Bega Cheese Limited (BGA) Earnings Call Transcript

Thank you for standing by, and welcome to the Bega Group Full Year 2025 Results Conference. [Operator Instructions] I would now like to hand the conference over to Mr. Barry Irvin, Executive Chairman. Please go ahead.

.Thank you, and hello everyone. And thank you very much for joining us for this FY '25 results presentation. From my point of view, I'll only say a few words before introducing the executive team. It is indeed wonderful to actually see a vision -- a business vision turn into a business reality. And that is a testament of the work that's been done over many years. And for those of you that have been shareholders for a long time, you would recognize the transformation that we continue to present to you, but I think we present to you with real substance today as we -- as over the time that I have been obviously leading the company, we've transformed from a very much a business-to-business company, very much a company exposed to commodities to one that realized the importance of brands, value adding of having an efficient supply chain right through to our consumer, both here in Australia and internationally. And indeed, we continue to work to make sure we achieve that vision. And each result shows a further step towards that great vision. Obviously, really important when we talk about how we went from very much a dairy business, very much commodity facing and business to business to one that began its transformation to brands through the acquisition of Vegemite. And that iconic brand that we're still very much known for today gave us the foundation to build an even stronger business through the acquisition of Lion Dairy & Drinks. And we've seen the platform that has given us to deliver innovation, deliver new products, to have the agility to respond to changing consumer needs, changing market circumstances. I think we've built the strength in the business and indeed the infrastructure in the business to make sure that we are well positioned for the future. And the future is one that I see is very exciting. We actually are demonstrating our capability around new product development and innovation pipelines. Pete will talk a lot today about the productivity that we are achieving or will achieve through technology and scale. Our opportunity internationally continues to be strong and the sophisticated approach that we now have to global sourcing, I think, builds the business well for the future. Ladies and gentlemen, it is really my role to introduce the team that I think not unlike the business has been developed to have agility that is fit for purpose, that is able to deliver on the vision that we've had for a very long time. So without further ado, my words will be few, and I'll be delighted. And I might add that people will -- each of the speakers will mention what slide we're on. Obviously, my introductory slide is Slide 3, but I'll hand to CEO, Pete Findlay; Gunther Burghardt also joined us today, our CFO. They will take you through the results for FY '25, and then I'll come back to chat to you a little at the end. So Pete.

Fantastic, Barry. Thank you very much. And I might just direct everyone to Slide 6, which is our key messages around our performance for the year. And so we're really pleased with our normalized earnings result that the team has delivered. I think we've achieved this result with -- through absolute focus on delivery of our strategic plan and the key initiatives that we outlined around that to the market a couple of years ago. And as we continue to stick to that plan, we still believe we have some significant opportunities ahead of us in the future, both from a growth perspective, but also a productivity and efficiency perspective. So it's really nice to see that the strategic plan is playing out and performance is playing out with both a mix of productivity and growth opportunities. So if we look at the business, we've put in place -- it's been a year of change, we've put in place some big initiatives that will help us in both FY '26, FY '27. And those are around, obviously, the announcements of the closure of our Strathmerton site and the closure of our 2 PCA sites, which helps our bottom line significantly in FY '27 and creates significant efficiencies for the group. But also around growth, we've -- we're in the middle of implementing our third pouch line, which is at a price of about $16 million. We're also spending significant money on the flow-through of our Morwell facility to improve capacity there and improve efficiencies around our cooling cells, which we use to get product ready for the market. And so I see a really good mix of initiatives there supporting both growth and cost optimization. Obviously, another key plank of the year was our brand performance driven by a focus on category innovation. In a year where the consumer was fairly constrained, and we saw consumer sentiment continue to be challenged, the team's ability to innovate, particularly in the second half, I think, was important for some of that growth, but also, I think, sets us up really well going into FY '26 and FY '27. We're particularly excited around our volume growth in white milk, yogurt and spreads and the launch of our higher protein and better-for-you products in key categories around milk-based beverages and yogurt in particular. As I said, we're really excited about where that can take us over the next couple of years, particularly as we see the desire for better-for-you and functional benefits flowing through into that dairy category. Our strategic plan has been very much -- we've been pretty bold around that. We wanted to continue to focus on core grocery where growth would be more constrained, but across a significant size and scale, there would be benefit there, and that was achieved. But we were trying to seek out accelerated growth in our foodservice business and our international branded business. And I'm really pleased to say we achieved both of those despite the local out-of-home market in Australia being quite constrained. We're actually able to grow well ahead of the market growth in that area by taking market share, by getting more focused with our offerings and by aggressively pursuing new accounts. And so, we were very pleased with that. Once again, outside of the big transformational changes we talked about with Strathmerton and our PCA sites, we did execute on the successful withdrawal from our Lincoln Juice site, and we were also able to execute a number of efficiency savings around our network based on a focus on line utilization, waste and overtime. And so, in a year where our top line was constrained, we're able to dig out some really good efficiencies out of our network. And I think that there's still plenty of room to go with those efficiencies. We've obviously got the big transformational ones I just mentioned earlier, but we will continue to run our footprints harder and in a more effective manner as we move forward. The bulk business recovered from those lows of '24. That was a combination of obviously a better alignment between farm gate milk pricing and commodity pricing. But it was really also due to the hard work that the team did back in '23, '24 when we were faced with some pretty heavy headwinds and around removing costs from the business and really working on premiumizing our commodity sales mix. And so the ability to transition into high-value protein offerings, focus on our high-returning fat streams where we're able to increase capacity, particularly around cream cheese, really did set us up for an improved bulk result that I think gets us back to a far more sustainable and normalized earnings range. And we sort of -- we are sitting within the earnings range we talked about within our 5-year strategy being sort of that $30 million to $40 million EBITDA number. If we just move on to the next slide, our financial performance highlights, Slide 7. I'll get straight off the back and talk about there was a difference between our normalized and our statutory result. That was primarily driven by the significant changes we've made around Strathmerton and the PCA sites that's writing off some of the assets there that will no longer use and obviously, some significant restructuring costs. But as I said, we feel very strongly about taking that stand because of the significant material impact that will have, particularly in FY '27 and beyond. It makes us a far stronger business moving forward. But normalized earnings, strong growth year-on-year. But I think what that does is it starts to set the business up or create those data points that demonstrate that our 2028 strategy is very much in line with where we want to go and the earnings result and the financial outcomes we posted there. Obviously, flowing through to a significant improvement in profit after tax and a lift in earnings per share. We continue to focus on trying to drive more margin into our business, both as we -- both through premiumizing our achieving growth and premiumizing our mix in our branded business, as I said, improving the underlying stability of our bulk business and so, we were able to get some margin improvement there. And although the branded margin looks a little bit benign, that was done in the year where the chilled dairy cabinet actually was reduced in value by nearly 2%. So we're actually quite happy with the climate in which we did that, the result in the climate that we operated in the last year. Obviously, net debt down to $126 million, and that was just great focus by Gunther and the team on driving that down, which flowed through to a leverage ratio of 0.8, which was actually better than our target. And if you think about where the business was 5 years ago when I sort of first joined, we're at around 3.5x leverage. So the business has done a terrific job of committing to bringing that leverage down after some aggressive acquisitions. And what I would say is I think that with that leverage ratio, we really set ourselves up for an aggressive growth platform into the future, whether it be through organic or inorganic opportunities. And so incredibly excited about that. And return on funds employed just continues to be a focus of the business, how do we sweat our assets harder, how do we do more with less. And that sort of also plays into our -- or helps explain some of our strategy around our optimization of our sites, but also just that day-to-day grind on line utilization and working capital utilization. So very happy with our performance highlights there. If we just skip on to the next page, which is Page 9, I'll stop on, which is our 2025 operational highlights. I'll go into those in a little bit more detail. New product launches were really important. Coming out of COVID was probably 5 years of a fair bit of -- a little bit stagnant around innovation. It was just a matter of getting through COVID, getting through those significant cost imposts that we saw at the other side of COVID. And I think probably a lot of consumer goods companies globally probably struggled to grow a little bit. And so we now move on to a growth platform, and we want to drive that through new product innovation and through releasing products that meet our consumers' needs, but also pick the bill around affordability and value. So that's why you always need to continue to drive those cost efficiencies below the line. So we're really happy with our protein push into milk-based beverages. We've had some stunning early results that came about in the second half of the year, and we think that, that will be a real platform for us through 2026 and 2027, and we'll just continue to drive that better-for-you highlights across our milk-based beverages. We've got some real innovation into peanut butter after several years. We came out with the whipped product, which helps address more occasions. And you'll see some really exciting innovation in the next few months, further innovation in peanut butter as we start to try and morph for cross into that treat part of the category, which is the highest growth component. And then in yogurt, yogurt continues to be such an amazing platform for functional health. Our yogurt volume increases just continue to surprise us. And so we think that we can continue to have a really strong growth trajectory across yogurt. It's ideal vehicle for protein. I'm really pleased to say you'll see some good news around our extended protein offering in yogurt over the next couple of weeks, which we think will just continue to drive or accelerate growth in that area. And then obviously, we launched our Gut Good yoghurt, which we think is probably a little bit ahead of the curve, but very much on trend with some of the things we're seeing coming out of Europe and the U.S. around a healthy gut and how that relates also to not just physical performance, but mental performance as well. And so we think that there will be a slightly slower burn, but we're seeing what's happening, particularly in Europe and the U.S. at the moment, and we're excited to be on the front end of the curve there. And of course, bringing back some fun around treat with our ad rotations. We have a terrific collaboration with Mars into our flavored milk segment. The -- we did -- in a year where there was constraint around our branded offering, we did actually invest more than $8 million year-on-year in strengthening our share of voice to the customer and want to remain front-facing in our customers' decisions on when they're at shelf. And so we think that, that's an investment well worth making because it will help maintain momentum into 2026 and beyond. Our bulk segment continued to recover. As I said, we did a lot of hard work around setting ourselves up for selling higher-value items, particularly around the protein offering. Milk protein concentrates went particularly well for us. We increased our capacity in that area back in 2023, and we're really glad about that decision because in 2025, that increased volume helped drive higher returns into our bulk business. And as I said, cream cheese expansion, capability expansion, which then flowed through into our branded business, particularly the international part of that and will be a real driver for us moving forward. So some good work done there. If I just move on to the next slide, which is Slide 10. We continue to refine our branded assets and footprint. So obviously, made the decision around the Lincoln site. We sold that to another business. They filled that site up. We've got an offtake agreement, which is providing us with a cheaper cost per unit on all of our juice. And then the big decisions around the consolidation of Strathmerton, which we've come out and said will provide a $30 million earnings uplift in 2027 and the closure of our 2 PCA sites, which will reduce our cost impost on our spreads business by about $5 million to $10 million a year. But they're big projects. There's a lot of moving pieces in it. Of course, with the Strathmerton site, we will invest $50 million in our sister site at Ridge Street with the same capability, which will actually increase our volume, but at a much cheaper cost per unit. So once again, it's around doing more with less. So despite making those structural differences to our business, we will actually grow the volume or output to our business in FY '26 and FY '27 and actually as we did in FY '25. We continue to optimize our chilled distribution network, really pleased with our automation project at Laverton, which is our biggest site, which all of our yogurt flows through back out to our national network. It is actually going live in the second half of this financial year. And I'm very pleased to say that we're actually loading and unloading our first full pellets using our automated equipment as we speak. So the concept has been proven out, and now it's just a matter of scaling that. We did some real -- some heavy lifting on our cost to serve project cost to serve throughout FY '25, we're actually able to drop that. A lot of that was actually enabled by our new digital portal, which enables us to communicate customers around minimum order values and also a far better optimization of drops. And so we continue to push through our cost to serve. And as I said, reducing our network substantially and utilizing that a lot better, our logistics network and depot network. Domestic foodservice, the team did a great job of relaunching our range in the domestic foodservice space, and it meant that we're able to actually pick up a whole lot of new customers. We bought in chef-based selling. We brought in some experts from the foodservice business from competitors, and we're delighted with the growth of our foodservice. And our international branded business continues to go well. We expanded our teams and on the ground presence in Singapore, Thailand and Dubai, and we're seeing benefits from that as we go both direct to customer, but also make our distributors a little bit more accountable and are able to push products into those channels with a bit more effectively. So we're seeing some great results there. If I just move on to our [indiscernible] slide, which is our market-leading brands. I won't spend long on that except to say that we continue to hold strong positions across all of our key categories, which helps us release both innovation into the marketplace, but also drive benefits back into our manufacturing networks and logistics networks, which is obviously helping us to operate at scale and continue to push our efficiencies. I'll move from Slide 12 through to Slide 15. We'll just have a very quick stop here. Our manufacturing network has gone on a significant transformation over the last couple of years. As you know, we closed the 2 better sites after acquisition. We closed our Canberra site. We've now announced the closure of Strathmerton cheese site and our 2 PCA sites, and we've sold out our Leeton site. So we continue to grow our business. Our volume has grown over that period of time, but we're now doing a more consolidated footprint that allows us to take more aggressive decisions around automation and capital allocation, but sets us up really well to be competitive into the future, both here domestically and globally. So we're obviously happy with the way that network is panning out, and we'll continue to optimize that network in the future. Just if we then quickly move on to the next slide, Slide 16. The key point I would say here is that we've seen realignment of the farm gate milk price to commodity price. I've been really pleased with our competitiveness at farm gate, both last year and this year in years where we expect, unfortunately, milk production to decline slightly, we have actually increased our milk acquisition. We've done that by having extremely dedicated and hardworking farm services team. We've done it because we're able to be very competitive with our farm gate milk price and still make good returns from that. And so we're very pleased with that. Slide 17, we have relaunched our sustainability strategy. We'll talk more about that in our sustainability report, which comes out in October. But basically, it will focus around circularity community and collaboration. And I would just say that we continue to remain on target to deliver all of our pledges and commitments that we've announced over the last couple of years. With that, Gunther, I will throw to you on Slide 18 around our key financial messages.

Fantastic. Thank you, Pete. And as Pete and Barry were reflecting, it was just about 2 years ago that we unveiled our 5-year strategic plan at our Wetherill Park site. And we said that when the -- when that 5-year period is done by F '28, we have an EBITDA of more than $250 million, and we would lift our return on funds employed from around 4% to over 10%. So we come through this year more than on track to achieve those objectives. We've lifted EBITDA from $160 million 2 years ago to over $200 million, with the biggest part of that increase occurring in the most recent year. And we said at the time that one of the most important metrics that we had to drive to get there is that gross margin. Pete talked a bit about that as well. When we began this journey, our gross margin was just over 19%, and we finished FY '25 at a 21.5% gross margin. Still not good enough. We have a healthy level of dissatisfaction with that gross margin, but we're very pleased that we've driven over 100 basis points a year over 2 years and remain on track to continue doing that through the life of our strat plan. As Pete alluded to, cash is king, and it's not just about the earnings increase. It's not just about effective net working capital management. It's about selling assets that don't contribute to the strat plan. So Pete touched on Leeton, which is a good sale of and a reallocation of capital in the first half. We also sold the Berkeley Vale warehouse. And if you think about it over 5 years, the BV Group has sold almost 25% of its warehouse and cool rooms nationwide. And just like Pete described with the manufacturing facilities, also in our logistics footprint, that leaves us with a more focused footprint, and we can invest and have the right ranges in that more focused group of cool rooms and warehouses and once again, allocate capital. So I won't say anything more on this slide other than we're quite pleased to see that step-up of 73% in earnings per share to 16.6%, and it leaves us in great shape as we enter year 3 of our strategic plan. The next slide is profit and loss. And again, I don't need to go through too much here, but I will -- Pete's about to get us some outlook for the upcoming year. And I will signal a couple of things on the profit and loss, both in this year and next that are important for any analysts on the line who are building their models. First of all, in CapEx, we invested this year $94.4 million in CapEx. And Pete talked about some of the things that growth and efficiency in labors and automation was the biggest one. Next year, in FY '26, we're going to have a fairly consistent investment level. We expect to invest about $95 million in CapEx in F '26, so very constant. And our depreciation and amortization next year will be about $92 million, $93 million, which is roughly in line with that investment profile. Our interest rate will begin to improve next year. So we see it dropping to about $32 million. And remember that of that net interest cost next year, about $12 million is lease interest costs on leases that we hold rather than banking facilities. So that will begin to drop as rates begin to drop and our cash flow improves. We also expect next year in F '26 to have a normalized tax rate of about 30%. We were a little higher this year. And a few people have noted that in FY '25, we showed a normalized effective tax rate of 34%. That 4% difference is worth about $3 million. And the biggest item within that is a capital gain relative to another warehouse that we sold in French's Forest. Now, we exchanged contracts on that in the F '25 year, but the settlement of that occurs at the end of H1 F '26. And so the capital gain on that is the biggest part of that difference that brings us up to a 34% effective tax rate. Some people have asked me, shouldn't you normalize that? Well, maybe you could normalize that. We do that on settlement, which will occur in November, December of the upcoming year. So model 30% for next year. And when you take all those into account, we should be north of $0.20 normalized in EPS as we go into the next year. So I think that's enough on the P&Ls. Key performance measures on the next page. Again, I don't need to talk to this one. We had 8.4% ROFE, which is a substantial uplift compared to the prior year. And we see the upcoming year getting closer to 9% or so. So is there the opportunity for us to deliver our ROFE targets a year early? Yes, we believe there is. So I think that's very positive and that we're well ahead of our expectations on return on funds employed. The next slide is bulk turnaround and branded growth in the segments there. And really pleased with that branded growth, as Pete and Barry outlined earlier. We started the year F '25 with 2.5% to 3% cost inflation. And that inflation was coming from areas like labor and energy and citrus and coffee and cocoa. Now, in a normal year, the model is you try and price close to cost inflation, and it's your innovation and your cost savings that expand your margin. But as Pete mentioned, in FY '25, it was a challenging year for the consumer and for some of our customers. And so, we didn't have the opportunity to price in line with cost inflation. We were somewhat below 1% in our pricing. And so we really had to focus on cost savings and innovation as the 2 main levers. And we're so pleased that we finished the year with $40 million of cost savings in areas like manufacturing efficiencies within the sites, procurement, logistics, routes, as Pete described. And not only are we pleased in that performance and cost savings in F '25, but we have a strong pipeline of those cost savings in the years ahead. So we expect to do at least another $40 million in F '26 as we look forward to that year. So more savings on deck. So I think that's good enough. The next page shows segment performance. I think we've covered most of that. The only comment I'll make here is that in unallocated overheads, you do see a step-up there. We do have $3 million or $4 million of restructuring costs in that unallocated overheads, which we didn't normalize. And those ones relate to our back office and our processes. And we didn't normalize those because we tend to do them every year. So every year, we have a program to recognize some savings through technology through process improvement. So we've left $3 million or $4 million of cost inside that number. There are some project costs. And of course, it is a good year, so employee incentives did well. So I think that's an offset on that segment chart. The following slide on 23 is the reconciliation of normalized results. Pete's already called out the main things there. Strathmerton and PCA are both included in there as well as some portfolio rationalization. So I don't think we need to say anything more on that slide. The balance sheet on Slide 24, I'll let you read for yourselves. The only point -- I'll note 2 points. One, very pleased with that net debt reduction of $36 million. There are some provisions building near the bottom there, a $28 million increase in provisions, and that largely relates to Strathmerton, and most of those will be paid out on a cash basis in F '26. Finally, on the last page, we have cash flow here. So very strong, as Pete said, improvement in leverage and cash flow with our cash flow up well over $30 million on a like-for-like basis and our leverage down to 0.8. I think as we get into F '26, 2 things will happen. As I mentioned, we will pay out those provisions for the consolidation of Strathmerton, and we will also see an increase in milk prices. And so we do expect our leverage will move up a little bit over 1 at the half year, and then we'll continue to deleverage from that point forward. We finished year 2 with a gross margin of profit and cash flow exceeding our expectations, and it leaves Bega really well positioned to create shareholder value through both organic and inorganic opportunities. Back to you, Pete.

Fantastic. Good, thank you for that. If we just hit to Slide 26, which is our outlook slide. Look, we feel very positive about the outlook for Bega Group. We think our strategy remains extremely relevant and has the key tenets to deliver our 2028 objectives that we outlined to the market a couple of years ago. And so we actually think that there's a significant amount of opportunity within those 6 pillars that we talk about to more than deliver those commitments. We have a really strong new product development pipeline that we think is tapped into consumer needs. Those who have chatted to me will know that I'm very positive about the benefits, the functional benefits that dairy is providing to both Australian consumers and consumers overseas, particularly in the regions in which we trade in and that they will continue to seek dairy as a vehicle for those functional benefits that they now have on a daily basis. We think that we've got some -- there's a huge amount of focus on cost management programs. We continue to implement AI initiatives across the business. We continue to develop a better cost to serve. We get better at our demand planning. We get better at our line utilization of our factories. We get better at minimizing waste and overtime. And we're doing things better at the head office level. So some of the work that Gunther and the team have been doing around robotic process automation. We just see a huge amount of benefits to keep driving our cost management programs across the business. Obviously, we remain very bullish around the international opportunities ahead of us, particularly in the branded space. We've invested in that part of our business, and we'll continue to invest ahead of the curve there. We just see some fantastic opportunities for our products. and doing work with new partners in that part of the world. And we think that, that will not only be a significant contribution to our growth over the term of our strategy, but certainly for the 5 to 10 years beyond that. And so it's really important we set the business up for that sustained growth in the future. Obviously, some difficult decisions are being made around the closure of Strathmerton, Kingaroy and Tolga, but fundamentally, they've been -- they will provide a step change to our earnings in FY 2027, which we've highlighted to the market. We are removing unfortunately, about 450 people from our organization, but we will actually increase the capacity of our business during that time, which sort of alludes to the -- not only the level of efficiency it gives us, but the level of focus will give us around CapEx and future growth objectives around that. And I'm really pleased to say that in doing significant change like that for the business in FY '25 and some of the optimization that Gunther alluded to around our head office, we've actually been able to improve our engagement scores. And that's led to that terrific discretionary effort from our people and actually improvements around safety and quality that we're really proud of. And we think that's an important step in moving forward as a business. Successful milk recruitment, we have been able to buck the trend and acquire more milk over last year and this year, which we're really pleased about and which we think helps add stability to our bulk business, which is so important. And when we pull all of that together, we actually think we are on track to exceed our EBITDA target of $250 million by FY 2028, and we just remain really focused on that trajectory. And so therefore, it gives me the pleasure to be able to say that we'll provide guidance a normalized EBITDA number of $215 million to $220 million in 2026, which I think once again underpins that trajectory that should give everyone some confidence around that delivery of our strategic outcomes. So I'd just really like to thank our team. I'd like to thank our suppliers and our customers for working with us throughout the year. I'd like to thank our consumers for supporting us and also our shareholders for their tremendous support during the last 12 months. Barry?

00:35:45 Thank you, Pete. And I think just before we go into questions, I'm sure those on the line that have followed the trajectory of Bega and my involvement. I'm delighted to be able to be presenting the FY 2025 figures. But for me, it's always been about making sure that we establish really strong foundations for the future, and we have the capacity and agility to respond to change. And I hope that through the presentation, you've got the sense of the abilities and the capacities and the foundations that have been established over a long period of time to position us well for the future. But that said, I will be happy to introduce question and answer.

[Operator Instructions] Your first question today comes from Josh Kannourakis at Barrenjoey. Please go ahead.

Just a couple of questions. Firstly, just on into the FY '26 guidance, obviously, pretty strong considering also some of the step-up payments you've made so far. Can you just give us a bit of a breakdown underlying that, how you're thinking about the different divisional outcomes? And maybe just with reference to -- you did mention in the '25 numbers that there were some elevated costs around restructuring and things that were included in the normalized. Maybe just to give a bit of context on how we bridge that out into '26 as well.

Yes. Sure, Josh. And I think let me start with branded, which is a huge focus for us and always will be. We hit $205 million in FY '25 in our branded business. And we see that reaccelerating. And in fact, we kind of see branded going back to its 7% or 8% a year EBITDA growth rate. That could bring us up to something in the neighborhood of $220 million for the branded segment. Now Pete did talk a little bit about the escalation in milk costs that we have. The majority of that usually sits with the bulk unit. So I would see the bulk unit coming down a few million dollars as that higher milk cost comes into the bulk unit, but I'd also see overheads coming down a few million. So if you look at it, let's call it, $220 million branded, you're talking about something in the 30s for the bulk unit and a similar amount for overheads in the 30s, and then you get to a range of $215 million to $220 million.

So Josh, we're really happy with our innovation and the trajectory of our product innovation in the branded business in the second half of FY '25. So we think that we draw a line through that into FY '26, and we're pretty-confident around some good volume growth there. The team are doing a terrific job of extracting costs from the business. So Gunther was alluding to before, whilst inflation has come off, we still got costs in the business. But I think the business has developed some really good muscle memory around we just attack cost all the time. And so we're always building cost initiatives into our run rate. You've also got foodservice continues to do well with some good growth, and we still think we can maintain that trajectory in the international business. So that's where we sort of get our confidence from around the step into FY '26. We're starting to see a little bit of green shoot with the consumer. So we would say that the unstructured petrol and convenience, pubs and clubs space has been really dampened over the last 18 months. We're starting to see some green shoots there. We haven't built a lot of that into our result, but that would be nice. And then with the bulk business, it's just really around the hard work the guys have done with that mix. So the optimization around our high-protein concentrate powders and in particular, our cream cheese and our ability to drive that into our branded business and then through our international markets. So I think it's just the incremental value add or the incremental sort of momentum that we're taking out of FY '25 that we think will sort of build out in FY '26. I'm not that sort of [indiscernible].

Yes. That's great, Pete and Gunther, very helpful. And just with regard to, I guess, the supermarkets as well, like obviously, your rate of innovation has increased. You're clearly spending a lot on your own sort of marketing, a lot of new products to market. Like maybe in the context of that, plus the context of the higher input costs from milk, does that give you also a bit more confidence with regard to potential pricing as well as volume? Or how should we think about -- I know the pricing environment has been extremely subdued over recent years.

Yes. So I think -- so like all suppliers to supermarkets, where we've got genuine cost increase, we go back and talk about that with them and show evidence of that, and we go through a fairly well-worn process. We -- and we will -- so Josh, yes, there's price rises going through at the moment across a lot of the dairy players in particular. Certainly, if you're in confectionery last year, we would have been putting significant price rise through with the cost of cocoa and so forth. So it swings around about for the various suppliers into the grocery trade. We work really closely with those -- with our big customers on that. We then also try and build in a promotional activity that makes sense. We try and build in ranging that makes sense. We obviously -- we've just got through a range review with both big partners. So it's about getting that balance right, both from a pricing perspective, promotional perspective, ranging perspective and then margin sharing. So we work through that on a continued process.

Yes. Got it. Got it. Just secondly, just obviously, great results on the balance sheet cash flow generation and that should obviously continue to deleverage. I mean in the context of that, obviously, the Fonterra process has been very public. So interested if there's any comments you can make on that. But then second to that, really, like outside of that, with the balance sheet in this shape, can we talk about some of the other potential initiatives or segments that you may be sort of looking at in terms of seeing further growth or different platform potential for the business?

00:42:38 Well, Josh, Barry. I think we the Fonterra process. It's been public in terms of speculation, but not public in any other form. And I think I didn't know Fonterra's comment the other day that they don't comment on public speculation, and it's probably not appropriate for us to lever on that process, except that it's obviously ongoing. I think Pete will probably add to that add to my view on the strong balance sheet. And I think for those that have observed over a long period of time, after acquisition, we look to get our balance sheet back into a strong position as quickly as we can. That's because we're always alert to new opportunities, and we always like to have that balance sheet strong, whether it's for internal investment or whether it's for potential acquisitions. We would -- I would say that we see great opportunity in both. And so we're very comfortable with the opportunities in this business that we can invest in to grow off the great platforms that we've got. But we would still see that there are many opportunities out there that we feel that, particularly in the branded space, I might say, that we see that we can add to this great portfolio and that we can bring some of the skills that we've built over the last few years. So we remain very alert to opportunities, but we are -- I think the right way of putting it, Josh, we're alert to them. We see that there are a number available to us or will be available to us over time, but we are always sensible in the way we approach them. And it's great to have a strong balance sheet and I think it goes beyond balance sheet, quite frankly, it goes to the capability of executing M&A. And I think, again, the demonstration of what we've been able to do, particularly with the integration of the Lion business says that we've got a team that is able to recognize value and create it quickly in the area of M&A. But equally, I think what we have in place now gives us a wonderful growth platform regardless of that in terms of M&A.

Yes. Absolutely. Just to reiterate what Barry said, I think we've got a track record with branded acquisitions in particular over the last couple of years. So that gives us confidence that the right scenario was to happen within our frameworks, which I would hope -- I think are disciplined, then we would take that opportunity. But Josh, I get really excited by the -- just the sort of the organic growth that we can get out of the business and not just around efficiencies, but I see what's happening in Asia, even that investment that we've made in [indiscernible]. One, we've got an engineering team that can and a manufacturing team and a sourcing team and an R&D team that can close a factory within 4 or 5 months, make a decision to close a factory and then over a 12-month period, close the plant, but invest more than $50 million in another factory and increase its capability significantly that I think opens us up to huge opportunities both here and in Asia. I think that that's -- there's still lots of things we can do, and I think we've got the team to be able to drive real value. So we're really excited about some of the internal stuff we can do even if acquisitions don't come along.

Your next question comes from Phil Kimber at E&P Capital.

Can I ask a question just around the outlook for the bulk business. What are you sort of thinking in relation to commodity prices from here? Because I know it's difficult to forecast, but that commodity milk value, I think you show it in your chart, has fallen sort of to a level that's basically below farm gate milk prices at the moment. So I just wanted to get a sense of whether you think that, that will pick up over the course of the year? And also, as a second part of that question, are there sort of lag effects that we need to consider that actually that's based -- that chart on Slide 16 is based on spot prices and that maybe there's a 3- to 6-month lag before those come through your P&L?

Yes. So Phil, it's a good question. So we're usually conservative around our second half predictions. So that -- I could leave you with that. So we think that the results probably front-ended with commodity prices. We would say that they may soften a bit in the second half, and we certainly build that into our thought process when we give guidance. That would be the first point. The second point would be that is a basket. That blue line is a basket, which is actually -- it's a good indicative -- it's a really good indicative indicator. What the team have been working on is trying to get the optimal mix within that basket. So hopefully, we can outperform it. And so that basket will probably be weighted by cheese. And as you know, we don't have a massive exposure to cheese. And the work we've been doing around valorizing, particularly the protein side of our business and the fat side of our business, fat through cream cheese and a number of products and the protein through protein concentrate and so forth, we think we can hopefully outperform that blue line a little bit. So we've been reasonably conservative, but the work we've done, we think places us in a good position to sort of hopefully buffer any decline -- significant decline in the second half. But if it really fell away, that there would be an exposure there. And then we do try and probably sell. So where we think commodities will probably fall away in the second half, we try and sell as much as we can. So we've probably extended our sell period out. You can't extend it out too much because you get -- you take a math on price. We've probably gone a little bit longer than 3 months at the moment. All of those factors that give us confidence around delivering that result. that bulk result in light of we think that commodities will probably come off in particular, cheese.

Yes. That's great. Can I ask one more just then on the growth side of things, particularly around the Bega manufacturing base where you're increasing capacity. There's obviously a lot of things going on in the industry and one area, as you just mentioned, that you don't have strong exposure to cheese, even though you've got one of the best branded cheese brand names in Australia. If things were to change around that trademark agreement, I know it's all hypothetical. I mean, are you well positioned if anything changes there? Is it a relatively easy exercise if things were to change that you could potentially take that back internally and put it through your own plants and obviously capture some more earnings as a result?

Phil, I'll probably be very conservative in the answer to this question. I don't think it's good for me to engage in any sort of speculation on any of the brand outcomes. I think the one comment I would say is that we are a very accomplished across-product dairy manufacturer that knows that business very well. So we -- and I think probably what this result demonstrates more strongly than any is that our capacity to be agile and make changes where we need to is very well developed. But I don't think I should talk about specifics.

Your next question comes from Ajay Mariswamy at Macquarie.

Just a question around the market share that you guys look to have taken in foodservice. Could you give us a bit of color on what the key drivers have been there? And were there any material contract wins we should be aware of that may be difficult to cycle in the coming years?

Yes. So we sort of -- we had a tiered approach. So first of all, we want to get the right talent into the business. So we've gone and source some excellent talent with really deep foodservice experience. We're probably a little bit light on there in both level of experience and quantity of people. So we've gone and beefed up our team, which is the start. We then went and developed -- with that expertise, we've then gone and developed sort of a close to full foodservice offering. So around pack size, performance and so giving us sort of a proper offering that we could go to the market with. And then we beefed up our sales team with chefs to get back of house. We spent a lot more time with key customers and key accounts, educating them on our product and engage them through all formats of media. And then the first piece was to get into the big distributors, and we've done that. We've actually won some awards this year for the first time with some of those big wholesale distributors, which we've been delighted with around volume and service and delivery and performance. We also wrapped our portal around that as well to enable doing business with us to be a lot easier. And now we're moving out into sort of smaller unstructured accounts. So really hitting areas like hotels, schools, institutions such as hospitals sort of a lot harder, so -- and that's going really well. So I can't talk of significant accounts that are changing the world, but that sort of hopefully gives you a little bit of a flavor, Ajay, of how we're just coming from a lot more focused perspective and still lots of room to go. As you know, out-of-home meetings accounts for about $60 billion worth of food spend in Australia. Dairy is the second biggest category in that. It's more than -- I think it's about 22%, 23% of that last time I looked. And so -- and we've still got lots of room to go in that space. And so what we do is we continue to support that team. We continue to innovate products that meet our customer needs. As I said, it's often a very different need to that of a consumer shopping through the traditional grocery channels. And so I think hopefully, I think we're getting better and better at that.

Got it. And then just secondly, around the International segment, are you able to give us a bit of color around the growth opportunities there in terms of is it growing your product set with your current customers? Or is it more of a penetration story that you break into more and more retail outlets and expand your penetration that way?

Yes. Well, yes. So we've -- first of all, we've focused our range down. So we really want to -- we don't want to try and be everything to everyone. So we've come out with a cheese strategy around processed cream and natural cheese, cream cheese and natural cheese, cream cheese being our champion product. And then we've also got yogurt, which is actually going exceptionally well for us at the moment of a much smaller base, but very well. So we have distributors. We realigned all of our distributors 18 months ago. So we consolidated them. And we've got -- we tend to look at our distributors between foodservice and retail. And so we're working on selling more into those foodservice agents. And with our team now beefed up team on the ground up there in those markets, we're doing a lot more work alongside those agents to drive volume. But then we've also got a direct model where we go direct to retailers. And so that's worked particularly well in China and in Thailand, where we're now dealing directly with retailers over there. So we had some excellent wins at Sam's Club in China. We're doing a lot of work with CP Group in Thailand that own 7-Eleven and a number of other retailers. And so it's a bit of a combination of both. What I would say is that I just -- every time I go into that market, I try and get out there 3 times a year and talk to our key customers out there. Every time I go into that market, I just -- the change and evolution of it just never ceases to amaze me. And I think when I look at the size of the addressable customer base and how that's growing, where that will be over the next 10 to 15 years, I think it's a significant opportunity for Bega well beyond my time, but also just other food companies in Australia. I think it's just going to be -- it could be a game changer for us.

And just last question, if I may, around consumer sentiment, both domestically and internationally, pointing to it being improving. If you look across your sort of essential and discretionary products that you guys offer, are you seeing sentiment improve across the range? And what sort of implication should we think about in terms of sales and margin across your major categories?

Yes, that's interesting. So a good question. What we -- so the data has been -- Gunther and I have been watching the data for the last sort of 9 months, and it has been heading in the right direction. What I would say is we've probably only just started to notice a few bits and pieces probably in the last couple of months. So there's been a little bit of a lag. But what we would say is we're starting to see for the first time in about 2 years, we're starting to see stronger numbers out of P&C. So last month, we had a really nice growth uplift in petrol and convenience, which was very subdued. I think when people were heading out, they're getting pull in and getting half a tank of petrol, but they certainly weren't going and buying a couple of days or sort of more discretionary spend. So we're seeing down in traffic and down in cross-buying in petrol and convenience. We're also seeing out-of-home pubs and clubs and restaurants and various takeaway stores also being a bit subdued. We're just starting to see those numbers come back. So the foodservice results that we were getting were well ahead of any market growth that we're seeing, but we're being really heartened by petrol and convenience and that unstructured trade cafes and so forth starting to come back. We're still seeing a real drive by major retailers to demonstrate a value offering. And I'd say that that's proving to be a bit more challenging around maintaining margin. That's why we're so happy that we actually grew margin in our branded space, and we had exposure to different channels. And that's just the consumer. We're probably seeing strong growth in the discount retailers still, and that's the other large retailers responding. So we continue to see margin very -- I would suspect fairly low margin growth in that area and will predominantly be driven by volume. So that's how we're sort of looking at it, which is not too out of step really with our 5-year strategy.

Your next question comes from Evan Karatzas at UBS. Please go ahead. Apologies, Evan has disconnected. I will move to the next question. This is from Mark Topy at Select Equities.

Just -- my first question is about the dairy protein segment as, I suppose, a distinct segment. And I've seen some headlines that say that dairy protein is the trend of the decade and some growth statistics even in Australia saying that the segment is growing at plus 20%, 23%. I'm just wondering how you might see that over the next 2 years, the opportunities in yogurt and milk and in terms of it becoming very meaningful to the bottom results going forward as a growth category.

I will try and stay pretty little headed about things, Mark, but I wouldn't disagree with that comment about it being the trend of the decade. Protein is a significant driver behind not just dairy, but a lot of food trends at the moment. I think if you think of low fat being a massive trend during the '80s and '90s, I think that protein is significant. It's changing the way we consume food and our relationship with food. It's tying into so much wellness and also what we're seeing around weight loss drugs as well. Protein becomes a key enabler of that -- of a healthy lifestyle under a weight loss program like that, which is gaining massive momentum. So I think protein will be significant of any food company's growth platform moving forward. I think consumers will become more educated about protein and the quality and type of protein they consume, natural versus synthetic versus various different variants. And I think the good news is that dairy proteins play to that base really well. They're a very high quality and they're actually very affordable. So I think that, that becomes a massive trend for us. We were late to protein, if I'm being truly honest. But what I think is we've actually -- when we've arrived, we've arrived with scale and velocity and a distribution network that can make it happen. And I think our sensor has come up really well because I think the early inhibitors around protein were around sensory and flavor and taste. So I feel really bullish about our protein offers. And to be quite frank, the last 12 weeks of data gives me no reason not to maintain that attitude. So I think it will be significant for us. I think we now need to make sure we continue to refine our view of protein and how we continue to appeal to customers because I think they'll become more -- a little bit fussier, but I think it will be a key part of our business moving forward. And then the branches out from protein, amino acids, fiber, all those great things that come from dairy or can be consumed with dairy, I think, will be significant for us.