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    Synlait milk truck
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New Zealand dairy company, Synlait Milk, has received a small reprieve in what has been a particularly challenging year with a two month extension to repay NZ$130 million that was due on 28 March.

The company now has until 15 July as it looks to raise more capital against forecast weaker earnings.

Synlait CEO Grant Watson said its focus was on deleveraging the balance sheet and reducing total debt to a manageable level. It has been granted an extra NZ$30 million in short term funding to 27 June.

Snapshot (all figures are NZ$)

  • Revenue: $793.5m, up 3% on prior corresponding period (psp);
  • Earnings before interest, taxes, depreciation, and amortisation (EBITDA): $19.9m
  • Net loss after tax: ($96.2m), down on a $4.8m profit pcp;
  • Net debt: $559m, up 8% pcp; and
  • Gross profit: $43.6m, down 47% pcp.

The results were impacted by a less favourable market environment for the ingredients business, unfavourable foreign exchanging risk (FX), lower Advanced Nutrition volumes, and higher inventory write-downs, operational expenditure, and financing costs.

Synlait revised its FY24 guidance, saying it expects results to be “significantly” down on FY23, in the range of $45-60 million.

The company is facing a number of material uncertainties due to its deleveraging activities, including a strategic review of its North Island assets, the sale of Dairyworks, and a possible capital raise.

Watson said Synlait has the support of its largest shareholder, China’s Bright Dairy, which owns 39 per cent of the company, which has agreed to support an equity raise as well as a loan extension at request.

The situation with its second largest shareholder, The a2 Milk Company, with a 20 per cent stake, is less clear cut, with it cancelling its exclusivity contract with Synlait last year. That move is still in arbitration.

There’s a sticky interdependence between Synlait and a2 Milk, with Synlait manufacturing – exclusively – a2 Milk’s Chinese labelled 至初 Infant Formula (stages one, two and three), which accounts for around half of its infant formula sales. 

Synlait holds the crucial Chinese regulatory State Administration for Market Regulation (SAMR) licence, which is attached to its Dunsandel manufacturing facilities, not a2 Milk. A SAMR licence is granted to a manufacturing facility, not the company whose product is being made there.

So, hypothetically, if a2 Milk is looking to remove Synlait’s exclusivity and start manufacturing the formula independently at its Mataura Valley plant, it would have to go through the rigorous and lengthy SAMR application.  

While for Synlait, its a2 Milk contract makes up most of its earnings, so is crucial for its viability.

The asset review will take in its North Island assets including the manufacturing facility in Pokeno and blending and canning facility in Auckland. Watson said the goal was to explore the highest-value ownership structure of these assets, but there is no certainty a transaction will result.

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