Friday, March 29, 2024

Staff doubles and fourth dryer on drawing board

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In the space of little more than two years Canterbury dairy company Synlait Milk will have more than doubled its staff as it fast-tracks expansion plans and cements its place in the world’s dairy nutritionals and ingredients business.
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Synlait managing director John Penno said by June next year the company will employ about 450 staff, well up on the 180 it employed at the same time last year.

It’s only just about to turn the first sod for its third dryer and already thoughts are turning to dryer four, he said.

Canterbury’s milk production is still set to grow despite environmental limits creating uncertainty for current and potential suppliers, and Synlait’s having no trouble getting all the milk it needs to meet its strategic goals and growth plans.

Penno said a significant proportion of its new milk comes not only from new farm conversions but from farmers “converting” from other companies, namely Fonterra.

The ability to cash in shares or not have to invest hefty sums in them in the first place, as well as a competitive milk price, are enticing farmers into the Synlait fold away from the dominant co-operative. He estimated the company’s natural share of supply in the region would be about 25%.

“We’re probably not looking for more than that at this stage,” he said.

He couldn’t say exactly what its current share is and admits that this year it still took about a third of its maximum entitlement from Fonterra under the Dairy Industry Restructuring Act (DIRA).

It will only be eligible to take DIRA milk until 2016 and expects to take it then as its capacity increases with its new dryer coming on stream.

The loss of former Oceania suppliers from South Canterbury as their three-year contracts run to an end has quickly been replaced with suppliers closer to its Dunsandel home, Penno said.

He won’t be drawn on how Fonterra’s move away from the milk price model calculation this year could benefit his company but Synlait’s processing assets are well configured to take advantage of the wide disparity between milk powders and other dairy products. 

It stands to reason its improved profit position this year will have been influenced by what it has to pay in milk price on a competitive basis with Fonterra and what it has been able to earn for its powders.

The company’s currently in expansion mode with a total of about $235 million worth of investment into the Dunsandel site including:

  • Its $19m lactoferrin plant, commissioned last month,

  • Its new $16.9m drystore just completed,

  • A $28m canning and blending line due to be up and running by June,

  • Construction just beginning on its $135m infant-formula-capable powder dryer three,

  • Construction also under way on a $21m laboratory,

  • Planning and design underway for a $15m, 7t/hour Ammix butter plant.

The lactoferrin plant will extract the highly valued nutritional component from milk using spray drying, rather than freeze drying as is commonly used. The blending and canning plant too has been “up-spec’d” and built to the requirements of its multinational customers.

But it’s unlikely the ambitious company will stop there for long, with Penno already talking about planning for dryer four and stipulating that no matter what other sites may exist in the future, Dunsandel will remain headquarters and its most sophisticated manufacturing site.

Synlait’s approach to partnering with customers and potential customers early in its design and build projects has paid dividends not only in ensuring customers get what they want out of the plants but also in cementing business-to-business relationships.

The company can now boast four of the big six multinational dairy consumer brand companies as being on its customer list.

Danone, which broke ties with Fonterra after the botulinum scare, is believed to be one although Penno wouldn’t confirm that. Another is Dutch co-operative FrieslandCampina, which took a 7.5% shareholding when Synlait listed last year and recently increased its stake so it’s now the third largest shareholder at close to 10% shareholding.

Penno said despite Synlait producing branded, consumer ready products for its customers it’s likely that even in the long term the majority of its production would leave its site as 25kg bags of value added dairy ingredients tailored for the big players’ plants.

It has three brand partners; Pure Canterbury with Bright Dairy, Akara with Sichuan New Hope Nutritional Foods a subsidiary of New Hope Dairy, the fourth largest dairy company in China and a2 Platinum range with a2 Infant Nutrition a subsidiary of a2 Corporation.

Changes to Chinese regulations require manufacturers in China to have the key components of infant formula manufacture on a single site including a committed milk supply, wet blending and spray drying, dry blending and consumer packaging with quality, traceability and analytical capacity.

Synlait’s view is that over time the same will be expected of companies exporting infant formula to China. 

Penno said that’s possibly been partially behind the increased interest in Synlait from the larger multinational players as they seek to establish contract manufacturing that will satisfy regulatory demands. But he also believes the act of listing on the NZX has brought increased interest as companies take the Canterbury niche player more seriously.

“Part of it’s probably because we are listed and that places disciplines around a company and makes customers feel a bit safer working with them.

“Some of it’s the investments we’ve chosen to make, the quality of them and the way we work with others to plan and spec them,” he said.

Profits are rising, based on year-on-year comparisons and its half-year results issued in March, and confidence among senior management and governors is high, but there are still challenges particularly with the Chinese market.

Penno said fallout from the botulinum scare and regulatory changes have been disruptive to the big multinationals’ business and to Synlait’s branded operations.

It led to a profit warning at the half-year announcement with the company having to reassess the bullish forecast it had made only a couple of months before. The warning caused the biggest tumble in its share price since listing last year, with 28c/share being knocked off what had been close to a $4 share price.

By mid-April it still hadn’t recovered and was sitting at about $3.63/share, although that’s still well up on its initial issue price of $2.20 and debut price of $2.62/share in July last year.

Penno views the Chinese problems as ones Synlait is well placed to work through.

The array of small brands is shrinking and those that remain will be in a strong position to take advantage of China’s economic growth and demand from the growing number of wealthier people. He believes Synlait’s relationships and strategy with its ingredients customers too will serve it in good stead.

Three founders, two entities

The original trio – John Penno, Juliet Maclean and Ben Dingle.

 

 

 

 

 

 

 

From a fledgling farming company early in the new millennium, the brainchild of Penno and compatriots Juliet Maclean and Ben Dingle, Synlait has morphed into two separate entities with the milk processing company now a landmark site on State Highway One in Canterbury

It hasn’t always been plain sailing and both Synlait Milk and the original farming enterprise, Synlait Farms, now operating at “arms length” have had financial challenges.

The global financial crisis, debt, a need for capital and ill-timed slumps in commodity prices had them under pressure at various points with the Chinese coming to the party twice.

Bright Dairy stepped up for Synlait Milk taking a 51% share in return for its capital injection while in recent months it’s been Shanghai Pengxin which has invested in Synlait Farms to take a 74% shareholding in its 13 Canterbury farms.

Penno said he’s not perturbed by Shanghai Pengxin’s controlling stake in the farming company even though it’s talked before of processing milk from the former Crafar farms it owns in the North Island and the potential for it to do something similar with its new Canterbury-based milk.

“For some time now we’ve had an arm’s-length relationship with Synlait Farms,” he said.

“It’s still a very strong, good relationship just as we like to have with all our suppliers but it is treated as any other supplier and it doesn’t get any special deals.”

Penno himself still holds 10% of the shares in Synlait Farms with Maclean holding 16%. He also has a 3.7% stake in the much larger company, Synlait Milk, while Maclean’s share is now 0.89% and Dingle’s 3.1%

Bright Dairy’s holding in the milk company slipped to 39% when Synlait listed on the NZX last year. In March, Dutch-based dairy co-operative FrieslandCampina lifted its interest in the company from the 7.5% it took when the company listed to close to 10%.

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