 51.7 million.
This reflected growth across export and private label channels, good butter price achievement, improved manufacturing recovery, and inventory management. Food service revenue increased 62%, with gross profit improving by NZD 15.6 million to NZD 11 million, t he first full year of positive gross profit. This was driven by 43% volume growth, improved pricing, lower fat costs, new China contracts, and expansion across Southeast Asia. Other revenue increased 32%, reflected tactical milk sales in order to manage surplus milk volumes and manufacturing capacity constraints. Next page, page 10. This page separates the North Island discontinued operations from the continuing business. The North Island sale is complete, making Synlait simpler and more efficient. The table shows the continuing business we are taking forward. The North Island result, including the gain on sale. Without the gain and related tax benefit, the North Island operations were still in loss-making in FY 2026.
Continuing operations generated NZD 1.68 billion of revenue and underlying EBITDA of NZD 46.3 million. This is the relevant baseline for assessing future performance. Now, we have a clearer operating base, with our focus and investment centered on Dunsandel and Dairyworks. Page 11. It shows how operating performance translated into cash flow and net debt. Cash remains the biggest financial challenge in FY 2026. Operating cash flow was negative, reflecting weaker operating performance and significant working capital build, which was mainly affected by higher receivables and inventory. Against that, the North Island sale generated roughly NZD 296 million of cash proceeds and materially strengthened the balance sheet. After operating cash outflows, capital investment, interest, and other movements, net debt finished the year at NZD 215 million. In summary, the second half showed clear improvements in operating stability and financial performance.
The next step is to translate that progress into stronger margins and cash generation, which continuing to reduce debt through disciplined execution and capital allocation. I will now hand back to Leon for the business update.
Thank you, Andy. I will now cover off the performance and the priorities of our business units: advanced nutrition, ingredients, food service, consumer, and milk supply. Advanced nutrition makes high-value products for early-life and adult nutrition. In FY 2026, we secured purchase orders from a new Middle East infant nutrition customer for commercial supply commencing in 2027. This is a significant win for the team as we seek to onboard new customers, and we are confident this partnership will scale up quickly. I am pleased to report we have a pipeline of customers keen to work with Synlait. This means we are confident we will field the capacity created by The a2 Milk Company moving its English label production. We have also commercialized Nutribase, creating a platform for adult nutrition products and multiple private label opportunities in Southeast Asia.
We also strengthened our dedicated business development function, a structured opportunity pipeline, and Project Lotus. This project focus on specialty nutrition using high-value ingredients, including lactoferrin. Looking ahead, our priorities are to grow the Middle East contract, onboard new customers from Southeast Asia, expand higher-value consumer-ready solutions, commercialize specialty supplements, and reduce exposure to any one customer or market. Our ingredients portfolio includes milk powders, milk fats, specialty ingredients for global customers. During FY 2026, we focused strongly on value over volume. This includes tighter pricing decisions, customer profitability modeling, and stronger sales controls. We advanced diversification across Southeast Asia and the Middle East, simplified product specifications, and strengthened sales facing, hedging, and risk management. With manufacturing stability materially improved, our future focus is to extract greater value from available milk.
That means disciplined pricing, stronger product mix, greater use of our infant formula-grade capability, customer-led technical solutions, and growth in higher-value applications. Food service delivered its first materially profitable year, supported by 43% volume growth, improved pricing, and wider geographic reach. We expanded across Southeast Asia, strengthened our Shanghai presence, and launched Synlait-branded UHT whipping cream in China. A new customer-owned brand partnership broadened our routes to market, while changes to the sales and marketing team strengthened distributor and end-user management. We will now grow volume and market share while protecting returns. We will expand through our distributor network, build on our China launch, and use Synlait product quality, grass-fed certification, and New Zealand origin to stand out. Our consumer business delivered strong growth through Dairyworks and its portfolio of brands. More than 5,000 additional metric tons of cheese was shipped to Australia compared with FY 2025.
Dairyworks brands delivered 11% volume growth and 17% value growth in the latest annual total. Value-added, grated, sliced, and snacking formats generated more than 55% of Dairyworks growth. Innovation remained important. Dairyworks Protein, launched in June, contributed 50% of natural cheese snacking segment growth. Talbot Forest brand continued to grow strongly, and Costco sales increased 133% year-on-year. Our focus on Project Hedgehog is to improve plant efficiency, further growth in Australia and Southeast Asia, new product development, and supply chain optimization. Strong farmer relationships remain fundamental to Synlait's success. We have almost 200 farmer suppliers. As mentioned earlier, we are confirming the second-highest milk price in Synlait's history today, NZD 10.07/ kgMS, including incentives for the 2025 to 2026 season. During FY 2026, we introduced a new customer-funded sustainability incentive of NZD 0.02/ kgMS.
This is focused on reducing greenhouse gas emission and expected to double in the future. We also delivered a new tool to provide real-time tanker arrival information, and our biodiversity program have now distributed more than 385,000 native trees across Canterbury. Our future focus is to grow customer sustainability partnership, improve the digital offer, and continue our market-leading on-farm support. We will look to the future now and explain how we will maintain the momentum we achieved in the second half. We are continuing to focus on our recovery roadmap. In operations, we have created a production plan to make the most of every drop of our farmers' milk. We will retain our focus on stability, strengthening our assets, and deepen our talent pool.
In quality, we are recruiting the Chief Quality Officer, continuing to reduce cost of quality, and progressing asset investment to maintain access to the key markets and reduce regulatory risk. For our people, we will continue leadership development, target critical capability, refresh onboarding, embed Synlait safe mindsets, and critical control assurance. We are focused on diversifying our revenue streams while aligning the product portfolio with plant capability, milk supply, and returns. As mentioned earlier, we will also deliver the strategy to scale of our success and share with you in 2027. We remain clear about the risks ahead and have active plans in place to manage them. Operational excellence. We will keep our focus on our plans and maximize returns from our Dunsandel assets. Leadership and strategy. We have a strong executive team at Dunsandel, and we will maintain that.
We will finalize CEO and Chief Quality Officer appointments and deliver a reset strategy in 2027. The a2 Milk Company volume shift. We have a new business pipeline, which means we are confident of backfilling this volume. Contracted commitment from our new Middle East customer have the opportunity to scale up quickly. Revenue, a s well as addressing our concentrated revenue stream, we are focused on protecting margins and ensuring all commercial arrangements add value for Synlait. Refinancing. We will continue working with our banking syndicate after showing them we can manage through challenging years like this one, whereas dairy support is very helpful, along with their renewal of shareholder loan, which now matures in 2028. China market registration. We have an experienced cross-functional team working to renew the approvals required to continue manufacturing infant formula for China, and we are confident of success.
We are also well-equipped to deal with changing quality and regulatory requirements, managing stakeholder confidence, and continuing to show leadership in on-farm sustainability. Synlait is still in a recovery phase, and FY 2026 is a five-month transitional period that will be influenced by the timing of production, sales, working capital movements, and other seasonal factors. Given the short and the non-comparable nature of this transitional period, Synlait is not providing guidance for the five months ending 31st of December 2026. You only have to look across Synlait's financial performance over the past 11 years to see the company was most profitable before it expanded to North Island. Profitability peaked in FY 2019 with a net profit after tax of just over NZD 82 million. The North Island assets created a drag on Synlait's performance, and now, they are sold. The company is stronger, simpler, and well-positioned for the future.
The graph identified a period of underperformance, and we are making sure we learn from the past. Our executives have taken a holistic view and identified issues that have caused Synlait to underperform, not just in FY 2026, but back to FY 2020. An oversupply of manufacturing capacity, the impact of COVID, and a subsequent decline in China's birth rate impacted every year until FY 2026. Operational stability issue impacted performance in FY 2025 and FY 2026. We have worked to address these issues. The capacity issue is resolved following the sale of our North Island assets. Our new revenue strategy will ensure Synlait is no longer exposed to a single customer, market, or product again, which help to protect us from future shocks. As we have achieved operational stability, our goal is to return the company to its earlier successes.
We are confident we will do that given the pipeline of customers we are working with, and the capacity and capability of Synlait's asset and its people. The key message from me from today, Synlait has made meaningful progress in stabilizing and simplifying the business. Second half performance improved substantially across EBITDA and net profit after tax measures. Operational recovery has been achieved, and we are on track to deliver continuous operational excellence. The North Island sale simplified the business and strengthened our balance sheet. We have started addressing our next biggest challenge, diversifying revenue. This is an opportunity we are excited about. It will strengthen Synlait for the future. A reminder, we will deliver full strategy to scale at our success in 2027. My final remark is to assure you all that Synlait is well-placed to progress our recovery. Thank you.
We will now move to our question- and- answer session. If you have joined via the webinar, please use the raise hand icon, which can be found on the bottom of your webinar application. When you are called on, please unmute your line and ask your question. We kindly ask that you limit yourself to one question and one follow-up. We will now pause a moment to assemble the queue. Your first question comes from Stephen Ridgewell with Craigs Investment Partners. Please unmute your audio and ask your question. Stephen, your line is open. You may ask your question. Stephen, we will return to you. We will move on to Nick Mar with Macquarie. Please unmute your audio and ask your question.
Hey, guys. Can you hear me?
Yep.
Yeah.
Yeah, that's good. Just in terms of the kind of outlook, and I know you're not wanting to provide guidance since half period, but do you think that the run rate on an underlying basis achieved in the second half is a sustainable basis for the business?
Yes, thank you. Thank you, Nick, for your question. Yes, we are confident to see we will continue the improvement in the second half, and we will continuously making effort to maintain that success, and which will enable us for scale up in the near future.
And in terms of the slide that you put on about the sort of pre-North Island earnings, are you saying that that kind of earnings figure is achievable in the future with just the North Island as it's set up today and the sort of evolved customer and product mix? Or is it purely very illustrative?
The slide actually show some historical data when Synlait was very successful before the North Island asset established. But of course, it's not the only reason. There are other challenges alongside. We summarize that the birth rate declining in China also contribute to against our initial plan. But the key message here is that we have a very solid plan to move forward to get success again in the near future.
Yeah. If I could just add, clearly, it's not indicative of a number in future. However, I would just add that it was also fairly clear that Pōkeno was a significant drag on the business, and that drag has been eliminated.
We are circling back now to Stephen Ridgewell with Craigs Investment Partners. You may unmute your audio and ask your question.
Good morning. Can you hear me?
We can.
Yeah.
Perfect. Okay, thanks, guys. Look, thanks for the update. First of all, on the milk supply, and apologies if you had difficulty at the top of the call, if you have already answered this, let me know, but can you just give us an update on Synlait's degree of success in its efforts to retain its farmer suppliers? Because we have had various anecdotes that some of them are still going to competitors. So, just any sort of more detailed updates you could provide on that would be appreciated. Thank you.
Yeah, thank you, Steve. In term of the milk supply, we have the right amount of milk for our plant, for our factories. That is the first thing I want to highlight. I talked to our farmers, many of them, and I can see that our farm suppliers, they are very keen to see Synlait to be successful again. I really appreciate their support. I do not see this in the near future that we have challenges on the milk supply. All what we need to do is to deliver the performance to our stakeholders, to our shareholders, and to our farm suppliers, and we can continuously bring the value back to them.
Okay. But so, if we look at production volume in the year just gone, it was down 6%. Should we be expecting volumes to stabilize in FY 2027 and FY 2028, or should we expect further decreases? I am just trying to understand what the right level of supply is. It sounds like you might possibly are expecting some of your farmer suppliers to go to other brands, but that is part of the plan. But just help us understand, m aybe with a few numbers would be helpful. Thanks.
We actually have a very good start of the season. We are expecting 3%- 6% more than budget. As I highlighted earlier, we have the right amount of milk for our plant, and we just want to get the right product mix in order to get the value of the available milk.
If I could just maybe also add to that, maybe Andy can give us some detail, but one of the reasons we had a decline in production last year was actually not the way the shortage of milk, but we actually had to sell milk at peak because we were unable to process it due to the manufacturing challenges. So, there is an artificial drop in the volume, as opposed to us actually not having the milk supply.
Yeah, I think George just covered what I want to say, but also, just remind us that for these outlooks for the new season's volumes, that we should also take into account that for the Pōkeno site, we do not have it, then that which means we definitely for the advanced nutritions, we have some kind of the reductions, which as we already expected early enough.
Okay, that's helpful. On the same topic, you're currently paying a premium, I think NZD 0.38/ kgMS. At some point, if you're in the right supply and got the right amount of supply, one would presume that might come off a little bit, or are you comfortable with the NZD 0.38/ kgMS premium? Do you think, over time, that should come down? The reason I'm asking it is if I think about a medium-term profitability track, certainly, obviously, for that to come down a bit to maybe where it was in the past would be helpful to profitability and some of your targets there.
So, any comments on that premium, how long that might stay at that kind of level, or perhaps does it need to go up in the near term, or do you see it potentially coming down at some point in the future?
We review our milk price strategy every year, like everyone does. But what I want to say is that Synlait came from very deeply on the farming background. That is part of our DNA. So, we want to bring the value back to our farmers. Good examples are Lead with Pride, which is very well- welcomed and supported by our farmers. That brings the value. That is part of the reason we can pay more incentives on top of the farm gate price. We also have customer-funded sustainability programs which help as a part of our incentives, what we pay above the farm gate milk price. We will continuously doing that, and we do have global customers who are very interested working with Synlait, working with our farm suppliers on that.
So, yes, we will maintain or looking at the more incentives to bring back more values to our farmers. But year-on-year, it will be some difference.
Okay. Second line of questioning was on the advanced nutritionals business. Just a point of clarification on the statement you have made that you expect essentially this new Middle East customer and maybe some other customers to see you recover volumes that you are going to lose from The a2 Milk Company internalizing English label this year, which they have obviously stated publicly. Just wanted to clarify, when you state that you are going to recover the volumes, first of all, are you referring to the FY 2025 year where you, I think it was 40 metric tons, or you are referring to FY 2026 was 45 metric tons? What is based on when you make that statement?
Then, second part of the question is, for this new Middle East customer, are you expecting the volume from that customer to be material over the next 6- 12 months, or is it going to ramp up back end of next year? Some indication of time would be helpful that you are customer thinking.
All right. Just to give you a little bit clarity, the new Middle East customer we are working with is quite a big supplier, player in the market. They are quite interested to work with us as a long-term partnership. The volume we are looking at is significant, and that is why we say that we have the confidence to backfill the gap that The a2 Milk Company, they are moving away the English label from Dunsandel. Also, there are a list of customers we are working with, the team have been working on, and we are looking at onboarding more customers to Synlait. It is not only the infant formula, but also adult nutrition as well. Synlait's strength is the nutritional product. Once we are very good at infant formula, it is easier for us to get into adult nutrition, the other nutritional products as well.
If we look at in a positive way, that is why we say that we are excited about opportunity. When The a2 Milk Company moved away some of this volume, especially the English label products to their Pōkeno factory, this creates opportunity for us to be diversified, rather than just exposed on one customer, one product, one market.
Sorry, can I just ask again? Sorry, just in terms of that Middle East customer, so take the point it is a potentially large customer, but do you have an idea perhaps how we should be thinking about the ramp up of those volumes?
Just to give you example, the volume we are looking at is that representing 18% of our FY 2027 capacity. So, that is quite significant.
Yeah, maybe just to add, j ust to add, Stephen, that, yeah, so regarding that, the ramp up, we assume about roughly three-year time, we can backfill.
Yeah, because for any nutritional customer, it does take a little bit of time to ramp up the volume. So, normally it takes two to three years to get the peak volume we are expecting.
Okay, no, that's great. Good news. Just to be clear then, it's three years, call it, to get to 18% of capacity. That would be a rough idea in terms of the trajectory.
No. What I said that in 2027, we are expecting a big volume growth already.
Stephen, if.
Yeah.
If I can clarify, so what Leon means is that for the next 12 months, it will be an 18% backfill of the lost volumes or capacity, and in three years' time , we can fully backfill the capacity or the demand.
Okay, got it. Thank you. Just in terms of the revised banking facility which you announced in end of July, just in the near term before this new customer ramps up, and you obviously are still very reliant on The a2 Milk Company volumes, and English volumes are coming off and your China label volumes are down a bit at the moment, so j ust wanted to ask, are you confident that the company will remain compliant with its banking covenants over the next, call it, 12- 18 months, and particularly you've got a three monthly EBITDA test that looks to it. So, are you comfortable given that the near-term impact on production of demand from The a2 Milk Company that you can still be compliant with covenants, or you likely to need waivers in the near term?
Yeah. So, regarding the ramp-up together with this The a2 Milk Company English label, actually, we already knew that early enough. So, all of this, we already take into account in our forecast and very openly shared with the banks. That's why that we said for Synlait business, the second half is really good to see the improvement of the operations stabilities and the improvement, which really makes the financial numbers can be more reliable. Now, that we have also a very close follow-up for all the bank covenants and as of today that, yeah, we feel comfortable or confident we meet the compliant.
Can I ask just one last one. Given you've obviously got those detailed plans with the banks and you've shared it with them and they're comfortable and you're comfortable, did you give more consideration to providing guidance to the equity market? Because I guess, if I sit back and look at your five months period that you're about to go into now, you've had two months of actuals roughly, and you've only got a three-month period to forecast. Is it just this period you won't be giving guidance or is it generally in a product that you won't give guidance to the equity market for reporting periods going forward?
We actually haven't given guidance for some time, and I think that was on the basis of us genuinely struggling to get our hands around operations. I think we stopped giving guidance about 18 months ago. So, what we'd like to do is to review our position on guidance at the end of this year. We'll get back to the markets and obviously, yourselves, probably early February, with our view on that. But at this stage, that remains our position.
Yeah. Cool. Thank you very much for your answers.
Thank you. Your next question will come from Marcus Curley with UBS. Please unmute your audio and ask your question.
Good morning. Can you hear me?
Yeah.
Great. Just one point of clarification, Andy. You mentioned 18% of the capacity being filled with the new customer. Can you give us some perspective on what is the reduction in volumes from The a2 Milk Company internalization for this year? What is the level of capacity you are looking to replace?
Yeah, I think from The a2 Milk Company volume, it is more commercial sensitive, so I do not think I can answer that. But maybe proposal, you can find some other kind of export numbers to fund it. What I can say regarding that volumes, yes, that we try to backfill the 18%. Yeah, sorry, I cannot answer that.
Then, maybe a different style of question on it. Are you expecting to do any material English label volumes for The a2 Milk Company in the next 12 months?
This is the question to ask The a2 Milk Company actually, because they want to prioritize their Pōkeno factory. For English label, we have the plan to not have their English label production in Dunsandel, but from time to time, they may still need our help. In fact, we are still doing some English label for them.
Okay, good to know. In the underlying result, as you highlighted, the advanced nutrition EBITDA was low, and particularly low on a per ton basis. You called out efficiencies, and you called out costs. How much of it is structural? How much additional cost are you needing to carry now, particularly around testing and quality, that will mean that the gross profit per ton is lower than what we have seen in the past?
Let me answer this question at a high level first, and t hen I get Andy to tell you a little bit more details. The high cost or lower margin in the last financial year is not representative. Advanced nutrition is a profitable business. Just that when we have the instability of the operation and some challenges, the cost is going up very quickly. That also came to our food safety product quality mindset. When we see some challenges, when we see the potential risks, we take a cautious approach. That cost us a lot, but I want to say that what you see now in the last financial year is not representative of its real picture should be. We are confident. After resetting all the fundamentals, we will be back to profitable business on the nutritional business. Andy?
Yeah. To build on that what Leon just mentioned, once that we have these operational stabilities and also, let's say, we have the better controlled for the quality, everything, definitely that we expected the margin will back to the more normal levels, which means the previous, the more standard years. Yeah, normal years.
Okay. With additional costs like the incremental testing that you have to do to meet the Chinese regulations, that is going to be passed on to customers?
Any extra cost will be discussed with our customers b ecause as you realize that there is a regulatory change and quality standard change, especially for the China market, in the last few years. The testing cost, as example, does increase.
Okay. Then, just finally, on debt and working capital, obviously, a big increase in working capital. Are you expecting any reduction or any of the issues that lifted the working capital to be temporary? I am talking about large magnitudes here.
Yeah, Marcus, that is a very good question. Actually, for me and my teams, from now on, the focus and the biggest one is cash generation. So, definitely, we expected the working capital should be improved from both inventory management and also receivable side. Yes.
Okay. Any magnitudes, Andy? Can you give us any targets in terms of your reductions in working capital over the course of the next 12- 24 months?
Not for the moment. I can just check it and see what I can provide you, maybe afterwards.
Okay. In the accounts, just following on from that, in the accounts, there is noted some EBITDA minimum milestones that need to be met for the bank facilities. Are you able to give us any perspective on what they are?
No. Sorry, I cannot.
Okay, thank you very much.
Thank you.
We will return now to Nick Mar with Macquarie for your final questions. You may unmute your audio and ask your question.
Hi. Thanks. Sorry, seemed to get cut off before. Just in terms of the Middle Eastern customer, can you confirm whether that's a sort of bulk or base product versus a tin product, and how we should think about the margin profile, I guess, initially and as it ramps up versus what volumes you're giving away or losing [K2]?
Yeah, I can give you a high-level picture of that. It is in the bulk, in the base powder. All right? So, this customer has their own brand. They want to use New Zealand high-quality product, grass-fed product for their brands. So, yes, it is a very promising business for us for the near future.
Any sort of indication of relative margins of a sort of bulk product like that versus the tin product you're doing for The a2 Milk Company?
We do have a good margin on that because it is their nutritional product, even though it is packed into 25- kg bags. But the details I cannot share because commercially sensitive.
Okay. No, that is all. Thanks. We will chat later on.
Thank you.
There are no more questions at this time. I would now like to turn the call over to Leon Fung, Acting CEO.
Thank you. Thank you, everyone. This concludes today's call, and I really appreciate your time and questions. If you have any further questions, please contact Jo Scott, who is the Head of Corporate Affairs and Engagement. Thank you very much.
Thank you all.
Thank you.