Thursday, November 30, 2023

Synlait making heavy weather of recovery

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Net profit after tax plummets 83% to $4.8m.
Synlait chief executive Grant Watson said in light of infant formula shortages in the US, ‘this is a pleasing result for us and US parents and caregivers’.
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Synlait’s interim results for the 2023 financial year have confirmed and underlined its much-reduced profit guidance and cost headwinds released to the share market 10 days earlier.

Revenue was down 3% to $770 million compared with the first half in FY2022 – but net profit after tax was down 83% to $4.8m.

Therefore, the full-year guidance is now between $15m and $25m, drastically below the FY2022 outcome of  $38.5m.

Chief executive Grant Watson has reiterated his warning that company recovery will now take three years rather than two, and by that he means a return to the FY21 result of $75m.

Chief among the reasons are delayed demand for infant formula base powder from its main customer and minority shareholder, A2 Milk Company, increased underlying costs and a delay on new business with a multinational food company for which Synlait has geared its Pōkeno plant.

In the first half of FY23, Synlait incurred about $20m of increased operating costs and recurring costs for its new SAP Enterprise Resource Planning (ERP) software, which governs all its manufacturing, product storage and despatch.

“Operational stability and cost challenges are evident across Synlait, including a reduction in milk processed, raw material supply challenges, CO2 shortages, an extremely tight labour market, extreme weather events, and high inflationary costs pressures,” Watson said.

“Implementing and stabilising SAP ERP significantly impacted our ability to release and ship products to customers in Q1.

“The flow-on effects resulted in higher inventory levels and costs, including interest costs.”

Net debt on January 31 was $518.6m, 32% higher than a year earlier, and operating cash flow was minus $125m, down $242m.

Chief financial officer Rob Stowell said the net debt position was disappointing and the company’s guidance for the end of the financial year is a range of 3 to 3.5 times earnings before interest, tax, depreciation and amortisation.

That net debt target previously had been 2 to 2.5 times.

“Synlait is currently undertaking a review of its capital strategy, focusing primarily on debt and a further update will be provided at the investor day on May 8.”

The current milk price forecast is $8.50 and the higher advance rate to farmers is contributing to the debt position.

Synlait’s shares were trading around $3.14 before its March 17 announcement of the profit guidance downgrade and the price has subsequently lost 80c, or 25% of value.

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