Forecasts were difficult, managing director John Penno told the annual meeting in Christchurch, as the group lifted its figure from the previous $5/kg MS estimate.
“Trading prices today support a payout of $6 or more but later in the season commodity prices could move back again.”
Europe had 400,000 tonnes of surplus skim milk powder, the biggest stockpile in many years and a significant overhang of product on the market.
His team was cautious on the fundamentals but overall optimistic.
A $6 payout would be a big increase on Synlait’s $4.02/kg MS payment to suppliers for the 2015-16 season.
Synlait tripled its after-tax profit in the July 2016 year, from a year earlier, but expected this year to consolidate on the latest figure or be “a little bit ahead”, chairman Graeme Milne told shareholders.
He emphasised Synlait’s status as a growth company, with a further $300 million of capital expenditure planned over the next three to four years from profits, new capital and debt, including a fourth drier to make sure capacity kept up with market demand and development in cream manufacturing to take advantage of increasing prices.
Where the fourth drier would be built was not yet decided.
The directors have said they planned to develop a second manufacturing site, in addition to the existing central Canterbury site at Dunsandel.
They expected to identify a new site by the end of this financial year but there were no details available yet, Milne said.
Synlait’s gains were based on producing higher volumes of high-value infant formula for multi-national business customers. It supplied four of the top five of those groups.
The highest profile product was the A2 Platinum brand formula made for a smaller customer, A2 Milk Co, and was being sold in increasing volumes in China.
The planned reset of the regulatory system in China was expected to hold an increase in volumes to about 2000 tonnes this year but with an increase of about 10,000 tonnes in 2018, when the new system would come into force. That would also lead to new profit growth for Synlait.
The new regulations were designed to reduce the number of infant formula brands in China, with about 3000 available now, which the authorities say are too many to manage. Manufacturers would be able to register up to three brands.
“We have no concerns as we are well positioned with our strong partnerships but it will involve a lot of work,” Penno said.
“It will be positive for us.”
With a lot of brands taken out of the market, the remaining brands would secure good growth levels.
Synlait was trying to be careful not to be too dependent on the Chinese market, though that was not that easy to achieve with the scale of its population, he said.
Up to 16m babies a year were born in China and that could increase to about 19m now couples were allowed to have a second child.
That was a big number to feed, especially when children were raised on infant formula till about the age of three, further extending potential sales.
“While we’ve been developing, our infant formula sales to China have grown to about 500,000 tonnes a year and are expected to grow to about 900,000 tonnes.
“The next biggest market is the United States with about 150,000 tonnes a year so you see how big it is.”
The US was also a target market for Synlait through its new business customer and 4% shareholder Munchkin. The US market involved a very rigorous process, with laboratory studies and clinical studies with babies but the Munchkin launch was expected in April next year.
“We are very confident with Munchkin in North America.”
Synlait had always planned to invest in cream manufacturing but that had been delayed because the company was too busy with infant formula, Penno said.
However, it was time to move on that because milk fat was becoming a more important ingredient, ahead of vegetable oils, especially in Asia with the growth in western-style diets. Cream was a key part of that.
Consumers were moving back to butter and away from margarine, which was good for Synlait.
