Infant formula boom expected to boost Synlait's half year profit

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Synlait Milk [NZX: SML] is forecasting a boost in underlying net profit for its first-half, which will be significantly above the $419,000 achieved in the same period in 2015 mainly due to a boom in sales of infant formula.

At its annual meeting in Rakaia today, chief executive John Penno said the company, in which Shanghai-based Bright Food has a 39% stake, was experiencing strong nutritional product sales due to a rise in demand for infant formula.

Chairman Graeme Milne said 2015 sales of $448 million, a long way back from the $600 million achieved the previous year, was due to falling global commodity prices and disguised the increase in value-add products sold during the 2015 financial year.

"With the successful commissioning of our third large scale spray dryer in September and current increases in the sales volume of consumer packaged infant formula, I stand by my previous statement that our profitability will be in advance of anything achieved to date," he said, though he didn't state an actual number.

Synlait is anticipating a four-fold increase in sales of consumer packaged infant formula, up on earlier guidance of a three-fold increase.

That will follow the launch next year of the Munchkin Grass Fed infant formula. 

The privately held Californian company which designs, manufactures, and distributes innovative infant and toddler products. It is launching a new branded Grass Fed retail ready infant formula into the United States and China that will be made exclusively by Synlait. The move is expected to help the dairy processor reduce its exposure to China although sales to that country have already dropped from 30% of total sales to just 10% in the past financial year.

Synlait said it has now developed a Grass Fed standard and secured 25 farmers to supply this milk, who will be paid an undisclosed premium. 

More than half of the milk supply in 2016 is likely to achieve a premium above the base milk price, Mr Penno said, though Synlait doesn't reveal what most of those are apart from its Lead in Pride best practice dairy farming programme which attracts a premium of between 6-12c per kilogram of milk solids.

In 2015 an extra $3.1 million was paid above the base payout of $4.48 per kilogram of milk solids.

The company is also the exclusive manufacturer of a2 Platinum infant formula, sourced from herds that produce only a2 type beta-casein protein, which is having continued volume growth.

Mr Penno said the dairy company had this year completed the growth programme outlined in its 2013 prospectus and told shareholders that an expected increase in the volume of nutritional sales will be a key performance indicator for Synlait in the 2016 financial year.

"Our total sales volume is set to grow from FY15's 97,800 MT to 122,500 MT in FY16. More than half of that growth will be the result of increased nutritional sales in consumer packaged infant formula, which carries a significant benefit in terms of gross margin."

The focus over the next two years will be on improving operational excellence, pushing harder on its value-add strategy, reducing debt, and improving its return on capital.

Chief financial officer Nigel Greenwood provided shareholders with an update after completing renegotiation with a banking syndicate of its long-term loans, with capital expenditure under its growth strategy having pushed up debt levels.

It has decreased working capital facility requirements set at $35 million for the 2016 financial year. A new five-year revolving facility includes capital expenditure that previously came under the working capital loan and is set at $245 million for this financial year, Mr Greenwood said.

Synlait said it now had 173 contracted milk suppliers and increased contracted milk supply by 6.6% year-on-year to 51 million kilograms of milk solids. That supply is forecast to increase by a further 6.1 million kgMS this financial year.

Resolutions passed at the annual meeting including Mr Milne's re-election to the board and the maintaining of directors' fees at current levels.

One of Bright Dairy's appointed board directors has been changed with Zongbo Dong being replaced by Qikai Lu, the Chinese company's international business development manager.

(BusinessDesk)