Friday, March 29, 2024

Synlait’s tough road to riches

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Potential riches bypassing Synlait became apparent a year after the Canterbury company opened its milk drying plant.
Synlait has matched Fonterra’s farm gate milk price for the 2022-23 season, at $8.22/kg milksolids.
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Customers were buying powder to make their own infant formula and while Synlait had plans to eventually enter the added-value game, such was the demand for its powder and rate of international growth in formula, a strategy rethink was required, managing director John Penno said.

“It gave us an insight to the demand. We saw growth, we saw the market and we saw why they were coming to Synlait.”

Penno said added value was about aiming to be the best in the world in your segment.

“It’s really saying you are adding more value to a product than anybody else. Added value involves everyone in the business, shareholders, suppliers, staff and customers.”

The company polled focus groups in China, Vietnam and Taiwan as part of market scoping for its added value move and the message it received was consistent with research findings by Lincoln University done about the same time.

The melamine scare was still resonating throughout Asia and consumers sent a clear message they would pay more provided products were proven to be safe, of high quality and from a supply chain that had integrity.

Research showed consumer concerns about farm practices and food safety rated highly, regardless of the consumer.

Farming’s environmental impact was easily the biggest concern for urban New Zealanders followed by animal welfare and people.

“To be the best in the world you need to reinvest continuously in cash, capital, people, systems and processors.”

John Penno

Synlait

International consumers wanted their milk to come from a healthy cow, a clean environment and from farms where people were looked after.

The thinking was that unhappy staff could tamper with milk quality.

Penno said urban concerns about irrigation and the environment in Canterbury could not be ignored and, together with expectations from international consumers, led Synlait to develop Lead With Pride, a voluntary onfarm certification programme.

It promotes best practice dairy farming under four foundation pillars: environment, animal health and welfare, milk quality and social responsibility, for which the supplier receives recognition and a premium on the milk price.

To be certified farmers must meet standards, monitor activities and impacts, have plans in place for certain farm activities and document activities. There are several levels of certification which will earn suppliers up to an extra 12c/kg MS.

Half Synlait’s 161 suppliers will receive a premium in the coming season for doing something onfarm that adds value to Synlait products.

Synlait produces milk powders, nutritional formula and lactoferrin for a variety of clients of which 70% are multinational, 25% are regional market leaders and 5% new positioning companies, such as A2.

It is also developing a new product iNdream, which has a greater amount of melatonin-rich milk than standard milk. The melatonin hormone helps humans regulate their night-day cycle.

Penno described the company’s target Asian market as professional, educated and intelligent, aged 25 to 35 who “live online.”

Lead With Pride also helped improve farm productivity with a Lincoln University study showing that it could add an extra $120,000 a year in revenue for a certified farm compared to an average Canterbury dairy farm.

Penno said certification also met the standards required by Environment Canterbury’s farm environment plans.

“We do know it takes around 200 hours of their time and half a season.”

It also opened up other added value opportunities such as online traceability, where a consumer can trace the infant formula they have bought back to the farm where the milk was sourced.

Penno said Synlait’s move to value-add was possible only because shareholders were prepared to forgo dividends, ensuring sufficient capital was available for reinvesting in the company.

“To be the best in the world you need to reinvest continuously in cash, capital, people, systems and processors.”

Having built its spray drier in 2008-09 then deciding to follow the value-added path, Synlait decided to launch an initial public offering (IPO) but it coincided with the global financial crisis and growing industry competition.

“We desperately wanted it to be local, it was just bad timing.”

Chinese company Bright Dairy took a cornerstone shareholding and in 2013 the company floated 51%.

Synlait is still expanding, spending $224 million over two years including building a new drier for next season taking the number to three, which will lift powder capacity to 140,000 tonnes a year. It is also building a new laboratory and administration block.

Staff numbers will increase from 320 at present to 360 over the next year, and the processor is looking for new suppliers.

But it is a tough road that requires support from shareholders.

In the six months to January 31 the company lost $6.4 million after tax on the back of lower sales and revenue.

Part of the result was caused by exchange rate losses and timing, with higher-value product being produced in the second half of the year and losses from selling product bought at a higher commodity price.

Synlait expects to make a $10-$15m full-year net profit after tax for the year.

Penno said Bright was still a cornerstone shareholder and its involvement had been invaluable supporting its move to value add, providing connections and an understanding of the Chinese market.

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