Synlait Milk Limited (SML) Earnings Call Transcript & Summary

Good day, everyone. My name is [ Ronnie ], and I will be your conference operator today. At this time, I would like to welcome you to the Synlait FY '26 Results Call. [Operator Instructions]. At this time, I would like to turn the call over to George Adams, Synlait Chair.

Thank you. Good morning, everyone. I'm George Adams, Chair of Synlait, and it's my pleasure to welcome you to our FY '26 full year results conference call. Joining me on the call is our acting CEO, Leon Fung; and our CFO, Andy Liu. They will take you through the results in detail shortly. First, I want to acknowledge that financially, this has been another difficult year for Synlait, and I appreciate that for our shareholders that is challenging news to hear. However, we have delivered a major operational recovery in the second half. And just like the repairs to the company's liquidity, milk supply and balance sheet over previous years, this is critical to our future. Synlait is now stronger and more focused than before and well positioned to progress for recovery. That is real progress, and I want to thank Synlait's team for delivering that, including Hendrik and Rueben, who you can see on the front of our investor presentation and annual report. There have been many long hours work, and the Board and I are grateful for that. I'll now hand you over to Leon and Andy, and there will be Q&A after the presentation. Thank you. Leon.

Thank you. George. Good morning, everyone. Thank you for joining us for Synlait's Full Year 2026 Results Call. FY '26 was a difficult year financially. It was also a year of real progress in our recovery. In the second half, operations stabilized, and this resulted in a strong improvement in financial performance. Today, Andy and I will cover the progress, the work still ahead and how we will work to ensure seamless recovery continues. We will start by looking at our first half performance as this is what has driven the overall result for FY '26. The half year result was impacted by 3 main issues: manufacturing plan adjustments, lower ingredients returns and deferred tax assets. The financial impact was significant. We posted a first half EBITDA loss of $34.7 million and an overall net loss after tax of $80.6 million. Synlait responded with a clear recovery road map. It has 3 interconnected horizons: stabilize the business by fixing the fundamentals, simplify by focusing on Dunsandel; and finally, scale, creating a strategy to drive future growth. I'm pleased to say we have made real progress on the first 2 horizons: stabilize and simplify. This slide shows some of the work we have done. This is the deep work that has involved resetting the fundamentals across 4 areas: operations and assets, quality, people and revenue. In operations, we strengthened frontline leadership. We are investing in our assets, have improved production planning and completed major projects to support long-term stability. In quality, we strengthened protocols and processes to align with new regulatory expectations in the key markets, including China. We also introduced the new product checks and improvements and embedded a company-wide food safety culture. For people, we developed our frontline and senior leaders, uplifted engagement, drove a new performance framework and launched a new health, safety and well-being strategy. We reset our revenue function with a strengthened business development team, broadened our infant formula customer base, progressed adult nutrition opportunities, and tightened pricing discipline. Together, these actions have built a strong foundation for recovery. Our key achievement for the year has been operational recovery. Manufactured in spec improved from 88% in FY '25 to 93% in FY '26. Production plan attainment rose year-on-year from nearly 92% to 95.5%. That is a huge achievement, thanks to our frontline teams. I'm pleased to say that manufactured in spec was 99% for August. We are focused on delivering that consistently to reach that level of operational excellence we are aiming for. You can see on Slide 5 that operational improvement translated into a much stronger second half financial performance. Reported EBITDA improved by $77.5 million. Underlying EBITDA improved by $38.1 million. Reported net profit after tax improved by $85.8 million and underlying net profit after tax improved by $33 million. These results show the benefit of a more stable business. However, the full year result reflects the difficult first half. My final slide for you shows the overall results. The total group revenue for the year has increased to $1.93 billion a (sic) [ $1.94 billion ]. Reported group EBITDA was $8.1 million. Underlying group EBITDA was $46.3 million. We have reported a net loss after tax of $75.4 million with an underlying net loss after tax of $21.6 million. Net debt reduced by 14% to $215 million. Operating cash flow was negative $183.3 million. This reflects weaker operating performance and higher working capital needs. The good news is for our farmers Synlait is confirming its second highest milk price in our history at $10.07 per kilo of milk solids. This includes the incentives we pay our farmers above the base milk price. I will now hand over to Andy.

Good morning, everyone. Thanks for joining us. I will begin with the main drivers of FY '26 results, followed with business unit performance, the North Island discontinued operations, cash flow and net debt. Move to Page 8. Let me start with the main drivers. Improved second half operations kept seamless recovery on track, although the full year results still reflected significant first half impacts. The main point on the bridge is that volume was not the issue. Consumer and Foodservice growth contributed $2.3 million into bottom line, but that benefit was more than offset by price, mix and cost. Price and mix reduced impact by $7.3 million, reflecting higher portion of relatively lower-margin products in Advanced Nutrition, and an unfavorable ingredients product mix, partly offset by stronger food service and better price. Costs were the biggest challenge, reducing impact by $39.8 million. Operational disruption reduced fixed cost recovery and increased manufacturing, quality and milk transport costs. Milk premiums also increased costs. These impacts moderated in the second half. Other margin and income were mainly affected by unrealized foreign exchange losses at year-end. This was partly offset by Abbott TSA income. SG&A provided a $1.6 million benefit. This come from closing Palmerston North office, leaning our leadership and commercial structure and tighter spending controls. We achieved these savings despite inflation and oil-related cost pressures. At the same time, we continued to invest in our people, systems and core capabilities. Financing was a clear benefit despite negative operating cash flow, financing costs improved by $22.2 million. This reflected improved banking pricing, better base rates, debt reduction followed the North Island sale and more cost-effective CNH funding. After adjusting for one-off items, underlying impact was a $21.6 million loss in FY '26. Go to Page 9. I will show how these drivers came through across business units. The portfolio result was mixed. Consumer and Foodservice delivered growth and stronger margins, while Advanced Nutrition and Ingredients were affected by operation disruption, capacity constraints and weaker stream returns. Advanced Nutrition revenue was broadly flat, but gross profit declined 78%. The key issue was manufacturing efficiency with operational disruption, product plan changes and increased the cost from production catch-up. Lower lactoferrin sales also reduced the contribution. Ingredients revenue declined 15%, with gross profit down 26%. Lower volumes and constrained product mix forced us to produce more whole milk powder and sold into lower-priced markets in the first half. The mix improved later in the year, especially through skim milk powder and AMF. Consumer revenue increased 32%, with gross profit at $51.7 million a (sic) [ $51.6 million ]. This reflected growth across export and private label channels, good butter price achievement, improved manufacturing recovery and inventory management. Foodservice revenue increased 62%, with gross profit improving by $15.6 million to $11 million, the first full year of positive gross profit. This was driven by 43% volume growth, improved pricing, lower freight costs, new China contracts and expansion across Southeast Asia. Other revenue increased 32%, reflected tactical milk sales in order to manage surplus milk volumes and manufacturing capacity constraints. Next page, Page 10. This page separates the North Island discontinued operations from the continuing business. The North Island sale is complete, making Synlait simpler and more efficient. The table shows the continuing business we are taking forward. The North Island result, including the gain on sale without the gain and the related tax benefit, the North Island operations were still in loss-making in FY '26. Continuing operations generated $1.68 billion of revenue and underlying EBITDA of $46.3 million. This is a relevant baseline for assessing future performance. Now we have a clearer operating base with our focus and investment centered on Dunsandel and Dairyworks. Page 11. It shows how operating performance translated into cash flow and net debt. Cash remains the biggest financial challenge in FY '26. Operating cash flow was negative, reflecting weaker operating performance and significant working capital build, which was mainly affected by higher receivables and inventory. Against that, the North Island sale generated roughly $296 million of cash proceeds and materially strengthened the balance sheet. After operating cash outflows, capital investment, interest and other movements, net debt finished the year at $215 million. In summary, the second half showed clear improvements in operating stability and financial performance. The next step is to translate that progress into stronger margins and cash generation, which continuing to reduce debt through disciplined execution and capital allocation. I will now hand back to Leon for the business update.

Thank you, Andy. I will now cover off the performance and the priorities of our business units, Advanced Nutrition, Ingredients, Foodservice, Consumer and milk supply. Advanced Nutrition makes high-value products for early life and adult nutrition. In FY '26, we secured purchase orders from a new Middle East infant nutrition customer for commercial supply commencing in 2027. This is a significant win for the team as we seek to onboard new customers, and we are confident this partnership will scale up quickly. I'm pleased to report we have a pipeline of customers keen to work with Synlait. This means we are confident we will fill the capacity created by The a2 Milk Company moving its English-label production. We have also commercialized Nutrabase, creating a platform for adult nutrition products and multiple private label opportunities in Southeast Asia. We also strengthened our dedicated business development function, a structured opportunity pipeline and project launches. These projects focus on specialty nutrition using high-value ingredients, including lactoferrin. Looking ahead, our priorities are to grow the Middle East contract, onboard new customers from Southeast Asia, expand higher-value consumer-ready solutions, commercialize specialty supplements and reduce exposed to any one customer or market. Our ingredients portfolio includes milk powders, milk fats, specialty ingredients for global customers. During FY '26, we focused strongly on value over volume, this includes tighter pricing decisions, customer profitability modeling and stronger sales controls. We advanced diversification across Southeast Asia and the Middle East, simplified product specifications and strengthened sales facing, hedging and risk management. With manufacturing stability materially improved, our future focus is to extract greater value from available milk. That means disciplined pricing, stronger product mix, greater use of our infant formula grade capability, customer-led technical solutions and growth in higher-value applications. Foodservice delivered its first materially profitable year, supported by 43% volume growth, improved pricing and wider geographic reach. We expanded across Southeast Asia, strengthened our Shanghai presence and launched Synlait-branded UHT whipping cream in China. A new customer-owned brand partnership broadened our route to market, while changes to the sales and marketing team strengthened distributor and end user management. We will now grow volume and market share while protecting returns. We will expand through our distributor network, build on our China launch and use Synlait product quality, grass-fed certification and New Zealand origin to stand out. Our consumer business delivered strong growth through Dairyworks and its portfolio of brands. More than 5,000 additional metric tons of cheese was shipped to Australia compared with FY '25. Dairyworks brands delivered 11% volume growth and 17% value growth in the latest annual total. Value-added, graded, sliced and snacking formats generated more than 55% of Dairyworks growth. Innovation remained important, Dairyworks Protein launched in June contributed 50% of Natural Cheese Snacking segment growth. Talbot Forest brand continued to grow strongly, and Costco sales increased 133% year-on-year. Our focus on Project Hedgehog is to improve plant efficiency, further growth in Australia and Southeast Asia, new product development and supply chain optimization. Strong farmer relationships remain fundamental to Synlait's success. We have almost 200 farmer suppliers. As mentioned earlier, we are confirming the second highest milk price in Synlait's history today, $10.07 per kg of milk solids, including incentives for the '25 to '26 season. During FY '26, we introduced a new customer-funded sustainability incentive of $0.02 per kg of milk solids. This is focused on reducing greenhouse gas emission and expected to double in the future. We also delivered a new tool to provide real-time tanker arrival information and our biodiversity program have now distributed more than 385,000 native trees across Canterbury. Our future focus is to grow customer sustainability partnership, improve the digital offer and continue our market-leading on-farm support. We'll look to the future now and explain how we will maintain the momentum we achieved in the second half. We are continuing to focus on our recovery road map. In operations, we have created a production plan to make the most of every drop of our farmers' milk. We will retain our focus on stability, strengthening our assets and deepen our talent pool. In quality, we are recruiting the Chief Quality Officer, continuing to reduce Cost of Quality and progressing asset investment to maintain access to the key markets and reduce regulatory risk. For our people, we will continue leadership development, target critical capability, refresh onboarding, embed Synlait Safe mindsets and critical control assurance. We are focused on diversifying our revenue streams while aligning the product portfolio with plant capability, milk supply and returns. As mentioned earlier, we will also deliver the strategy to scale of our success and share with you in 2027. We remain clear about the risks ahead and have active plans in place to manage them. Operational excellence, we will keep our focus on our plans and maximize returns from our Dunsandel assets. Leadership and strategy, we have a strong executive team at Dunsandel, and we will maintain that. We will finalize CEO and Chief Quality Officer appointments and deliver a reset strategy in 2027. A2 volume shift, we have a new business pipeline, which means we are confident of backfilling this volume. Contracted commitment from our new Middle East customer have the opportunity to scale up quickly revenue as well as addressing our concentrated revenue stream, we are focused on protecting margins and ensuring all commercial arrangements add value for Synlait. Refinancing, we will continue working with our banking syndicate after showing them we can manage through challenging years like this one, Bright Dairy's support is very helpful, along with the renewal of shareholder loan, which now matures in 2028. China market registration, we have experienced cross-functional team working to renew the approvals required to continue manufacturing infant formula for China, and we are confident of success. We are also well equipped to deal with changing quality and regulatory requirements, managing stakeholder confidence and continuing to show leadership in on-farm sustainability. Synlait is still in a recovery phase, and FY '26 is a 5-month transitional period that will be influenced by the timing of production, sales, working capital movements and other seasonal factors. Given the short and the noncomparable nature of this transitional period, Synlait is not providing guidance for the 5 months ending 31st of December 2026. You only have to look across Synlait's financial performance over the past 11 years to see the company was most profitable before it expanded to North Island. Profitability peaked in FY '19 with a net profit after tax of just over $82 million. The North Island assets created a drag on Synlait's performance, and now they're sold. The company is stronger, simpler and well positioned for the future. The graph identified a period of underperformance, and we are making sure we learn from the past. Our executives have taken a holistic view and identified issues that have caused Synlait to underperform, not just in FY '26, but back to FY '20. An oversupply of manufacturing capacity, the impact of COVID and the subsequent decline in China's birth rate impacted every year until FY '26. Operational stability issue impacted performance in FY '25 and FY '26. We have worked to address these issues. The capacity issue is resolved following the sale of our North Island assets. Our new revenue strategy will ensure Synlait is no longer exposed to a single customer, market or product again, which help to protect us from future shocks. As we have achieved operational stability, our goal is to return the company to earlier successes. We are confident we will do that given the pipeline of customers we are working with and the capacity and the capability of Synlait's asset and its people. The key message from today, Synlait has made meaningful progress in stabilizing and simplifying the business. Second half performance improved substantially across EBITDA and net profit after tax measures. Operational recovery has been achieved, and we are on track to deliver continuous operational excellence. The North Island sale simplified the business and strengthened our balance sheet. We have started addressing our next biggest challenge, diversifying revenue. This is an opportunity we are excited about. It will strengthen Synlait for the future and a reminder, we will deliver a full strategy to scale at our success in 2027. My final remark is to assure you all that Synlait is well placed to progress our recovery. Thank you.

[Operator Instructions]. Your first question comes from Stephen Ridgewell with Craigs Investment Partners. Please unmute your audio and ask your question. Stephen your line is open, you may ask your question. Stephen, we will return to you. We will move on to Nick Mar with Macquarie.

Just in terms of the kind of outlook, and I know you're not wanting to provide guidance in the half period, but do you think that the run rate on an underlying basis achieved in the second half is a sustainable basis for the business?

Yes. Thank you, Mar, for your question. Yes, we are confident to see we will continue the improvement in the second half and we will continuously making effort to maintain that success and which will enable us for scale up in the near future.

And in terms of the slide that you put on about the sort of pre-North Island earnings, are you saying that, that kind of earnings figure is achievable in the future with just the North Island as set up today and the sort of evolved customer and product mix? Or is it purely very illustrative?

The slide actually show some historical data when Synlait was very successful before the North Island asset established, but of course, it's not the only reason. There are other challenges alongside. We summarized that the birth rate declining in China also contribute against our initial plan, but the key message here is that we have a very solid plan to move forward to get success again in the near future.

Yes. If I could just add, clearly, it's not indicative of a number in future. However, I would just add that it was also fairly that Pokeno was a significant drag on the business, and that drag has been eliminated.

We were circling back now to Stephen Ridgewell with Craigs Investment Partners.

Look, thanks for the update. First of all, on the milk supply and apologies if you had difficulty at the top of the call, if you already answered this, let me know. But can you just give us an update on Synlait's degree of success in its efforts to retain its farmer suppliers, because we have that some are still going to competitors. So just any sort of more detailed updates you could provide on that would be appreciated.

Yes. Thank you, Steve. In terms of the milk supply, we have the right amount of milk for our plant for our factories, right? This is the first thing I want to highlight and I talk to our farmers, many of them, and I can see that our farm suppliers, they are very keen to see Synlait to be successful again and I really appreciate their support. I don't see this in the near future that we have challenges on the milk supply. All what we need to do is to deliver the performance to our stakeholders, to our shareholders and to our farm suppliers, and we can continuously bring the value back to them.

Okay. But if you look at production volume in the year just gone, it was down 6%, should we be expecting volumes to stabilize in FY '27 and FY '28? Or should we expect further decreases? I'm just trying to understand what the right level of supply is, it sounds like you might possibly you are expecting some of your farm suppliers to go to other brands, but that's part of the plan. But just help us understand maybe a few numbers would be helpful.

We actually have a very good start of the season. We are expecting 3% to 6% more than budget. As I highlighted earlier, we have the right amount of milk for our plant and we just want to get the right product mix in order to get the value of the available milk.

If I could just maybe also add to that, maybe Andy can give us some detail, but one of the reasons we had a decline in production last year was actually not that we had a shortage of milk, but we actually had to sell milk at peak because we were unable to process it due to the manufacturing challenges. So there's an artificial drop in the volume as opposed to us actually not having the milk supply.

Yes. I think George just covered what I want to say. But also just remind us that for the outlook for the new seasons volumes that we should also take into account that for the Pokeno site, we don't have it, then which means we definitely for Advanced Nutrition, we have some kind of reductions, which is we already expected early enough.

Okay. That's helpful. And maybe just on the same topic. So you're currently paying a premium, I think, $0.38 a kg of milk solids. At some point, if you're in the right supply -- right amount of supply, one would presume that might come off a little bit? Or are you sort of comfortable with $0.38 per kg premium? Do you think over time, that should come down? And the reason I'm asking it is if I think about a medium-term profitability track, obviously, for that to come down a bit to maybe where it was in the past would be helpful to profitability and some of your targets there. So any comments on that premium, how long that might stay at that level in the near term? Or do you see it potentially coming down at some point in the future?

We renew or review our milk price strategy every year, like everyone does. But what I want to say is that Synlait came from very deep play on the farming background, that is part of our DNA. So we want to bring the value back to our farmers. Good examples are Lead With Pride, which is very well welcomed and supported by our farmers. So that bring value. That is part of the reason we can pay more incentives on top of the farm gate price. We also have customer-funded sustainability programs, which help as a part of our incentives, what we pay of the farm gate milk price. We will continuously doing that and we do have global customers who are very interested working with Synlait, working with our farm suppliers on that. So yes, we will maintain or looking at the more incentives to bring back more values to our farmers. But year-on-year, it will be some difference.

Okay. Second sort of line of questioning was on the Advanced Nutrition business. So just a point for clarification on the statement you've made that you expect essentially this new Middle East customer and maybe some other customers to see recover volumes that you're going to lose from a2 Milk internalizing English-label this year, we've obviously stated publicly. Just wanted to clarify, when you say that you're going to recover the volumes, first of all, are you referring to the FY '25 year where I think it was 40 MTs where you're referring to FY '26 was 45 MTs. What is baseline when you make that statement? And then second part of the question is for this new Middle East customer, are you expecting the volume from that customer to be material over the next 6 to 12 months? Or is it going to ramp up end of next year? Some indication of time would be helpful for that new customer.

All right. Just to give you a little bit of clarity, the new Middle East customer we are working with is quite a big supplier player in the market. They are quite interested to work with us as a long-term partnership. The volume we are looking at is significant and that's why we say that we have the confidence to backfill the gap that a2 Milk, they are moving away the English-label from Dunsandel, so -- and also, there are a list of customers we are working with, the team have been working on, and we are looking at onboarding more customers to Synlait. It's not only the infant formula, but also adult nutrition as well. So Synlait's strength is a nutritional product. Once we are very good at infant formula, it's easier for us to get into adult nutrition, the other nutritional products as well. And if we look at in a positive way that's why we say that we are excited about the opportunity when a2 moved away some of this volume, especially the English-label products to their Pokeno factory. This will create opportunity for us to be diversified rather than just exposed on one customer, one product, one market.

So can I just ask again. So just in terms of the Middle East customer, take the point potentially large customer, but do you have an idea how we should be thinking about the ramp-up of those volumes?

Just to give you an example, the volume we are looking at is that representing 18% of our FY '27 capacity, so that is quite significant.

And maybe just to add, Stephen, that -- yes, so regarding that the ramp-up, we assume about 3 -- roughly 3 years time, we can backfill.

Yes, because for any nutritional customer, it does take a little bit time to ramp up the volume. So normally, it takes 2 to 3 years to get the peak volume we are expecting.

Okay. That's good news and then just to be clear, then it's 3 years for it to get to 18% of capacity, that would be a rough idea in terms of...

No. what I said that in 2027, we are expecting a big volume growth already.

If I can clarify, what Leon meant is that for the next 12 months, it will be 18% backfill the lost volumes or capacity and in 3 years' time, we can fully backfill the capacity or the demand.