I think the answers you seek can be found within this conversation from the Q&A.
In short, from my interpretation. It is Synlait.
DB holds back and says it's inappropriate to discuss this in detail. He said he is not blaming Synlait directly and that it's more appropriate for them to explain their side.
We are within our rights to ask this question and expect an explanation.
David Arrington (Bank of America):Morning. Look, I’ve received a few emails from people who are confused about the supply chain issue. I don’t want to waste a question on this, but I think we need to clear it up. The consensus forecast was expecting you to grow sales by about 9% next year, with margins around 14.5% to 15%. However, there seems to be a discrepancy between these expectations and your guidance for FY25, even after considering reduced losses in the U.S. and Matura Valley. Could you clarify the supply chain constraint? It’s causing a lot of concern in the market, and your previous answer didn’t fully explain it. A clear explanation would be beneficial for all investors and participants on the call.
DB:
Hi David, it’s challenging to be very specific. In terms of growth, we’re targeting mid-single digits, and without this issue, we might have aimed for mid to higher single digits. Regarding margin improvement, we hoped for more substantial EBITDA margin growth, but the potential loss in sales and increased air freight costs may limit any improvement in EBITDA margins. Our best estimate now is that EBITDA margins will be broadly flat, though they could slightly increase or decrease.
David Arrington:
What exactly is causing this? Is it a one-off issue, or is it sustained? Can you clarify?
DB:
David, it’s not appropriate to discuss our supply chain in detail. The issue is more operational and temporary and will be corrected. We’ve faced similar problems in the past, which isn’t unusual for the industry. While I’m not blaming Synlait directly, such issues occur occasionally. It’s more appropriate for Synlait to explain their side, as I don’t want to speak on their behalf.
David Arrington:
Okay, that clarifies things a bit. We have a continuous supply chain, so any disruption impacts us. We ended FY24 slightly lower, which doesn’t help. If there’s an interruption, it takes time to catch up, but we’re currently ramping up production. It’s unfortunate but temporary. The longer-term impact could be on new user acquisition, but it’s hard to quantify right now. We should be back on track by the end of the half, hopefully earlier.
David Arrington:
I understand the sensitivity of the issue, and I appreciate the answer. I have questions about the details, but you’re sitting on a billion dollars in cash, and your operating execution is strong. To meet your $2 billion sales target and mid-teen margin, how much CapEx do you need? How much excess cash do you have right now to achieve your medium-term target?
DB:
Firstly, let me clarify that our target is not 16%. In terms of CapEx, fully developing MVM and installing blending and canning would require $100 to $200 million of CapEx. We may also consider some investment in the China market, but that’s likely further down the track. The M&A/JV opportunities we’re exploring in New Zealand and potentially China could cost hundreds of millions of dollars, depending on whether it’s an outright acquisition or a joint venture. We’re also preserving our balance sheet to mitigate supply chain risks and invest in developing our capabilities and market access for the future. We’re not holding onto close to a billion dollars without a reason. Once we have more clarity, we’ll assess how best to return capital to shareholders.
David Arrington:
How long do you need for clarity? A year or two? What you’re discussing seems like a longer-term issue.
DB:
No, it’s more like a year or two, and I hope it’s less than that. The key factor is the Synlait recapitalization process, which should be clarified soon. As for our M&A/JV opportunities, we’re always looking, but we can’t be certain. I hope to have clarity within the timeframe you mentioned. We’re not sitting on a billion dollars for the next five years if that’s what you’re thinking.
David Arrington:
Okay, well, thank you for answering the questions, David. They needed to be clarified, so thank you very much.
