A2 Milk's supplier Synlait half year net profit drops 76%

Synlait Milk expects to break even in the 2021 year. Photo / NZ Herald

A2 Milk's sole infant formula supplier, Synlait Milk, said its half-year profit slumped by 76 per cent to $6.4m, driven by Covid-19 disruption, and said it expected to be "broadly breakeven" in the full year.

The full-year outlook has worsened since last December when the company said it expected the 2021 profit to be half that of the previous year's $75.2m.

Early this month Synlait withdrew that December guidance due to uncertainty and volatility within its business.

In today's result, Synlait's revenue gained 19 per cent to $664.2m while EBITDA fell 29 per cent to $47.7m.

Chair Graeme Milne said it was a challenging first half, "and we continue to find ourselves in a period of significant uncertainty and volatility as Synlait faces into several headwinds".

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A2 Milk - Synlait's biggest customer - has been hit hard as Covid-19 has severely curtailed the important "daigou" unofficial trade channels into China.

Synlait said uncertainty was affecting its short-term operations and would impact on the full year's financial result.

Chief executive Leon Clement said the company's focus was on mitigating the impact Covid-19 has had its customers.

"We will need time to get through this, but we remain confident about our future," he said.

Synlait has been investing heavily in a bid to diversify its interests away from a2 Milk.

"Our investment phase is complete. We have the capacity, capability, and customer base to generate significant value," Clement said.

"Covid-19 hit us late, but we will emerge from the pandemic a stronger, more sustainable Synlait," he said.

Synlait signalled earlier this month that it was continuing to experience significant uncertainty and volatility within its business due to ongoing uncertainty in a2 Milk's expected demand for the remainder of 2021 and 2022.

"Synlait does not currently have sufficient confidence to forecast when this recovery will occur," Clement said.

"The resulting impact of this on Synlait's business is two-fold: demand for consumer-packaged infant formula remains uncertain, which in turn impacts forward infant base powder production and asset use."

Commenting on the ingredients business, Clement said the sudden drop in consumer-packaged infant formula demand, combined with rapidly rising Global Dairy Trade prices, foreign exchange, and a changing product mix, created volatility that limited returns.

Furthermore, Synlait said its expectation was that global shipping delays would continue and further impact the 2021.

Board and management have considered the above factors and how they will impact Synlait's 2021 profitability.

"There is still a range of scenarios contributing to the company's profitability, and our current outlook suggests a broadly breakeven FY21 net NPAT result," the company said.

While all banking covenant ratios were met during 2021, Synlait has "proactively engaged" with its banking syndicate to increase its leverage ratios to manage any risk at the end of 2021.

The 2021 business plan is fully funded by its current banking syndicate.

In its result, Synlait said consumer-packaged infant formula sales down 16 per cent to 18,085 tonnes.

Lactoferrin production gained up 16 per cent to 13.6 tonnes.

Dairyworks, which Synlait bought in 2019 for $112m, reported revenue of $112.6m.

Shares in Synlait Milk last traded at $3.41, down 14c or 3.9 per cent from Friday's close.