Edited Transcript of BGA.AX earnings conference call or presentation 27-Aug-20 1:00am GMT

We do continue to review our capacities, and we did take some steps of rationalization of processed cheese capacities this year between our Ridge Street and Strathmerton facility, again, with a view of being as efficient and as competitive as the company should expect to be. We have been delighted to see improved environmental conditions in all our dairy regions. I think this is one of those rare occasions in recent times that we’re seeing good weather conditions in each of our dairy regions and, of course, one of the benefits of that is that we’re seeing supply growth and — across the industry, which means that it’s a more stabilized dairy environment — dairy procurement environment.

We do continue — and we’ll talk about this a little later, making ongoing investments in new product development. And I think it’s important to note that, really, as we’ve embedded particularly our foods business into Bega Cheese, that pipeline of new product development is now maturing and now regularly seeing us able to add innovation to the market, which is very pleasing and something that we’ve invested strongly in over time.

I will walk people through the presentation, so I’m now moving to Page 3. And look, I guess, for myself and for all at Bega Cheese, the values of this company is extraordinarily important. I do have them as our second slide here because, quite frankly, I think in uncertain times and in periods of volatility and in periods such as we’ve experienced this year, it’s your values that see you through. It’s that core tenet of how your people react to challenge and how they work together and indeed work with others and the community in general that makes an enormous difference, which I think has just been so well demonstrated this year as we’ve dealt with each challenge as it’s occurred and kept on building for the future and ensuring that we look after both our suppliers and our customers and everyone else involved.

I will dwell on Slide 4 just — on the impact of COVID-19 just for a moment. It’s, obviously, a subject that is on the news every night and top of mind for everybody, so I thought it was appropriate for me to touch on it early in the presentation. As is always the case, the first priority for Bega and the manner in which we responded very quickly to the early information that we were getting on the likely impacts COVID-19 and the care required and the way we reacted very quickly to the arrival of COVID-19 on the shores of Australia and, indeed, we are monitoring carefully how it was being dealt with around the world.

Priority — safety is always our first priority, but not only for the people that work for us, but for everybody that we’re involved with. So in terms of making sure that we were well equipped to respond to COVID-19, we obviously look to get all the information we possibly could. We’ve worked closely and continue to work closely with government in terms of the best information and the best approach to dealing with the challenges of COVID. And we are in very close contact continuously with all our relevant stakeholders, particularly our overall supply chain, where we need to make sure that it is not only our business that is managing COVID, but everybody else across our entire supply chain from farmers right through to customers.

We did very quickly establish an internal COVID-19 management team, which included all of — so included Paul, Pete and myself, so everybody on this call, plus all the people that we thought were required to ensure that the company was — had a voice from all elements of what we do. Those teams have continued to operate daily or at least, in some cases, biweekly depending on the status of COVID-19. We’ve got a significant COVID-19 management plan across all our sites and across our entire supply chain. Interestingly, at this stage, we maintained the position from the very start that if people could work from home, we would facilitate that happening and, indeed, ensure that they did, where at all possible, work from home. So from the very early stages of COVID-19, we’ve been focused on having people that are able to work from home work from home. We still currently have more than 500 staff working from home.

In terms of the market, I think it’s pretty well documented the variability in what — in how COVID is impacted. We’ve certainly seen the food service market significantly impacted both in Australia and around the world. That’s been offset by — in terms of our business by increased retail sales.

We’ve obviously — in terms of the market, one of the most important things is that, that ingredient supply chain remains stable, and the capacity to deliver products to the market is stable, and I’m pleased to report that, that has been the case and remains the case for the business.

We are seeing some disruption beyond that obvious food service disruption, and we’re seeing that particularly in the Diagou channel as travel between China and Australia has been — is significantly reduced and, indeed, activities such as international students have diminished to a very low level. So that channel disruption has been observed, and we continue to observe that, that is one of the parts of the business that is affected. But overall, we would say that we continue to manage COVID, both from a personnel point of view and a supply chain point of view and a customer point of view very successfully and expect to continue to do so.

On to the more financial part of the report, pleasing, as I mentioned in my opening comments, to see revenue increase in a year that was quite volatile. So we’ve increased our revenue to now $1.5 billion, importantly, with a very strong operating cash flow of $138 million. Of course, that strong operating cash flow has meant that we have been able to make a significant debt reduction of some $52 million. So some good sort of dynamics, if you like, in terms of the stability in the performance and the ongoing growth of the business. Export sales have increased by 15% to $523 million. And obviously, the inventory management that we often talk about and that we were aware, there were some opportunities for reduction. We’ve achieved a level of reduction to — by some $15 million to $257 million.

There has been a decrease in normalized EBITDA by some 2% to $103 million. And I guess, in broad terms, I would say that the strong performance in our international business and particularly in our retail business has been offset by a decrease in margins, in particular dairy ingredients and in some components of our nutritional business. So it was, again, volatility in the market, but pleased to deliver stability at this time.

I think it’s probably appropriate in terms of the detail of this report that I hand to Pete Findlay as this is Pete’s — Pete’s been with the company for our half yearly result and the preparation of this result, but this is Pete’s first report of annual accounts as CFO, and I thought it was probably appropriate that I share some of the presentation around the financials with Pete and, of course, later with Paul on some of the operational and strategic issues. So Pete, I might throw to you to talk through the next 2 or 3 slides, which would be helpful. Pete, over to you.

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Pete Findlay, Bega Cheese Limited – CFO [3]

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Terrific. Thanks, Barry. So this slide here really just calls out our normalized costs that we’ve removed from the statutory numbers of the business. You’ll see there that they’ve decreased year-on-year, so — by nearly $11 million, which is predominantly due to the fact that we didn’t have any Koroit acquisition costs — sorry, very few Koroit acquisition costs in the numbers this year. Just over $9.5 million of legal costs. Most of those were related to our legal case with Fonterra. There was a small overhang of costs related to activity with Kraft this year, but we envisaged that both those costs will decline next year significantly. And then there was just over $5 million of ERP costs, and they were predominantly around our hypercare process. So as we fully rolled out the ERP system early in the financial year, we had a number of costs that [we didn’t capitalize that are really] around changed management and implementation of the system within the business, process changes, et cetera. So they were the normalized costs for the year. As you can see, there’s a pattern of them coming down over the last couple of years.

If we move on to the next slide, just looking at the balance sheet, I guess, the key things I’d like to call to attention here is the improvement in trade and other receivables. And the — really, they have come down due to a couple of factors. One was the smoothing of our revenue during the year so we can have quite as much revenue in the last couple of months of the period, but also some really good management around our receivables assisted by the single ERP system, the consolidation of our cash receivable teams and just the tightening up, in particular, around some of our international customers, obviously, with increased exposure there. We’ve reduced the amount of overhang we’ve had with those customers.

Inventory down by $15 million. Once again, some good management. Probably could have got that down a little bit more, but decided to build some inventory in our foods business, particularly with the uncertainty occurring around COVID. We also had a little bit more milking in the last couple of months of the year and some opportune share repurchases. So there’s probably a little bit more room to move on inventory in the future, but very, very happy with that number. Obviously, a lot of that fell through to the bottom line, and there was a reduction in net debt and cash that — in net debt that Barry talked about, which is great. That’s reduced our leverage from 2.7x down to 2.35x and certainly looking to drive that down further in FY ’21.

Just on to the next slide. This is just our cash flows there. Obviously, really happy that we’re able to extract an extra $37 million of cash from the business. The key call-outs here are just — we had a little bit of an upside last year with our transition to the trade receivable facility. And so when you look at that, the $188 million last year and the adverse impact of $35 million this year, you really should net that out against receipt of customers. But what that showed was even with the level of exposure to trade receivable facility dropping by $35 million, which actually hurt our cash flow, the overall improvement in receivables and the extra $70 million in sales actually saw our receipts from customers come out ahead of prior year, which was terrific. You’ll see there that we’ve washed out most of the Koroit acquisition. Cash flow from last year [fell away] in FY ’20, and there was about $57 million of CapEx offset by the $5 million of proceeds from the sale of our Coburg facility. That’s probably still a little bit higher than our normal run rate. We’d be anticipating CapEx to be high $30s million to $40 million for next year, so it will come back to a more normalized run rate now that we’ve finished the lactoferrin plant and our ERP system spend and so that will also help us with cash realization next year.

Financing activities was predominantly payback of our debt and also the payment of dividends. So overall, a really strong cash flow result.

I’ll hand over to I’ll hand over to Barry or Paul.

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [4]

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Thanks, Pete. And look, it’s — and I would say that it’s great to have feet on board and, obviously, we’re seeing the business’s financial performance and, particularly, debt improved — debt position improved, which is obviously pleasing, as I mentioned in my opening comments. I think the strongest thing about this year’s result is, indeed, stability that it reflects and the fact that the business has been able to deal with those changes in the marketplace and challenges around the supply chain.

I will just briefly talk about the fact that I suppose in terms of where we’ve come from and where we go, it seems that Bega is often talked about around step changes and transformational strategies in the dairy industry, and I suppose I’ve had particular [calls] to reflect on that this year as I think back to when we’re a very small cooperative, producing a few thousand tonnes of bulk cheese not that long ago in my terms, I suppose, and we’ve grown to be this genuine dairy and food business through a number of controlled steps. And we’re now emerging as a strong branded player with a strong manufacturing network, good regional representation in terms of supply and the capacity to respond to change, both on the supply chain side and on the market side. So that’s sort of controlled ambition, if you like, that sees us today being able to consolidate a number of the things that we’ve done, add to the efficiency of the business, do operational and process reviews, rationalize lines. All of those things come from the benefits of making very strategic acquisitions, but then having the capability of integrating them with the business and then using that integration to deliver value but also to increase the value of the products we produce. And the ambition for us is to be that truly food and agriculture integrated company that can take a raw material and add value to it, both as an ingredient as well as a branded retail product. That’s — I’m not going to sort of go through the various changes that we have identified on Stage 10, but — I’m sorry, on Page 10, but I think they’re well-known to most of the listeners on this call.

Paul is well positioned to talk about the strategy and the way in which we’re thinking about the business, particularly in the way in which we’ve launched a new segment reporting this year. So I might hand to Paul to talk through the next group of slides.

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Paul van Heerwaarden, Bega Cheese Limited – CEO [5]

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Thanks, Barry, and good morning, everyone, and I’m glad you’ve qualified Page 10, not Stage 10, Barry, because I thought there might have been 6 stages of our strategy (inaudible) but, importantly, as Barry has covered off well on the last slide and has been the architect of the 4 transformations of Bega Cheese, the more recent one, which we can sort of date back to about 2016 is that the transformation from being a pure dairy play into a broader food-based business. And Slide 11 here does really outline the core platform of our strategy, which is growing and diversifying our branded business. We presented this slide 6 months ago at the half year results, and it outlines where we were a few years ago and where we are today and certainly where we want to be in 2023, the target, which is around 70% of our revenue coming from our branded consumer business. This year, we’re pleased to see the increase to 59%. I’ll go into a little bit more detail on that later on. But that’s primarily been driven by those 3 focus areas: increasing our organic growth through both product innovation and promoting our brands and products; improve margins across the board, and there’s a number of initiatives I’ll talk about later on in that category; and also, importantly, expanding our brand portfolio, which is also driving good growth for us and setting us up for the future.

Just moving on to Page 12. The second aspect of our strategy, which remains very important for us, is maintaining a very cost-competitive supply chain. And this has been very important for us, particularly in recent years where if we go back to pre-2017, we had a highly concentrated milk pool in and around the Bega Valley in Northern Victoria and a high exposure to commodities. And as we sat down and looked at our strategy about 5 years ago, we called out that, that exposure and what we saw coming with respect to increased competition, climate change and other impacts in the dairy industry would cause us a few problems if we didn’t make some significant changes. Talked about the significant changes on a previous slide with the expansion into broader food base business, but it was also important for us to diversify our milk pools, and our manufacturing base has been well-publicized and discussed in previous presentations regarding the acquisition of Koroit, closure of Coburg and other toll process arrangements that we’ve entered into, and we’ll just continue on with that approach of continuing to reposition our supply chain and ensure that it’s relevant to the markets in which we compete and also maintains a level of cost competitiveness.

Moving on to Page 13, and you’ll note in the report that we have started reporting along the lines of the new segments, which is our bulk dairy nutritional business and our branded consumer packaged goods business. So we’ve now got the 2 segments that are separated in the annual report. Most of you will recall that since August 2011, when we were listed, we’ve had our 2 segments around Bega Cheese Limited and Tatura Milk Industries. And as the business has transformed significantly, particularly in recent years, both segments were no longer aligned to how the Board and management look at the business, how we make our key capital decisions and, indeed, how we run the business. And so the 2 segments that have been structured are very much aligned to the strategy and very much aligned to how we report through the Board and, as we mentioned it earlier, make capital decisions around the business.

So our dairy ingredients and nutritional business includes all of our milk processing assets, our very important business-to-business dairy ingredient sales that’s very much our bulk business, and our dairy nutritionals, which is also predominantly business-to-business bulk format powders predominantly and a business that we’ve been in for many years. And then our consumer packaged goods business, which is around our secondary processing, so this is consumer formats. It also includes food service formats as well. It’s our retail products, it’s our brands, and it also includes our private label and third-party manufacturing of those consumer products in that segment.

If you turn to Page 14, you can see a breakdown of revenue between the 2 segments, and this is further broken down into domestic sales and export sales with a comparison to FY 2019. And you can see, if I just draw your attention to branded, both in terms of the domestic market and export, you can see strong growth in that part of our business, both domestically and export. And then on the bulk, we’ve seen a good increase in our export business and a decline in our domestic business. And that decline in our domestic business is absolutely aligned with our strategy. That’s not anything that we’re concerned about. In fact, that’s something that we celebrate because that’s really demonstrating the shift of those commodity products into our value-added business. So you can see the increase overall and the shift between that bulk into branded line. And the split there is getting closer to that 70% split that we’re targeting. So on the domestic side, we’re getting very close to our objective in 2023 of having 70% of our revenue and our business coming from that branded consumer foods business. On the export market, we’ve still got a bias towards the bulk business. So we’ve got a bit of work to do there, and we’ve got a lot of opportunities there that we’re going to continue to explore.

If I move on to Page 16 now to just commence the overview of the commercial operations for the year, we’re very pleased, as Barry outlined earlier, to see group sales growth in excess of 5% to $1.49 billion. We have a strong track record, as you can see from the chart, with sales growth despite several of our segments coming under a lot of pressure in the last couple of years. And while we’re seeing growth in all segments, it’s particularly pleasing to see the strong growth in our branded foods business, both in the domestic market and internationally, as I outlined on the previous slides.

Just getting into a bit more detail on this on the following slides. So I’m now on Page 17. You can see that we have had very strong growth in the domestic retail grocery market in Australia, so an increase of 10.5% across the grocery market in the domestic market. And this is primarily due to both food price inflation throughout the year and also since sort of March/April, the impact of COVID-19, which has seen a significant amount of pantry filling, particularly over about a 6-week period, and also a significant reduction in the level of promotional spend that we saw in our category, but also across the broad in the grocery market. So that certainly has settled down somewhat from about mid-April onwards, but still year-on-year, it’s relatively strong growth. And in the case of our core product range, we have seen a strong growth, both in terms of price and volume flow through into our business. And in most cases, in our core product range, we’ve seen our performance higher than the growth in the broader market, and that’s allowed us to capture some increased market share.

We’ve also seen that growth now, if I turn you to the following page, with the launch of some new brands and also new products. And in FY ’20, we saw 2 new brands launched in Happi, which is a range of baby and kids nutraceutical products and also B honey, which was launched a few months ago, and this is a range of Australian sourced honey and is associated with the development of the Purple Hive Project, which has received a lot of coverage in the media in recent weeks. We’ve also launched a number of new SKUs in our core range, Vegemite and Simply Nuts and also have seen good growth in income, particularly in Vegemite with our royalties and our e-commerce store. There’s a great range of yellow Vegemite beanies out there, and you’ll see a few Bega employees walking around the streets of Melbourne at the moment with masks on and yellow beanies on. And if you’d like to get one, you can hop on line and order one online. They’re great. And a few new products coming through spring onto that website, which we’re very excited about.

Moving on to the following page on dairy nutritionals. We’ve seen a lot of changes in our daily nutritionals business in recent years, including our milk supply with the impact from drought and competition at our dairy nutritionals manufacturing network with the acquisition of Koroit and the closure of Coburg and various toll processing arrangements and also, importantly, a number of changes in our customer [base], particularly with infant formula. As demand from some of our longer-term customers has declined in recent years, we’ve been focusing on developing new business, for example, with goat-based products and also new markets, including Indonesia. We have seen — as Barry outlined earlier with his update on the COVID-19 impact, we did see infant formula and the flow-through demand from our customers’ strong pantry filling, particularly in the Chinese market sort of in February, March, and then we’ve seen a reasonably strong slowdown in the fourth quarter. And that’s coupled with an increase in nationalism in China and strong growth in a number of domestic premium brands in particular. So we have seen some changes there, and we’re well positioned with a much more diversified customer base and much more diversified geographic base to ensure that, that’s not having as significant impact on our business as it would have only a few years ago.

And of course, with the commissioning of the lactoferrin plant in quarter 4 of last year, we’ve also seen strong growth coming through already this year as we continue to build that very important part of the supply chain.

Moving on to the following page now, Page 20, for an overview of the dairy commodity and farm gate milk prices. As indicated on the fresh agenda chart, this is a chart that we present on all of our presentations and have done now for a number of years, we saw dairy commodity prices spiked very quickly and to historic highs from about October through to February during the financial year. And while global demand growth has been in line with expectations, sort of around that 1.4% to 1.5%, we didn’t see supply growth during that period keeping up. It was tracking well behind, particularly out of Europe and the U.S. So that was — it was on that supply side that we saw the main cause of the significant increase in dairy prices through that period. And then of course, in March, we saw the demand shock come through with prices dropping over 30%, primarily due to COVID-19 and the impacts that, that was having across, again, in Europe and the U.S. being the 2 key markets where we saw that decline and then that has a flow-on effect of prices coming down very significantly.

Supply in Australia remains tight, and competition is strong. We were very pleased to see high rainfalls across Eastern Australia about 6 months ago, and we saw a strong pickup in milk supply in the second half and some of that competitive pressure easing, but it’s still very much alive. But it certainly did ease through that second half of last financial year. And as we come into FY ’21, we’re very comfortable with the way we’re positioned in terms of milk supply. And it’s also important to note that from this year — or actually from last year, but the full effect coming through this year is the implementation of the new dairy code, which caused us to put a few changes in place in terms of our contracts with suppliers, how we communicate with supplies, and we have the added complication of not being able to do face-to-face meeting with suppliers at the time. So we had a few challenges there, but we, along with a number of our competitors in the Australian dairy industry, got through that period and sort of reasonably well positioned as we head into FY ’21.

Moving now to Slide 20 — Slide 21. Just a quick operations overview. Barry has touched on some of these points in the key highlights slide, but the organization and process review that we discussed at the half year results has been a fairly major initiative for us throughout the year. We have taken a number of costs out during FY ’20 through the second half of FY ’20 and the benefits of those cost savings have been offset during the financial year with the cost of redundancies and also the cost of consultancies. You may recall that we brought in Boston Consulting Group to assist us with that process. So that’s effectively netted off within the financial year. And then we’ll see the full benefit of those savings that have been enjoyed to date in FY ’21 along from further changes that were announced in early July and a number of cost savings that will flow through them and then at a later stage savings coming through towards the end of the first half of FY ’21.

We’ve also — on the back of the significant changes that we’ve made to our dairy network in the recent years, we have commenced the number of changes in our secondary processing footprint. And Barry mentioned one of these earlier in terms of consolidation across our processed cheese facilities with Ridge Street in Bega and Strathmerton. So we’re consolidating the manufacturer of IWS, individually wrapped slices of processed cheese onto a single site. We’ve announced a number of redundancies at our site in Bega, and we’ll start to see the benefits of that flow through in the second half of this financial year. And that will certainly position our business to be a lot more competitive in that space. We’re basically running duplicate lines across the 2 plants for legacy contract reasons, and we’ve now got the freedom to actually put in place that consolidation and see that benefit come through.

We’ll also see a lot of the benefits starting to flow through from the common ERP platform, and it’s very pleasing after a number of years on that project, that project continues to be extended as we made more and more acquisitions. It’s very pleasing to see that we were able to complete that implementation in the first half of the year and starting to see some of the benefits coming through that Pete referred to earlier, and also, of course, the lactoferrin plant at Koroit, which has been discussed on previous slides.

Moving on to Slide 22 and just to cover off before I pass back to Barry is our approach to corporate social responsibility. And Bega has a strong track record in corporate social responsibility, including, for example, our BEMS program, our own farms BEMS program, which runs — has been running now for about 10 years, and also our corporate events, the Tat 200 and other events that have been raising money for local communities, and the list goes on. A few years ago, the Board incorporated corporate social responsibility as part of our strategic planning process, and that’s been a great initiative in terms of really focusing on the key initiatives across the business, the key areas where we need to invest and see some improvement. And we presented this slide previously. It covers the key — 5 key focus areas across corporate social responsibility for our business: food nutrition, diversity, greenhouse gas emissions, packaging and water sustainability. And I won’t go into any details on these slides. I would just say that we’ve made good progress in each of these focus areas. And in about a month or so, we’ll be releasing our sustainability report for 2020, and there’ll be further details provided in the — in that report, which we’re looking forward to.

So Barry, I might hand back to you now.

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [6]

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Thank you, Paul. And listeners may be pleased to know we’re coming towards the end of the presentation and be happy to take questions. But I think it is important to reflect on where we are today and I suppose the stability in strategy that is demonstrated by this year’s results. So that continued path to our diversified branded food companies is continuing to progress well as Paul outlined. Of course, the impact of COVID-19 on all aspects of the economy and society has been significant, but we’re very proud of how our people have approached managing COVID-19, how they’ve demonstrated their adaptability, but also the importance of caring for one another as we work through a significantly difficult time.

The supply chain and operational issues due to COVID-19. Obviously, there’s still uncertainty out there and how we ultimately see COVID-19 managed continues to emerge. But from our point of view, those supply chains and operational issues that have emerged are now well embedded and well understood in our business and well managed in our business.

There is some global uncertainty relating to dairy demand. Paul touched on it earlier. I think we did see that significant drop away in demand. So traditionally, some of the volatility around dairy demand has been more around — sorry, dairy pricing globally has been more around the supply side volatility than the demand side volatility. This is the first time that I’ve really experienced a significant demand curve change because of the change in food service. So there’s still some uncertainty there, but it is fair to say after the drop, prices have been relatively stable. And I think the other thing to perhaps mention in terms of where global dairy demand is, is that we are seeing the Australian dollar quite strong and stronger than might have been expected, which also, of course, has an impact in terms of our competitiveness on the international market where dairy commodities are concerned.

As mentioned a couple of times now, very pleased to see good seasonal conditions and, therefore, stabilized milk procurement environment and, indeed, there’s an expectation that milk supply across the industry will grow this year. The business improvement initiatives that Paul touched on are well progressed. We continue to always look at opportunities to improve. It probably is fair to say that it is not common for the business to create a number of redundancies. But of course, occasionally, that has to be done in terms of ensuring that we remain competitive and, indeed, the business performs well. We do still await the legal outcomes of both the Fonterra and Kraft cases, but it is fair to say, as Pete mentioned in his report, that we are well through those — each of those cases and, therefore, a large amount of the expenditure that they have required has been absorbed. So we now just await the final outcomes.

In terms of our priorities, which I’ve listed on Page 24, we continue to invest in the strategy that we have evolved but have been consistent with — for as long as I have been involved with the business. We have, as you can see by the results this year, focused on cash generation, and we’ve focused on cost to make sure that this business is well positioned in an environment that is volatile, and I think I don’t need to say too much about the dairy industry and the challenges that I’ve had, but the stability that it get presented to the market is always around the fact that we manage this business carefully. We manage it very deliberately, and we do make sure that we are focusing on those — some of those key business principles such as cash generation and cost control. There is still greater opportunity for us in leveraging and rationalizing our existing assets and product capacities. And so we have got a wonderful network of manufacturing capability and assets, and it’s now a matter of making sure that we create the most value we can from those assets.

We have had our long-term strategy, I think, best demonstrated by our acquisition of Koroit a couple of years ago to not only protect the milk supply we have, but diversify our milk supply regions to ensure that we have a relative stability of supply regardless of what might be occurring in particular regions of supply. I won’t dwell on if there is — there’s more to go in our operational process review and optimizing our new information systems, but Paul and Pete have both discussed that.

I think I’ve been asked a few questions about this over the last couple of days. And I think the statement that I always make around the dairy industry and that I’ve been talking about for a very long time is that industry consolidation, I believe, will create additional value in the industry. And of course, we have always positioned ourselves and will continue to do so in terms of being ready to participate or examine opportunities as they arrive in the dairy industry.

So ladies and gentlemen, that brings me to the end of the presentation. And of course, as always, I thank all involved in assisting and particularly Pete and Paul, and very happy to take any questions that may come. So I’ll hand back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Peet from Goldman Sachs.

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Michael Peet, Goldman Sachs Group, Inc., Research Division – Executive Director [2]

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Congratulations on the result in difficult times. Just the first question. You highlighted some of the cost benefits that you’re looking at and you’ve been undertaking this year. Obviously, there’s a number of things going on. I’m just wondering, can you give us a feel for what the net benefit you think is going to come through this year in terms of reduction in your cost base?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [3]

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So look, Paul [made a mention of that]. I think in the year — from the year we’re reporting on, as Paul said, those sort of [early end] savings, if you like, have been largely offset by the cost of implementation. So there will be benefit this year. We haven’t reported what we expect that number to be, but obviously, we wouldn’t be calling it out if we didn’t believe it to be significant. But we are specifically pointing to the contribution that it will make to the following year. Paul, I don’t know whether you want to add any more to that.

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Paul van Heerwaarden, Bega Cheese Limited – CEO [4]

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Sorry, Barry, I was just on mute there. No, it’s — I mean broadly speaking, we’ve got a mix of personnel and nonpersonnel costs — I mean, Michael, we’ve got a number of redundancies that we’ve announced that we’ll close on. As Barry said, we wouldn’t talk about them if they weren’t material. And we’ve had — it was around about 110 roles that we’ve sort of removed from the business in terms of our organizational process review and further roles that are coming as part of the consolidation of the manufacturing footprint that we’ve discussed before. But we’ve got about — another 1/3 of the savings are coming from just reducing costs across our business and just removing processes. Part of that’s been enabled with the ERP implementation. And then other processes or expenditure items, we’ve just made the call to just reduce them or take them out of the business altogether. So — but from our perspective, it is material overall. It’s also been very disruptive in our business and particularly as most of us are working remotely. So that’s caused us a few challenges, particularly in the last few months. But we’ll see further savings coming through, as I said before, in the second half of this financial year as well, which will be good for the bottom line.

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Michael Peet, Goldman Sachs Group, Inc., Research Division – Executive Director [5]

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Excellent. And just on the outlook. I’m looking at the annual report Page 10 and the outlook statement mentions the guarantee coming off for Koroit. Could you just quantify what you think the impact is going to be for the lower intake this year?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [6]

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So Michael, obviously, this is something that we were expecting. And I tend to look at supply more in terms of total supply and what we’re getting out of Northern Victoria and what we’re getting out of Western Victoria and Gippsland. The milk supply guarantee was always there, but we — from the day we bought Koroit, we were working towards making that supply direct supply rather than becoming part of the guarantee. So that’s what we’ve spent the last couple of years doing. So whilst it will be — whilst still some requirement to top up, we expect milk intake to be relatively stable in an overall position — from an overall perspective. So we’re not — that’s part of how we are managing Koroit. Paul, again…

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Paul van Heerwaarden, Bega Cheese Limited – CEO [7]

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Yes. Michael, we’ve also been doing a lot of work in the last 13 months on further toll processing arrangement. So we’ve also been able to increase overall utilization of our assets with increased processing of milk for others. So that’s also helped deal with that — any of that milk that was going to drop away that Barry just referred to…

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Michael Peet, Goldman Sachs Group, Inc., Research Division – Executive Director [8]

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So Barry, is that roughly stable, roughly? Maybe down a little? Is that…

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [9]

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Yes, stable. Our expectation is stable. So as I said, we were managing towards this from the moment we bought Koroit. So it’s not as if it’s a surprise to us all or something that we weren’t planning for.

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Michael Peet, Goldman Sachs Group, Inc., Research Division – Executive Director [10]

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Okay. Great. And just finally, look, hard to measure, but a lot of swings and roundabouts here, but do you think — obviously, boosted in the retail channel and supermarkets, but impacted in food service, disruption in exports, all sorts of things going on. But do you think you benefited during the period that we had it in this sort of last quarter or so? Or is it — I’m just trying to get a sense of what I don’t want to capitalize into the fourth quarter next year.

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [11]

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So I might let Pete add some commentary, but if I was giving it, from my perspective, an overview, it was exactly as you described. And we obviously haven’t called out anything material because we see that, really, it’s the benefit of our diversified business of where we lost in food service, we gained in retail, and we would expect that, say, for example, if that started to change back, we would equally change back with it. The same applies with the international markets. As Paul mentioned earlier, we are stronger in Indonesia than we ever have been down in some other markets. So we would say — I would say, it actually demonstrates the diversity of the business, and there’s not any particular thing that I want to call out, but I — Pete if you had…

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Pete Findlay, Bega Cheese Limited – CFO [12]

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It was probably almost — maybe a slight — might have been $1 million or so because we — the initial spike we had in retail sales during sort of March, pretty — that was really filling the supply chain that came back out again in April and sort of almost netted off food service. So really only a very, very small component of our earnings COVID spoiled.

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Operator [13]

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Our next question comes from Jonathan Snape from Bell Potter.

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Jonathan Snape, Bell Potter Securities Limited, Research Division – Senior Industrials Analyst [14]

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Can you hear me okay?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [15]

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Yes, Jonathan. Yes, all good.

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Jonathan Snape, Bell Potter Securities Limited, Research Division – Senior Industrials Analyst [16]

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Great. Look, can I just follow up, I think, on Peet’s earlier question just around the COVID-19 benefit. I’m just having to look through some of the numbers. I think you kind of made a comment that your brand marketing costs, you’ve got some savings in there. And if I look at the second half, the numbers go from somewhere around about $46 million down to $40 million relative to where it was in the first half. And if I look at some of the comments in the annual report, it looks like your spread sales for the first 9 months or 8 months were up around 3%, and then for the year, they ended up kind of 10%. So it suggests there was quite a big pickup in that fourth quarter, like, [must have been] 30-odd percent year-on-year growth. I’m just trying to quantify in my own head the numbers around that. Would you expect that the marketing saving you got in the second half returns back into next year? It looks like it’s somewhere around about $12 million or $13 million of sales. Should we be taking that out of next year? Or is it something that kind of offsets that?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [17]

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I might — you go, Pete. Yes.

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Pete Findlay, Bega Cheese Limited – CFO [18]

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So the marketing savings, a lot of those were actually in our international business, around Bega Foods international because we pulled back costs there with a reduction in anticipated volumes and a lot of those around our domestic food service business as well. So I think all of this relate to the domestic business. I think that the increase on spreads in the fourth quarter is probably a bit high. We had a spike in February and March, but our overall growth wouldn’t have been 30% up year-on-year. We did get some benefit out of promotional spend for that month only, so we have a bit of a lift in margin there. But our overall marketing costs, I’ll have to go back through that with you in more detail, but I would envisage that they would come back a little bit next year if revenues stay in line with our projections.

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Jonathan Snape, Bell Potter Securities Limited, Research Division – Senior Industrials Analyst [19]

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Okay. And can you clarify — you’ve split out a lot on the — in terms of changing your division also into the branch and, I guess, the other ingredients side of the business. How much of that branded business these days is going into, I guess, toll processing for supermarket supply contracts relative to, say, your own branded and food service business that you’re doing offshore?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [20]

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Paul, do you want to…

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Paul van Heerwaarden, Bega Cheese Limited – CEO [21]

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Yes. It would be — Jonathan, it would be probably around 30% to 40%, would be in that– in those couple of categories with private label and the third party. Most of the growth is coming out of their own brands in both domestic and export.

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Jonathan Snape, Bell Potter Securities Limited, Research Division – Senior Industrials Analyst [22]

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And I guess, just on the cheese business, one thing I was — I saw you put some details around the run rate and the step change in spreads, but the numbers in cheese required strong year-on-year in terms of the growth that’s been in that retail channel. How much of that is, I guess, the new contracts and getting new products through and starting to see growth in that relative to things that happen similar to spreads where you would have got a demand pull for it?

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Paul van Heerwaarden, Bega Cheese Limited – CEO [23]

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We have — so in that cheese category, private label plays a much more important role than what we’ve seen in spreads. Obviously, Vegemite is dominated with the brand and even in peanut butter. It’s much more of a stronger presence of brands compared to cheese. So cheese, about half the volume is — about 35% to 38% of the value is in private label, so much more relevant there. So we have seen — to your point, Jonathan, there has been that sort of overarching growth just in consumption and also food price inflation, but we have seen some — and we called this out in the half year, too, you might recall, some improvement in margins in that cheese category as well. So that’s certainly flowing through, and we’re starting to see the benefits of that in the second half and flowing through into next year as well of those contracts.

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Operator [24]

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Our next question comes from Paul Jensz from PAC Partners.

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Paul Jensz, PAC Partners Securities Pty Limited, Research Division – Executive Director of Research [25]

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Just — firstly, just a quick question for Pete on the COVID costs just to have a (inaudible). Was there any, I suppose, consideration of taking any of those costs below the line? Obviously, it looks as though you’ve put them all above the line. And maybe is there any one that you could highlight that was a [waiver]?

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Pete Findlay, Bega Cheese Limited – CFO [26]

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Yes. So we didn’t put them below the line. There’s been over $1 million of COVID costs. A lot of that was around setting up our plants and monitoring for employees and their safety. We had implemented temperature checking and sort of precautionary measures around people safety and keeping our plants up and running. So that sort of totaled just over $1 million, and we sort of considered that part of running our facilities.

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Paul van Heerwaarden, Bega Cheese Limited – CEO [27]

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Paul, it’s Paul here. It’s worth also pointing out that we also had the impact from the bushfires earlier this year. And I wouldn’t say they’ve been forgotten by any stretch of imagination, but COVID-19 certainly taking dominance in the front page of the paper. And we shouldn’t underestimate the impact that had in the economy more broadly, but also in our business, we certainly had a lot of disruption in that sort of first half of January and beyond. You may recall we talked about this at the half year. We were having milk dumped on farm where we couldn’t get farm pickups. We were supporting farmers with generators to make sure that they could keep their dairies operating, and then a range of other costs, including our workforce staying at home, not coming into the plant. So we were starting back up again after the Christmas shutdown. So you would say, Pete, that there was as much, if not more, impact in the financial year from the impact of bushfires and (inaudible).

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Pete Findlay, Bega Cheese Limited – CFO [28]

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Yes. It was about $2.5 million.

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Paul van Heerwaarden, Bega Cheese Limited – CEO [29]

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And again, Paul, those costs are all above the lines.

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Paul Jensz, PAC Partners Securities Pty Limited, Research Division – Executive Director of Research [30]

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Yes. I appreciate the way you do that because it makes it easier to move forward. And maybe staying with Pete on the debt side. You’ve got the debt-to-equity down to, I think, around 29%. And would you be able to make some comment as to where your comfort zone is because it looks as though, the DRP, that you’re looking to try and take that lower?

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Pete Findlay, Bega Cheese Limited – CFO [31]

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Yes. So I mean tend to look at it in leverage ratio terms. So we’d like to get below 2x as soon as possible. That’s what we see in front of us now. So we’ll be able to do that in FY ’21. Yes, we should get — we still think we can work a little bit harder on inventory with our normalizations dropping back and CapEx dropping back to a more normalized rate and some of those initiatives that Paul and Barry have spoken about coming through, we’d like to drop the leverage ratio below certainly 2x in the short to medium term.

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Paul Jensz, PAC Partners Securities Pty Limited, Research Division – Executive Director of Research [32]

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Just a quick one then on the — you’ve put some more working capital, I think, into the food business. Is that something that’s going to keep going back? Or do you think that might come back in the ’21 year, might be able to bring that back another $10 million or so?

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Pete Findlay, Bega Cheese Limited – CFO [33]

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Yes. So we’ve put about $8 million of inventory just towards the end of the year, and that was really to cover ourselves. We had uncertainty around planned operations, and we’re really taking each day as it came with, obviously, the pandemic out there. I think as we become a bit more sophisticated around some of those demands and sort of understanding where the supermarkets are at with their supply chains, we can look to pull some more inventory out of finished goods.

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Paul Jensz, PAC Partners Securities Pty Limited, Research Division – Executive Director of Research [34]

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And then the final one maybe is more for Barry or Paul on the milk supply side. So if you guys stay relatively solid and steady in ’21, and we’ve got 2 or 3 players there that are desperate for more volume, and then you talked about consolidation, so I suppose could you quantify certainly how much you’re doing third-party-wise and maybe some steps that you can take, baby steps, towards that consolidation?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [35]

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Sure. So I think, Paul, while we don’t name the companies, it’s — we’ve always had the view that capacity utilization and efficient capacity utilization creates value and so we’ve obviously done a couple of those with 2 other industry players, one, where we’re having product tolled and another where we are tolling. So there’s still opportunity there, and it’s sort of good to see that those discussions are occurring. Look, the broader perspective of how much more opportunity, I think it — I think the reality is it depends on the product range that we can present to others and the willingness of others to obviously work with us. So I think that I would have to say that the environment for that is positive at the moment, but I do still think — we’ve still got examples of facilities that are underutilized significantly and some of the underutilization will just require rationalization. They don’t have — there’s too much capacity. And we can still see that pressure in Northern Victoria, for example, and, to a lesser extent, in Gippsland.

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Operator [36]

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Our next question comes from Phil Kimber from Evans & Partners.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division – Executive Director of Consumer [37]

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Can I just clarify, sorry, that comment you said about milk intake as being stable. So if you — was that — are you talking about just specifically in the Koroit region? Or are you sort of suggesting that…

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Pete Findlay, Bega Cheese Limited – CFO [38]

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No, I’m talking about overall, Phil.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division – Executive Director of Consumer [39]

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Okay. So even though the milk — the expectation is the overall Australian pool grows, you’re assuming you will lose some, I guess, in that Koroit region, which will offset any natural growth you get…

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [40]

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Yes. So — well, I’d put it another way, Phil. Even though we’re pleased to see supply growing, competition is still very hot for milk. And we’re — and we think we’ve announced a very competitive milk price, which we see is good, but there is still individual need that companies are still aggressively pursuing supply, and we think for us, that little bit of growth will ensure that if we do lose a little bit of milk, we don’t have to chase it for the one of the better way of putting it, and we’ll have — we’ve got enough supply and enough stability in our supply to be comfortable with where we are at the moment with that price. And I should say, Phil, the best outcome, quite frankly, is overall total supply growth. And I think the milk pricing, although there was a great deal of fear, that crash that Paul pointed out earlier in our slide presentation was going to see milk price substantially dropped to farmer. That has been — it has dropped, but it’s still at a level, I think, where most suppliers — I think that there’s an opportunity for them to be profitable and grow.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division – Executive Director of Consumer [41]

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Yes. And actually, moving on to that, I guess, that was — I was worried about — when I looked at the global milk prices, in Aussie dollar terms, have come right down. Unfortunately, they’ve pretty much come down after you struck your opening price, which the reality is you’re not going to go backwards on. They can step up, but they don’t step down. I mean how much — is that something that you’re concerned about? Or were you sort of already factoring those lower prices for the rest of the year-end?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [42]

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So the truth is still — the significant drop had occurred before we were doing our opening price and budgeting calculations. Now it did continue to fall, but we were obviously making all those assessments of the market when we were coming to a price. Now we also knew that we would still be in a highly competitive milk procurement environment, so we had to put our best foot forward. The reality of where we sit today is that we had — to your question, we had taken into account both the drops and what we expected the market to look like. I think the only thing that I would say has varied a little more than we expected, which I mentioned earlier, is that the Australian dollar has strengthened greater than we expected, but we’re very comfortable with where we landed on price and how much of those factors we had been able to take into account before we announced that price.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division – Executive Director of Consumer [43]

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Okay. And then just on the drivers, and I understand that you’re not going to give sort of quantification around your statement that you expect EBITDA to grow. But the big chunks seem to be the lactoferrin plant. I don’t know if you can give us some sense of what that might contribute. And then the other one is cost savings. Is there any sort of the third driver being easing in milk competition which I know has hurt you? Or maybe that’s just a breakeven doesn’t help — doesn’t hurt. If you can sort of think about those 3 buckets.

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [44]

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Sure. So Paul might add to this. But — so you’ve answered your own question [that somebody said.] You’re right, we’re not going to actually put numbers around the improvement, but again, a little bit, as we mentioned earlier, we would not be mentioning if we didn’t consider them to be material. So you’re right, the 2 drivers in terms of improved financial performance are those 2 internal initiatives, if you like. Those are lactoferrin, very secure in terms of the way we’ve built and contracted the supply for that; and the operational and process review, which is obviously under our control.

In terms of other opportunities to improve, obviously, we’re always looking at overall business improvement, but we’ve still got some uncertainty and volatility out there. And in the area of dairy ingredients, which we have been calling out, I’m not sure that we’ll necessarily see a lot of opportunity for improvement this year, but certainly, that improved sort of farming conditions, improved, I guess, stability in demand around the national supply of milk in Australia does give the opportunity should market improvement occurs to maybe restore some margin. But at the moment, it’s still pretty competitive in that area. But Paul, I don’t know whether you’ve got anything more to add to that.

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Paul van Heerwaarden, Bega Cheese Limited – CEO [45]

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Phil, you did answer your own question [by others]. There are couple of key components that we’ve called out for this year. I mean — but it might be worthwhile to say a lot of the focus this year will be on that ongoing growth of that branded business with the innovation pipeline, and particularly, in the export markets and also that secondary manufacturing footprint. And we won’t see a lot of that benefit in this financial year, but that’s being built during the year. We’ll see a bit of it in the second half, and that will drive good growth for us into FY ’22. Those 2 key call-out items, lactoferrin and the OPR are the 2 key items coming to this year.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division – Executive Director of Consumer [46]

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Yes. And can I just get a final one qualification from Pete? He mentioned under 2x net leverage ratio. Do you just include the balance sheet debt? Or do you also sort of, when you calculate that ratio, include effectively the trade receivable, which I know has gone down year-on-year, but something…

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Pete Findlay, Bega Cheese Limited – CFO [47]

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2x in the short and medium term — sorry, the short-term, Phil, (inaudible) FY ’21, 2x refers to the balance sheet debt. Obviously, sort of longer term, we’ve always said we’d want to move towards 2x in total. But over the next 12 months, that’s the balance sheet debt.

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Operator [48]

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Our final question comes from Mark Topy from Select Equities.

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Mark Topy, Select Equities Pty Ltd., Research Division – Institutional Research Adviser [49]

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Just to go back to just the question around, I suppose, the industry dynamic in terms of farm gate, the Aussie dollar and the commodity price, can we assume that perhaps your comments about margins that you see margin stabilizing or some improvement from the sort of current levels in that bulk dairy commodity space?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [50]

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Yes. Look, as I said, Mark, I think my perspective in what we’re seeing for the remainder of the year is that they’ll be stable. We’d, obviously, like to see improvement in them, but that competition for milk is still very strong. And as we sort of demonstrated in that graph, the global commodity prices at the moment are stable with a bit of volatility being sort of generated by currency and some level of uncertainty in demand, but they look okay. Now obviously, if things go back to even somewhere near what pre-COVID was, you will see a lot of that demand return, which could see the opportunity for improved margin. But I’d say, in this year, there’s too much uncertainty for us to be suggesting anything, but it’s still probably going to be a reasonably challenging year for us on that ingredient side around margin, but certainly more stable than what we were seeing in the previous year.

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Mark Topy, Select Equities Pty Ltd., Research Division – Institutional Research Adviser [51]

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Great. And just to touch on that export sales side of things, can you give us a breakdown of, perhaps by product, where the growth was and just sort of the outlook? And you mentioned the service sector. Have you seen some signs of that service sector coming back and some products including, I suppose, mozzarella and some other products as well, but into that Asian channel?

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Paul van Heerwaarden, Bega Cheese Limited – CEO [52]

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Yes. So the China business, for example, Mark, is pretty much back to normal. So we saw that through sort of June, July orders coming through. So we had that disruption for about 3 months and then started to pick up through May, June. And then we’re sort of back to normal in that market sort of as we get through July, August. Markets like Malaysia, Indonesia, still — Philippines still taking a little bit of time to recover. They are certainly not back to where we want them to be, but they weren’t big parts of our portfolio anyway in terms of our food service business. Interestingly, in Malaysia, we’ve got much more exposure on the retail part of the business, and that has moved quite strongly, as was the case in Australia.

In terms of products, look, mozzarella is certainly probably — in terms of all the dairy products, that’s probably bore the brunt across markets. For us, we haven’t seen a significant decrease, but that certainly had some impact on us. But look, in terms of growth, cream cheese continuing to be a strong performer for us and processed cheese is also continuing to be a strong performer for us.

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Mark Topy, Select Equities Pty Ltd., Research Division – Institutional Research Adviser [53]

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And something like butter, which has been a big product. And Koroit, how is that looking?

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Paul van Heerwaarden, Bega Cheese Limited – CEO [54]

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Butter, look, on the domestic front, particularly with the private label business that we do, that’s been quite strong. On food service, it’s really fallen off. And you can see that just broadly, I mean, we can go into a lot more detail in some of the previous questions about what’s happening in the dairy complex globally, but fat prices have really, really come off, and we’re starting to get that sort of fat pricing ratio back to where we were sort of 5 years ago. So butter demand globally is — and demand for fat, [MF], et cetera, has dropped right off, and we’re seeing that in the pricing. So that’s certainly the case in our bulk and our food service business. But consumer has been quite strong. A lot of people are making cakes at home, and I’m sure you’re making them, too, yourself.

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Mark Topy, Select Equities Pty Ltd., Research Division – Institutional Research Adviser [55]

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No, very good at that baking cake. But just in terms of new branded segments and a new segment presentation, I’m just looking at the margins between the branded prior year to the current year, and it looks like the margin is a little lower in the brand business in the current year. With the sort of move in the food business, I thought that might have picked up a little bit. Can you just give us a little bit more insight into how we should think about that margin going forward, EBITDA margin to, say, sales in the branded division?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [56]

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I think that’s probably the growth of the international branded business, Mark, which are lower margins.

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Mark Topy, Select Equities Pty Ltd., Research Division – Institutional Research Adviser [57]

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Right. Okay. Okay. Got it. And then just lastly, Barry, you did touch on plant utilization as a key factor. Are you able to talk about, for instance, in Northern and Central Victoria with the Tatura part, which has sort of been an issue in the last year, just how does the plant capacity utilization look across Koroit and Tatura? Can you give us some insight into that?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [58]

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Sure. And look, I might get Paul to add to this. But the reality is it is about — the attitude we’ve taken to those plants now is that they really are very integrated, and they need to operate almost to benefit one another. It is fair to say that the volumes in Tatura are reduced and so we do have spare capacity there, but by the same token, we continue to sort of focus Tatura on nutritionals and the higher-value, lower-volume-type products. And we use Koroit for the less complex products, if you like. And of course, we use Koroit for butter and Tatura for cream cheese. But there is, obviously, as we’d always said at Koroit, there is fair capacity there that would — that unfortunately we didn’t have to pay for when we purchased the business. So there’s sort of great marginal cost opportunity there should volumes grow. But as I mentioned earlier, competition for milk is still very strong in all regions. And Tatura, we continue to adjust its capacity along the lines that I described. But Paul is, obviously, a little closer to working there. I’m not sure whether that sounds (inaudible), Paul.

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Paul van Heerwaarden, Bega Cheese Limited – CEO [59]

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A bit more. Yes, you’ve covered the key points here, Barry. And maybe a little bit more detail, Mark, is — I mean that sale (inaudible) a few years ago, that certainly took a lot of that base capacity out for us, which was all part of the strategy and the evolution that Barry referred to. And the 2 commodity drives up there, indeed, one of the commodity drives in Koroit at lower capacity utilization than you’d normally see, but I wouldn’t go as far to say the sort of margins in those incremental commodity products, those lower-return commodity products, it’s not necessarily something that keeps us awake at night.

So as Barry said, we’re focused on higher value in Northern Victoria. So milk — while milk volumes have dropped off for us up there, our capacity utilization of our key lines has been quite strong. And also that shift into other nutritional products has certainly given us a fair boost compared to where we would have been otherwise if we didn’t have that new business developed. And then plants — look, the retail lines there and the retail sachets in butter are running at reasonably full capacity as our lactoferrin plants and our GUMP lines, et cetera, et cetera. So the — where we are seeing capacity utilization dropped down a bit is in those lower returning commodity products, so not having that much of an impact on us.

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Mark Topy, Select Equities Pty Ltd., Research Division – Institutional Research Adviser [60]

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Right. Okay. And sorry, just lastly, just looking at your new products here, the Happi baby and B honey, are they going to be supermarket products or pharmacy sort of products? Can you maybe explain on how you see the growth potential of these new products and how you’re going to drive sales there?

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Paul van Heerwaarden, Bega Cheese Limited – CEO [61]

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So they’re both — so the B honey product is — has been launched in Coles a few months ago. So you’ll find it at a high level, Mark, in the honey section in Coles and that’s doing remarkably well. You will recall a couple of years ago, we had a look at Capilano and that didn’t progress, and we’ve been busy establishing our own supply chain, the Australian-sourced honey and set up with that Purple Hive Project and got launched in Coles a few months ago, and that’s going particularly well, in a category that’s in growth and a category that actually fits our sort of value proposition but also a category that we’re very strong in terms of spreads with peanut butter and Vegemite. So we’re very optimistic about that. And it’s a — it will, hopefully, become a very good core product for us in that range.

Happi is through the pharmaceuticals through the chemist channel, and there’s also an online business as well. So we’ll start to see a little bit of take-up into online and in new export markets with that product. Certainly, lactoferrin-based products initially sold through that channel. So you won’t find those in the supermarkets.

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Operator [62]

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We’ve had a final question come through if we have time for Belinda Moore at Morgans.

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Belinda Moore, Morgans Financial Limited, Research Division – Senior Analyst [63]

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Congratulations on all the benefits that are starting to come through. Obviously, a lot of hard work has been going on in the past year. Can I just — Barry, just on industry consolidation, obviously, you’ve received a fair bit of publicity maybe in the last 24 hours. Any comment there? And just sort of if a line was of interest just sort of talking through the strategic fit of the different parts here maybe, please?

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Barry Irvin, Bega Cheese Limited – Executive Chairman (Leave of Absence) [64]

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I was surprised you took this long to get to the question. Well, obviously, the publicity is by others, and we’ve remained silent on the opportunity. And look, it is very difficult to make much comment at the moment. Obviously, there’s been a lot of publicity around the decision made. A couple of days ago, look, really, the only thing I would say is that I think everybody knows by our track record that we are really — that we are both interested in industry consolidation, and we are active when corporate opportunities come around. So I don’t have any more information that I can really add to that, but — except to just, I guess, confirm a little bit more broadly on what I said on the slide that industry consolidation is always something that we’ve been talking about for a very long time, and it would be silly of me to not sort of refer to our own track record of looking to be involved in those consolidations.

Okay. Thank you, everybody. Thank you, again, for your time and your support, and look forward to speaking again soon. Thank you.

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Operator [65]

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Thank you so much. Ladies and gentlemen, thank you for your attendance today. You may now disconnect.