Synlait exects to soon return to robust profits after reporting its first loss as an NZX-listed company. Photo / NZ Herald
Synlait exects to soon return to robust profits after reporting its first loss as an NZX-listed company. Photo / NZ Herald
Synlait Milk has mapped out a return to profitability after reporting a $28.5 million annual loss - its first in nine years.
The loss - which was at the higher end of the company's published guidance - compares with a net profit of $75.2m in the previous year.
It alsoannounced the appointment Grant Watson, the current chief executive of Taupo-based up and coming dairy company Miraka, as its chief executive to replace John Penno, who has been filling in since the resignation of Leon Clements early this year.
The highly indebted Synlait - which has been caught in the downdraft of its main customer a2 Milk - said infant formula sales fell by 35 per cent in the July year to 34,362 tonnes.
The current 2022 year will include a one-off gain on sale of about $17m from the sale and leaseback of the land and building at Synlait's Mangere site and it expects to return to "robust" profitability in the 2023 year, when a large new customer comes on stream.
Planned reductions in inventory at Synlait and at its Dairyworks business would generate operating cashflows in excess of earnings.
"By the end of full year 2023, the recovery plan will have seen Synlait return to similar levels of profitability, operating cash flows, and debt ratios as the years leading into 2021," it said.
Grant Watson will become Synlait's next chief executive in January. Pnoto / Supplied
Penno, who co-founded the company, said he was disappointed that Synlait had reported a loss after nine straight years of solid profitability.
He said Synlait had been hit hard by the flagging sales of its main customer and 20 per cent shareholder, a2 Milk, since late last year.
A2 itself had in turn been it hard by the impact that Covid-19 had on its important unofficial "daigou" trade channel into China from Australia.
"The shape of our business changed dramatically in December following The a2 Milk Company's large forecast volume reduction, which meant inventory levels and demand outlook had to be reset," Penno said.
During the last quarter of the financial year, the board and management team had built a picture of Synlait's current performance in the context of changes over the past five years, and had begun to execute a plan to rebuild.
While Synlait remained committed to a2 Milk, which aims to make its own formula through its newly acquired Mataura Valley Milk, it had high expectations of its large multinational player, which it signed up last year.
"The a2 Milk Company remains our most important customer and we expect that to be the case for some time," Penno said.
"We are continuing to work with them on new product opportunities but of course the most important thing in our whole company is making sure we achieve regulatory authority from China to continue to build this business in partnership with a2 - supporting them as they build their brand going forward," Penno said.
Penno said Synlait was working closely with a2 Milk on the product registration with China's SAMR side and was confident of "a good outcome" over the next 12 months.
Synlait has kept the name of its new customer confidential for commercial reasons.
"What we can say is that they are a major multinational and a global leader, particularly in the Asia Pacific region.
"Their product grouping has been growing quickly over the last few years on what we expect to be a very long term relationship to manufacture a group of nutritional products centred on the Pokeno plant."
Synlait achieved a covenant waiver from its bankers ANZ and BNZ Expects and expects to have its debt back to normal within two years.
Harbour Asset Management senior analyst Oyvinn Rimer said Synlait appeared to have some confidence about its return to profitability.
"Obviously, it's going to take a bit of time for people to believe in it 100 per cent, given the volatility that is still at play," Rimer said.
"To be honest, it is still in the hands of a2 Milk and it will remain so for some time," he said.
"Their strategy is fairly clear. They want to diversify away from a2 but it will remain their number one customer for a long time," he said.
In the meantime, the as yet unnamed "white knight" customer promises to lift Synlait's infant formula business by 30 to 40 per cent.
Once again, the result highlighted how important a2 Milk was to the company, Rimer said.
"It looks pretty tough in the near term, and whilst it looks positive and optimistic, hard to see a slam dunk," he said
"A recovery is going to take a bit of luck and really good execution."
Synlait's shares rallied on the back of the result, last trading at $3.49, up 19c or 5.7 per cent.
