The publicly-listed milk firm says one of its priorities is finding milk, customers and acceptable margins to match its investment.
Shareholders at the annual general meeting in Christchurch asked about risks, like the impact of a Supreme Court ruling on the status of a land covenant on part of its new plant at Pokeno, south of Auckland.
A quarter Synlait’s property is contested in the legal challenge by its neighbour. At a hearing in April Synlait will ask the court to overturn a Court of Appeal finding the covenant restriction on industrial land-use should stand.
Synlait chairman Graeme Milne agreed with a shareholder’s suggestion the land is critical to the effectiveness of the plant but Synlait is quite confident it will work through the case without significant impact to the company.
Meantime, the board and management continue to increase profit while spending more on the business as it enters its second decade of milk processing.
Net profit rose by more than 10% in the latest financial year to more than $80m as Synlait rode a 39% rise in operating cashflow to about $137m. Sales lifted by 16% to just under 150 million tonnes.
Milne said it is at the end of a second major growth phase with significant investment in people and capital.
Staff numbers went from 682 at the start of the financial year to 900. Another 120 have joined since and the number will keep rising. The Dunsandel plant in central Canterbury is by far the biggest employer. Pokeno has just 70 staff, processing, marketing and shipping milk products from 56 farmers.
Yet Synlait did not have any new customers to announce. It is going to market with a bond issue to raise capital to pay for continued expansion.
During the year Synlait bought Talbot Forest Cheese for a reported $30-$40m and post-balance date it paid $120m for larger cheesemaker DairyWorks, which has big but unheralded supermarket supply contracts.
The acquisitions of the two Canterbury firms show how the company is diversifying and making good use of increasing plant capacity and growing liquid milk supply, reducing costly operational downtime.
It is important for the company to optimise its investment in new plant as it seeks new customers. It is dedicated to infant formula, particularly in its big market in China, but also recognises Chinese regulators can and do restrict sales of foreign-produced formula.
China has not registered two of Synlait’s infant formula brands meant for China, Pure Canterbury and Akara. The products, which are sold in New Zealand, are made for Bright Dairy, a subsidiary of Synlait’s 39% shareholder, Bright Foods.
Separately, Synlait had problems with commissioning its advanced liquid processing plant at Pokeno.
It made a $3.5m loss because of the problem and will work to stabilise performance and bring it back into line, Milne said.
Chief executive Leon Clement said any business has challenges but it’s how they deal with them that matters.
The replacement for founding chief executive, now-director, John Penno, Clement implemented a Heart, Head and Hands strategy based on goals including $2b revenue within five years and focusing on new categories like sports drinks. As part of eight strategic priorities Synlait will also investigate disruptive forces in the business, he said.
Adding supply, customers and increasing return on investment is one of the key priorities.
“Synlait has always been a capital-intensive business. We’ve needed stainless steel to be able to make money for our shareholders.”
From the moment it stopped being a farmer and decided to process its own milk the company has worked on de-risking the business. As the owner of power dryers, for example, it found ways to create extra value from commodities.
Now it is doing similar with a new liquid milk plant.
“By establishing a contract with Foodstuffs South Island up front you’ve got an anchor tenant that underwrites the base cost but your strong returns don’t come until you find those incremental customers and markets that you’re going to pursue.”
As a privately-owned company, rather than a co-op, one of Synlait’s main checks on investment is constraints in its banking covenants and making sure its balance sheet is in good health, Clement said.
It also has to ensure its net debt-ebitda ratio gives it capacity to keep investing.
“So, what sort of debt are we holding, relative to the profits that we’re making and how can we fund that growth.
“Yes, it comes with risk but if you can mitigate the downside and secure the baseline of what you can fill it with and then transfer high value, that’s where Synlait’s unique approach delivers good returns.”
The nitty gritty
Synlait’s financial results for the year ended July 31:
• Revenue exceeded $1 billion for the first time, increasing 17% to $1.0243b
• Net profit increased 10% to $82.2m
• Operating cashflow increased 39% to $136.7m
• Sales volumes increased 21,087 tonnes or 16% to 149,709t
• Consumer packaged infant formula sales up 21% to 42,907 MT
• Average milk price of $6.58/kg MS for the 2018-19 season, made up of a base milk price of $6.40 and an additional $0.18 in incentive payments
