Synlait Milk forecasts boost in half-year profit

Synlait MilkSynlait Milk’s financial performance in FY16 will reflect strong growth in nutritional sales volumes and showcase the benefits of a value added strategy.

Shareholders were told today at Synlait’s 2015 annual meeting that the focus for the current financial year is on developing nutritional and infant formula products with key customers.

The South-Island based dairy company is forecasting a boost in underlying net profit for its first-half which will be significantly above the $419,000 achieved in the same period in 2015 mainly due to a boom in sales of infant formula.

CEO, John Penno, said the company, in which Shanghai-based Bright Food has a 39 percent stake, is experiencing strong nutritional product sales due to a rise in demand for infant formula.

Penno pointed to the completion of Synlait’s growth initiative program as a key milestone in the business’ strategy to make more from milk.

“We’re now geared up to achieve our strategy. With one of the largest and highest specification infant formula production sites globally, we’ve created an integrated supply chain from source to our customers,” he said.

“We will continue to partner with leaders in the infant formula industry, developing strong customer relationships that support our growth targets both in FY16 and the future.”

Penno invited shareholders to focus on the volume of nutritional sales as a key performance indicator for Synlait in FY16.

Chairman, Graeme Milne, said 2015 sales of $448 million, a long way back from the $600 million achieved the previous year, was due to falling global commodity prices and disguised the increase in value-add products sold during the 2015 financial year.

Milne discussed global factors behind the decreases in international dairy market pricing and pointed out prices since July 31 2015 have decreased further to unsustainably low levels from a New Zealand farming perspective.

“It’s important to understand our profitability is not directly affected by international dairy prices. It impacts our revenue, but the value we create by differentiating milk inside the farm gate and throughout the manufacturing process creates a margin for our business that is essentially independent of the global pricing of commodities,” said Milne.

“With the successful commissioning of our third large scale spray dryer in September and current increases in the sales volume of consumer packaged infant formula, I stand by my previous statement that our profitability will be in advance of anything achieved to date. He did not state an actual number.

Synlait is anticipating a four-fold increase in sales of consumer packaged infant formula, up on earlier guidance of a three-fold increase.

That will follow the launch next year of the Munchkin Grass Fed infant formula. The privately-held Californian company, which designs, manufactures, and distributes innovative infant and toddler products, is launching a new Grass Ged retail-ready infant formula into the US and China that will be made exclusively by Synlait. The move is expected to help the dairy processor reduce its exposure to China although sales to that country have already dropped from 30 per cent of total sales to just 10 percent in the last financial year.

Synlait said it has now developed a Grass Fed standard and secured 25 farmers to supply this milk, who will be paid an undisclosed premium. More than half of the milk supply in 2016 is likely to achieve a premium above the base milk price, Penno said, though Synlait did not reveal what most of those are apart from its Lead in Pride best practice dairy farming program which attracts a premium of between six cents to 12 cents per kilogram of milk solids.

In 2015 an extra $3.1 million was paid above the base payout of $4.48 per kilogram of milk solids.

The company is also the exclusive manufacturer of a2 Platinum infant formula, sourced from herds that only produce a2 type beta-casein protein, which is having continued volume growth.

Penno said the dairy company had this year completed the growth program outlined in its 2013 prospectus and told shareholders that an expected increase in the volume of nutritional sales will be a key performance indicator for Synlait in the 2016 financial year.

“Our total sales volume is set to grow from FY15’s 97,800 MT to 122,500 MT in FY16. More than half of that growth will be the result of increased nutritional sales in consumer packaged infant formula, which carries a significant benefit in terms of gross margin.”

The focus over the next two years will be on improving operational excellence, pushing harder on its value-add strategy, reducing debt, and improving its return on capital.

Chief financial officer, Nigel Greenwood, provided shareholders an update after completing renegotiation with a banking syndicate of its long-term loans, with capital expenditure under its growth strategy having pushed up debt levels.

It has decreased working capital facility requirements set at $35 million for the 2016 financial year. A new five-year revolver facility includes capital expenditure that previously came under the working capital loan and is set at $245 million for this financial year, Greenwood said.

Synlait said it now had 173 contracted milk suppliers and increased contracted milk supply by 6.6 per cent year on year to 51 million kilograms of milk solids. That supply is forecast to increase by a further 6.1 million kgMS this financial year.

Resolutions passed at the annual meeting including Milne’s re-election to the board and the maintaining of directors’ fees at current levels.

A change in one of Bright Dairy’s appointed board directors was also announced with Zongbo Dong announcing his retirement from his corporate and professional roles. The chairman praised Dong’s service and dedication to Synlait Milk after more than five years on both its board and audit and risk committee. Dong is replaced by Qikai (Albert) Lu as one of the Bright Dairy appointed directors.

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