The no palm kernel incentive will add to the group’s existing range of premium payments, which cover seasonal supply, the Lead With Pride quality certification and the Grass Fed and A2 milk supply.
It is early days for the palm kernel initiative, new chief executive Leon Clement said.
But farmers will want to be involved and the company will work with them to help them transition away from the feed.
More than half of the 200 or so suppliers are on some sort of premium arrangement, including about a third on the main Lead With Pride programme.
Not all of them are on all the premium programmes, which in total added 13c/kg MS to the average price paid by the company in the 2017-18 season. Added to the base $6.65/kg MS figure, the total average price was $6.78.
That is a significant gain over the $6.30/kg MS price a year earlier, which had a $6.16 and 14c split.
Synlait has now forecast a $6.75 total this season, compared to an opening forecast of $7, following commodity price falls only partly offset by a weaker dollar. The new forecast allows for an expected recovery in commodity prices in the medium term, Clement said.
That could result from an international supply/demand issue because there is pressure on milk supply in Europe, the United States and Australian industries and signs of constraints in Chinese domestic supply.
There is good production in New Zealand but if the international issues play out they will drive up prices.
“We’ve cautiously signalled a rise and if it does not happen the milk price may change through the season,” he said.
Synlait reported an after-tax profit of $74.6 million for the year ended July 31, a big rise over the $39.5m figure a year earlier but not a surprise following the record first-half reported in March.
Earnings growth will continue this year though probably at a slower rate, it said.
The 2018 profit gains outstripped revenue growth, up from $759m to $879m, because of a greater ratio of finished infant formula in the sale mix at 28% of the total, up from 13% a year earlier. That lifted the gross margin a tonne to $1294 from $792, a 63% gain.
Despite that, operating cashflows slipped to $98.4m from $115.17m but remain very healthy.
The main reason for that was an increase in inventories, up from $82.7m to $145.4m, chief financial officer Nigel Greenwood said.
Because of the rate of growth in infant formula sales, more bulk formula is needed on hand going into balance date to meet the following first-quarter sales.
Though Synlait’s already modest interest-bearing debt ratio is lower, at 18% from 21% of total assets previously, the net debt figure has increased by about $30m because of the lower cash on hand.
Synlait has a strong balance sheet from which to fund its expansion with major building projects including the advanced dairy and liquid milk facility at the main Dunsandel site and the new infant formula plant at Pokeno in Waikato.
The palm kernel incentive offer to suppliers is part of what Clement said is an holistic approach to the group’s value chain with the environment and sustainability becoming more of a focus.
The Lead With Pride programme will bring in greenhouse gas emissions targets, reducing levels by 35% by 2028.
Other targets are a 20% reduction in water use and a 45% reduction in nitrogen loss.
Farmers will be offered an increase in incentive payments as encouragement to secure the certification.
“We think our sustainability goals are a brave leadership position.”
The new, advanced dairy and liquid milk packaging plant at Dunsandel heralds a new Everyday Dairy category for Synlait.
From April the plant will supply Foodstuffs South Island with all its private label fresh milk and cream.
Synlait also announced plans to buy selected assets of the Talbot Forest Cheese business in South Canterbury, including a new production plant at Temuka with 12,000 tonne capacity. The investment, in two stages and involving between $30m and $40m, is expected to be completed in August next year. Talbot Forest Cheese has existing sales and sales growth but Synlait is really buying into the strategic asset.
The Everyday Dairy category is a $2 billion market in NZ and Synlait will also target overseas markets, Clement said.
The acquisition cements Synlait as a company with high-quality, flexible dairy manufacturing capabilities tailored to meet customer needs and with diverse revenue streams. The acquired business will have a variety of cheese products. NZ cheese is as big a market as milk, he said.
The new processing plant at Pokeno is slightly behind schedule because of some delays getting materials but momentum is building again and it was expected to open in the first half of 2019-20 season.
Synlait is working to recruit milk suppliers and getting a positive response from dairy farmers.
The A2 Platinum infant formula made for A2 Milk Co is Synlait’s highest-profile product and in July the parties signed a new supply agreement running to July 2023. Synlait is exclusive infant formula maker for A2 in the Australian, NZ and Chinese markets. A2 now owns just over 17% of Synlait.
For its biggest shareholder, Chinese group Bright Dairy, Synlait is working to secure registration in China for its infant formula brand that Synlait makes and is doing the same for the New Hope brand. There has been some tightening up in the regulatory process but approvals are expected this year.
Another customer is the United States-based Munchkin group, which is still working its way through the registration process for its Grass Fed infant formula in the US. That is taking longer than expected.
Grass Fed is selling well for Munchkin in Australia.
Synlait is also increasing its research and development spend, Clement said.
