Synlait Milk, the South Island dairy processor, expects premium payments to its farmer suppliers to double this financial year to $6 million, mainly on the back of a boom in canned infant formula sales.

The Rakaia-based company reported first-half underlying net profit of $12.3 million for the six months to January compared to $400,000 a year ago with a greater push to value add through increased infant formula sales, particularly to specialty milk marketer a2 Milk. Synlait shares rose 3.3 percent to $3.15, the highest level this year.

Nutritional sales for the first half were 7,498 MT, a 155 percent increase on a year ago and accounting for 16 percent of total sales. Ingredients were steady at 38,858 MT, down 2 percent on the same period in 2015.

Synlait said it is expecting an almost four-fold increase in canned infant formula sales for the full year compared to the 2015 financial year.

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More than half of the company's 201 farmer suppliers are likely to achieve a premium above the base milk price which is forecast at $4.20 per kilogram of milk solids for the 2015/16 season. Synlait doesn't reveal what the individual premiums are apart from its Lead in Pride best practice dairy farming programme which attracts a premium ranging from 6 cents to 12 cents kg/MS.

The half-year results show value-add milk premiums were $2.22 million compared to $723,000 a year ago. The company is the exclusive manufacturer of a2 Platinum formula, sourced from herds that only produce a2 type beta-casein protein. A2 Milk accounted for just under half the premium payments in the first half.

The big rise in premiums for the full year is based on expected higher a2 Milk sales and the introduction of Grass Fed infant formula.

Synlait's partnership with US-based Munchkin Inc to exclusively produce Grass Fed infant formula is expected to be launched in New Zealand and Australia in May. The first trial batches have been manufactured for clinical studies in the US, and are now awaiting regulatory approval.

"While Munchkin's Grass Fed formula is some years behind a2 Platinum infant formula, it is following a similar model," the company said.

Synlait has secured 25 farmers to supply the Grass Fed milk which will be sold into the US and China and it has established a Grass Fed standard to ensure cows are not fed any concentrated supplementary feeds such as palm kernel.

The launch of Grass Fed is expected to help the dairy processor reduce its exposure to China, which accounted for 8 percent of sales revenue in its first half. The big increase was in New Zealand which rose to 35 percent of the total from 13 percent a year ago, with that number including sales to a2 Milk which subsequently exports overseas.
For the second year running, Synlait is advancing a higher proportion of its final milk price than normal to support farmers though a difficult period of cash flow with low global dairy prices.

The lower milk price has impacted milk production with its farmer suppliers reducing costs, and production for the 2016 financial year is expected to be down 5 percent on last year. Synlait said it had sufficient milk supply secured to meet forecast growth of nutritional sales in the next financial year.

Synlait has forecast profitability is on track to be a record this financial year.
Statutory net profit was $10.2 million, or 6.99 cents per share, in the half, compared to a loss of $6.4 million, or 4.39 cents, a year earlier when Synlait's bottom line was dragged down by unrealised foreign exchange losses.


Read Synlait's latest investor presentation here: