Synlait Milk Limited (SML) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us. My name is Hannah Lynch, Synlait's Corporate Affairs Manager. Before our Chair opens today's meeting, I will explain the process for Synlait's first hybrid annual meeting. Today's meeting is being held online and in person here in Christchurch. This allows our shareholders, proxies and guests unable to travel to Christchurch due to COVID-19 to join us and participate via this live webcast. The Lumi platform allows shareholders to submit questions and vote just as you would do if you were here in person today. For those of us -- for those of you joining us online, I will now explain to you how to ask a question and vote. Questions can be submitted at any time. To ask a question, click on the Q&A icon at the top of your screen. Click on the question box, type your question and press the send arrow. You can submit questions from now on, and we will address them at the relevant part of the meeting. Please ensure your questions are succinct, clear and relevant to the meeting. If you are here in person with us today and would like to ask a question, the Chair will address you directly at the relevant part of the meeting. Voting will be conducted via poll for all items of business. Deloitte, Synlait's auditors, will act as scrutineers, and the results will be posted to the NZX and ASX exchanges before close of business. In order to provide you with enough time to vote, we will shortly open voting for those joining us online. If you are eligible to vote, a polling icon will appear on your screen. When the poll is open, select the voting icon at the top of your screen, and this will bring up the resolutions. To vote, click on your preferred option, the selected option will change color. There is no submit or send button. Your selection is automatically recorded, although it can be changed up until the time voting closes. If you are here in person today, as you entered, shareholders, proxy holders and corporate representatives will have reached a voting card. If you do not have a voting card, can you please indicate that now by raising your hand? Voting cards will be collected at the end of the resolution section of this meeting by Computershare. We realized the submitting format might be new to some of you. If you have any difficulty collecting to the Lumi platform, asking a question or voting, please refer to the online voting guide issued alongside the Notice of Meeting in the first instance. If you are still having difficulty, please call the Computershare team who are on standby to help. Finally, for those in the room here today, in the event of an emergency, please exit the stairs you entered and the Tait Communications team will guide you to the assembly point. I will now hand over to our Chair to officially open the meeting.

Thank you, Hannah. [Foreign Language] Good afternoon, and thank you, everybody, for joining us today. My name is Graeme Milne, and I'll -- and I'm the -- I have the privilege of being the Chair of Synlait Milk. A very warm welcome to all of you to our eighth annual general meeting as a listed company. I might just change this a little bit. Right. So firstly, a quick summary of our agenda today and then introductions. I'll speak first, and then I'll hand over to our CEO, Leon Clement. And then there will be an opportunity to ask questions. Then we'll move to the resolutions that we have for the meeting today, and there are 2 resolutions, and we'll vote on those and they're in the Notice of Meeting. And then there'll be a chance for any further general questions, and then we look forward to those of you that are physically here, an afternoon tea, and we've got some Dairyworks cheese products and Talbot Forest Cheese brands as well for you to sample. So before I begin, I'd like to introduce you to the Board. So on the screen here on the far right, you've got Edward Yang from Bright, Min Ben and Albert Lu. You can wave, Albert? Yes, there we go. Right. And on my left, starting on my left is Ruth Richardson on my far left, who's a Bright appointee and original -- the original non-executive director for -- on the Synlait Board; then Bill Roest is a very experienced financially-focused director, Chair of our Audit and Risk Committee, and Bill is retiring today; and then Sam Knowles, who's also a very experienced director, Chair of Synlait's People, Environment and Governance Committee. And then to my right, we've got John Penno, who's previous CEO and founder and now a Board-appointed Director; and next to me, of course, is Leon, our CEO. And seated in the front row, we have Simon Robertson, who is standing for election today, and you'll hear from him briefly a little bit later on. And then from our management team, we've got the whole row basically here. It's Deborah Marris, who's the Director of Legal and Risk Governance; plus Angela Dixon, our new CFO; Suzan Horst, in charge of Technical; Mark Toomey, in charge of operations; Tim Carter, in charge Dairyworks; Hamish Reid, in charge of lots of other stuff, but mainly environmental issues. And we also have people from the share registry here today, Computershare. And our auditors, I think Mike Hawken is in the back of the room and Anthony. So everybody, welcome. So I'm pleased to confirm there's a quorum here today, and so I can declare the meeting open. So before I begin my comments, I just make clear to all the analysts and so on that might be watching that there's no new announcements today, and there are no changes to Synlait's guidance. So I would imagine we've got quite a few clicking off at this stage. But it's going to still be interesting anyway. Right. So as per virtually all other companies, this has been a turbulent year, handling the demands of COVID-19 in the second half of the year has been quite extreme. As an essential industry though, we moved quickly to protect our team and then reacted to customer demand for fresh milk, cream, cheese and infant formula due to changing consumer patterns and pantry stocking and all of the things that we know happened around the world and still, unfortunately, are happening. So our FY '20 performance that we're reporting on today reflects that Synlait remains a solid and profitable company, with revenue year-on-year up 30% to $1.3 billion, and EBITDA showing that our core business is still growing strongly at 13%, up $171 million. This, however, as we all know, is behind the rate originally planned for when we built our new facilities and with customer opportunities taking longer than expected to develop and some existing products reducing in demand. So that means that the net profit after tax was $75.2 million, which is down a bit on 2019. And that reflects the manufacturing overheads and financing costs that we had to absorb as we invest for future growth. So in terms of Pokeno, to date, our success has well, largely been based on our core infant nutrition business, which has really grown strongly as an integral part of our strategy and profitability. But as we've mentioned on several occasions before, we had come to the view that we've become too reliant on a single product, infant formula, a single site, which was Dunsandel, a single market, which was China and a single customer, which was the a2 Company. So with strong growth projections, we needed to build a highly capable and engaged team, obviously. And we fully commissioned it this year in February. It was on time, on budget, and it's already produced over 15,000 tonnes of ingredient and infant formula-based powders. So -- and of course, we need a North Island milk pool to supply that, and we've established that. And it's about 13% of our total supply. However, as I mentioned just previously, the forecast demand for infant and infant-related products has not been as strong this year as we planned. And the demand for bulk ingredient infant powders has actually reduced during the year due to regulatory changes in China as the market consolidates and brand registrations for other customers have not been forthcoming. So with Pokeno commissioned, we redoubled our efforts to bring new large customers on board that needed our sophisticated world-class facility at Pokeno. So we needed to attract a customer who would lead us to new markets and new categories. And obviously, while China remains extremely important, we wanted to diversify in terms of geography as well as customer base. So we were very pleased to announce recently that we have signed a manufacturing supply agreement with a very large, established global category leader. So under the agreement, Synlait will manufacture blend and packaged nutritional products, which are largely plant-based. That's not cow milk-based. And commercial production is currently projected to start in the middle of 2022. So with a positive impact on earnings expected from FY '23. So our teams have been working on this agreement for some time. It recognizes our world-class technical and quality capabilities. This is a really significant step forward for us, and we genuinely -- as we genuinely diversify our customer category and geographic reach. So there will be -- as always, there's a capital cost to anything, and there's a capital cost to this as we extend processing and packaging that will be specific for this customer at Pokeno and our Auckland facilities. The cost will be about $70 million, and it's factored into our capital raise that I'll speak to in a minute. So we turn now to the Supreme Court. You would have realized this has been an issue that's bugged us for some time. And so we had to go to the Supreme Court about the covenant issue this year, which was unfortunate. But we're pleased to have reached a settlement regarding this historic land covenant issue. And we're committed to working now collaboratively with our neighbors for the benefit and integration of the Pokeno community. So we were actually very confident about the outcome of the Supreme Court hearing. We thought it was going to be positive. But we took the opportunity to settle a bit earlier than waiting for the outcome because we wanted to get it out of the way before the capital raise. We're pleased to have it behind us and pleased to provide certainty for you, our shareholders, going forward. And it was not a major cost involved in that. So perhaps the most notable strategic progress this year was the acquisition of 2 existing cheese businesses: At the start of the year, Talbot Forest Cheese; and towards the end of the year, Dairyworks. And they've become pillars of our everyday dairy strategy. So this marked the first time we brought existing businesses into the network. Before, we've always built our own. And Dairyworks has provided us with instant scale in the cheese sector and new growth opportunities and diversified our earnings base. On the other hand, Talbot Forest offered us the opportunity to enter the cheese manufacturing market at a site reasonably close to Dunsandel down at Temuka. So we've bolted on cheese manufacturer with Talbot Cheese and cutting and grating and packing with Dairyworks. And we're merging those 2 companies together to be 1 value chain. So we're now, of course, a lot closer to New Zealand and Australian consumers, and we own a new vertically integrated value chain. So the focus of these 2 businesses is now on generating further business and supply chain synergies, market and category expansion and ensuring we drive a sustainable earnings stream, which they've already well and truly started doing. So the everyday dairy category, which I'm talking about at the moment, also includes the fresh milk and cream line that we started operating at Dunsandel in April 2019. So the initial product lines are for the key customer, which is Foodstuffs South Island, and we had our first year of full operation this year. So as you can imagine, there were some challenging demand cycles during COVID for a short shelf life product like this. But we were very pleased that we managed to keep up with demand, pantry stocking and the whole lockdown issue, with varied daily demand, and we kept up with a virtually 100% order accuracy. During that time, the sales actually rose for milk, 2.8%, and cream by 20%. So alongside the fresh milk and cream unit, we also built a UHT line right next door. And this will supply our Foodservice category, which is being established with a focus on functional UHT whipping creams, which will be exported to international markets. And we just sent first pallet yesterday by air freight. So progress on commissioning this line has been all the same, somewhat disappointing, initially impacted by the focus. We spend our time focused on the fresh cream -- fresh milk and cream line. And then, of course, subsequently, with COVID, it's been difficult to get the technical engineers and capability to New Zealand to assist with commissioning this line. But it is up and running now, but now dependent on market development. So we expect the first significant sales by the end of this financial year. So despite the initial challenges here, we remain confident and excited by this opportunity. So if I turn now to our balance sheet. So our recent round of capital investments has been quite extensive. That's included Pokeno, Dairyworks, Talbot Forest, the fresh cream and UHT facility that I've just mentioned. But we also purchased some farmland surrounding Dunsandel site for environmental and waste disposal purposes. And we've also expanded our dry store, a major dry store facility at Dunsandel with a very good return on investment. So of course, that's left our balance sheet with a little bit more debt than the Board considers comfortable, especially in a COVID-19 world. And so -- and especially also with our earnings being a little slower than planned, as I've described. So hence, we launched a $200 million equity raise to ensure we had the flexibility to navigate anything that might happen further with COVID. And any modifications -- to fund any modifications needed by Synlait Pokeno, which I've talked about, and in Auckland for the new customer, and also to get our balance sheet better in order and have better ratios. So now that the placement part of that is complete, I can let you know that all allocations under the placement were only to existing shareholders. We had strong demand from new investors, but we provided them with no allocation to ensure that our existing shareholders were prioritized. All institutional shareholders and retail shareholders above 44,000 shares did receive an allocation on a least a pro rata of the full $200 million offer, to the extent they bid for it. And in addition to the $20 million SPP, retail brokers were allocated shares under the placement for existing shareholders and specifically those that had a 44,800 shares or above. The combination of these allocations broadly reflects the retail shareholding percentage of Synlait and assures that the retail shareholders will be treated fairly under the offer. A reminder that the $20 million SPP purchase plan closes at 7:00 this evening for those of you that haven't applied for shares yet. So thank you for those that have participated. So we look forward to providing a further update on this over the coming days. So finally, as you'd expect, I wish to comment about our share price. So at the end of July 2019, which was the start of the year we're reporting on, our share price was around $10. And when we finished the financial year, it was around $7. And we know that we've recently traded well less than that, and our recent raise was at a discounted price of $5.10. The reasons for the fall in price I've covered, but to summarize, essentially, we've invested in new capacity in Pokeno and while we need -- while the need for infant capacity did not grow as fast as we had planned and to the lesser extent, our UHT facility, which we commissioned later than we expected. So this has affected earnings and therefore, confidence in our plans. Additionally, the covenant issue and an expectation in the market that we may conduct a capital raise have also most likely had an impact on share price performance. So to our areas of focus for the next year. We've removed the covenant. We've announced a first new customer, which will substantially utilize Pokeno. And over the next few days, we'll have successfully concluded our capital raise. We will launch a new foodservice cream products this year, and we also have some high-returning opportunities underway to better utilize the streams of milk that we collect. We've made significant steps to derisk Synlait over the recent months. And now this FY '21 year is a year of focus, and we're bringing each of these important areas to fruition. Meantime, our guidance remains as recently updated earlier this month when we announced the capital raise, and our net profit after tax for this year will -- is expected to remain at or slightly below last year. And a net profit after tax for the first half of this year is expected to be significantly lower than the equivalent period for FY '20, and that's to do with product placements and orders as we go through the year. So those are my comments. Thank you, and I'd like to hand over to Leon to give more color to that and our vision going forward. Thank you.

[Foreign Language] Well, good afternoon, everybody, and welcome to the Synlait AGM, and thank you, Graeme, for your Chair's address. It's great to welcome your presence and the journeys that you've taken to come here. I know some of you have traveled from the West Coast today to be with us today. So we appreciate the effort to come into this room or join us online so that we can share a little bit of our story and our plans going forward and acknowledge your support through the year. As Graeme mentioned, it has been an extraordinary year for everybody in this room and our country and the world. And as it has been, it's also been for us. There have been many moments where, I think, from a leadership perspective, we've all had to be the best version of ourselves more often than not, and that's been challenging and tiring for many of us. And so I wanted to start my speech this morning or this afternoon with a couple of thank yous. The first is to our Board and the leadership and direction and counsel that they've provided us through this past year as we've navigated the uncertainty that COVID-19 represented. And some of the achievements that Graeme listed off, their guidance and their counsel, the late night Board meetings, the 4:00 a.m. starts for our Bright directors, the out of cycle request. We've had far more of these this year than historically. So I wanted to acknowledge their support and dedication and passion for our organization. Secondly, I wanted to thank and acknowledge our leadership team, many of which are here today. They have themselves made significant sacrifice for Synlait. And I know that many of you have experienced the kind of disruption around travel and family members. Our executive leadership team is almost 50% made up of peoples whose home is not New Zealand. They have -- they are expatriates in New Zealand and quickly becoming Kiwis, but many of them have made significant sacrifices to be away from their spouses and loved ones during challenging events and they've stuck with us and seen us through. So I think it's appropriate at our AGM that we acknowledge that commitment that those people have made to us. So Graeme's covered a lot of ground on what we've achieved looking backwards. And rather than repeat my version of the truth, he's given a very accurate depiction, I thought that I'd spend some time looking forward. And in order to look forward, we sometimes need to look at the past. And this picture that's here online at the moment, I think, is something I often go back to. It reflects, for me, the very DNA of Synlait and the very origins of our name. Synlait synthesizes the best of New Zealand and to fantastic products that we export around the world. And we synthesize 3 elements that are expressed really clearly in this photograph. The amazing natural capital that we have in New Zealand, reflected by the very snowy mountains and blue sky, I don't think I've seen those mountains covered in snow since I've been at Synlait. They're starting to move up, perhaps for global warming reasons, but it must have been a cold day that day. In the bottom half, we see New Zealand's world-class pastoral-based farming system, which we tap into and differentiate our products on. And we knit those elements together with a highly integrated and best-in-class value chain represented by the factory that sits in between. That's a picture of Dunsandel, our Dunsandel site when it was just 1 dryer. It's a substantially different site today. And I think that when we look back and where we're going, much of the DNA and what we're looking to do going forward still harnesses that history and what we set out to do many, many years ago. And I guess also what's unwavering is the framework that we use to guide our organization and our people. We presented this, I think, at our first -- or my first AGM, it's what we call our heart, head and hands framework, our purpose, our ambition and our strategy. Our purpose at Synlait is doing milk differently for a healthier world. It captures the elements of being different because we believe that finding different solutions to things deliver better outcomes for our stakeholders, our shareholders and our customers. It reflects our commitment and belief in the milk nutrition that we supply to our customers and consumers. And it reflects our commitment to sustainability and a healthier world, not just through the nutrition we provide, but our commitment to an ongoing progress and shaping a healthier world through our environmental and sustainability goals. Our ambition reflected by the head. We use a moniker of 2 + Zero. The 2 reflects an ambition to grow our organization to $2 billion in revenue. We're well on track to do that, and it reflects the growth aspirations that's always been inherent in our organization. The plus reflects our goal to have a positive impact on the planet and also to create a positive place to grow for our people. And Zero reflects our ambition to strive and have a mindset towards 0 harm in our organization around safety, 0 defects around a commitment to quality for our customers and 0 losses in terms of driving productivity across our value chain. So we remain really committed to doing milk differently for a healthier world and 2 + Zero. Our strategy has been, for the past few years, to work towards diversifying our organization, and Graeme spoke to some of the progress we've made, and moving away from a reliance on single site category customer and market. We are in the throes of completing that strategy and very much the focus for us as we look forward, having understood that context, is to continue to focus on execution with our hands. So the mantra for us as a leadership team looking forward is we must continue to focus on extracting value across the opportunities that we've created. And I think it's important that we just reflect on the progress that has been made, and this is a useful couple of slides that show the difference in our organization. We've built and continue to have a highly successful organization that underpins our profitability and our growth across this combination of site, category, customer and market. We've built a fantastic business in partnership with a2, which continues to underpin our organization in infant nutrition, largely out of the Dunsandel site, for nutrition that travels up to China and into Australia, ultimately, for Chinese consumers to enjoy. So I think that this is largely the excess of value that we've worked to date. But there is an acknowledgment that we carry concentration risk across all of these 4 elements. A lot of the narrative is around our customer concentration risk with a2. But in fact, our exposure to a single site or a single category in infant nutrition or a single market are just as relevant. And only takes a small change in perhaps the geopolitical environment, as we've seen, or an earthquake in Christchurch to give you a fairly prompt and direct reminder that this has been a key strategic risk for us to invest. Play forward 3, 4 years later, and the investments that we made create a remarkably different picture for our organization. We have continued to invest in making sure that the products that we manufacture are sourced from multiple sites. And with the addition of the Dairyworks site at Hornby and the Talbot Forest site at Temuka as well as the significant investment in the North Island milk pool with our Pokeno site, are significant investments in starting to shape and address the risk that we might have around any one of our sites going down and our ability to be flexible across that basis. The categories that we can now participate on with the manufacturing capability that we've built has also expanded, not just through stainless steel and new manufacturing equipment, but through businesses that we've acquired. And there's a long and complementary list of categories that we can now participate in and start to operate through which diversify the organization. The customers that are listed there are the customers that we have committed long-term contracts with. The two at the bottom are unnamed, and our multinational customers do prefer that they keep themselves confidential for some really good reasons. Below that list is a really impressive list of other multinationals that we have strong and deep relationships with around our ingredients business, names like Nestlé, Danone, FrieslandCampina are part of our customer repertoire. And when I look through our customer list today, we have a very impressive customer list that would be the envy of any manufacturing organization in our sector. And increasingly, as we've started to expand markets, whilst we've been reliant on China significantly, the acquisition of Dairyworks gives us a business that has 60% market share in cheese and butter and strong leadership positions in those markets. And our new customer provides us access to exciting growth markets in Asia Pacific and in many markets that are non-China. So we have built an organization and opened up pathways that create many, many opportunities for us to now focus on. And I think it's really relevant for our organization, given what has transpired with COVID-19. We are extremely fortunate now as an organization to have the opportunity set that we have in front of us. And as the world faces one of the largest shocks that I think it's faced in many, many years, and we're seeing significant changes to the economy and to consumer behavior, we now have an opportunity to start to leverage the diversification and the opportunities that we've built to make a bigger contribution in New Zealand's effort to start to recover and our industry's role in building and continuing to drive a primary sector in New Zealand. And for our organization, our people and our shareholders, we have a responsibility now to tap the investments that we've made and build a sustainable and diversified business that's part of our vision. So coming to our focus as an organization and where we're moving from and to. I see us moving very markedly in terms of the phase that we're in, from a buildup phase to a fill up phase. We've spent a significant amount of time, money and resource in creating those new opportunities for us. And it's now time for us to focus on making sure we deliver the optimization of that capability and capacity that we've built. And as we do that, we'll extract and generate new value for the organization. So I think the Synlait that you have come to know, which has been highly acquisitive and on -- focused on building new assets and capability will start to become an organization that focuses on driving value from the opportunities it's created. And I've left a view on Phase 3 that once we've driven and created value across that asset base, we can come back up to build growth momentum again. And if many of you have tuned into some of our investor updates at our annual meetings and annual results calls, you'll be familiar with the return on capital chart that looks somewhat like a sawtooth. We tend to invest ahead of the curve. As we fill that capacity up, our return on capital starts to grow, and that's very much the phase that we're in right now. But I wanted to perhaps just come back to the slide and talk about ways in which we can extract value across this network. And whilst, in many cases, the business cases that we've put to our Board have been around working the horizontal, working the combination of site, customer, category and market and what that opportunity represents for us. But actually, I also see an opportunity for Synlait to do what I call work the mix. And by working the mix, I mean that we have an opportunity to work the horizontal. For instance, in the category column, there's an opportunity to start to look really carefully around how we're optimizing the milk solids that we collect. There's a very strong complementary milk solids aspect between infant nutrition and cheese, which underpins the logic for us to invest in a cheese business. Infant nutrition has 3x more whey than bovine milk and half the casein. Cheese produces a significant amount of waste whey, which we can harness for that purpose, and it uses a lot of caseinate from a protein perspective to hold the structure for the cheese. So we see opportunities now to start to work a complementary mix of opportunities downwards as well as across and between. And when we look forward, seeking opportunities, for instance, where our Dairyworks business can open up new markets in China because we have a presence and an office there, become really obvious opportunities for us to continue to work the mix and extract value. And it underpins our rationale for why we are building a strong, diversified and sustainable business by creating opportunities for us. So I thought that, that was a useful way at a high level to talk about the focus of the organization and where we're heading without going into specifics, which we'll continue to work towards. And I was asked in this room, I think, two years ago, what would be my vision for the organization going forward. I don't know that these were the specific words, but I do remember thinking about what does success look like for us. And ultimately, building a more sustainable business has been top [Audio Gap] And most importantly to the planet, which is facing a grave crisis around the environmental aspects that have come to pass in recent years. So that's the journey that we're on. We're really excited about the opportunities that we've got ahead of us. We're really pleased to have completed the multinational agreement that Graeme spoke to. That's a core part of our strategy, and we'll continue to work towards bringing that to life. I'd like to thank investors for your patience as being part of this journey with us, but also your support. And it's great to have a group of passionate shareholders who are engaged in our journey and our process, and I look forward to your questions and engagement afterwards. There's a strong representation of our leadership team here today. So please feel free to approach them and ask them any questions that you may have. So that concludes my address this afternoon. Thank you very much. I'll hand back to Graeme.

Thanks very much, Leon. so we'll take questions on anything to do with the annual report, anything I said, Leon said. Well, you can direct questions to myself or Leon or individual directors, if you so wished. But do remember that, for those in the room, that your questions and comments are being webcast around the world. But I don't want to put you off. Right.

You mentioned Pokeno, plant-based. Can you expand on that?

Yes, the ingredients for -- most of the ingredients for this new multinational customer that we are going to manufacture for right through to finished product, plant-based ingredients. So they're not made from milk -- from cow's milk.

Is that it?

That's it. What else would you like to know?

[ What's a plant-based? ]

What's a plant-based? Like soya products and so on, different oils and products like that, that make up a nutritional product. I'm being a little bit cagey because this customer is quite sensitive to publicity. I mean it's a well-known worldwide brand.

[indiscernible] a major division, is it [indiscernible]

It's not -- the fact that it's plant-based is obviously a major division. But the equipment that is necessary to manufacture this product is the equipment that we've got at Pokeno, specialized, evaporative and drying capability to take liquids and turn them into powders and pack them into cans and sachets and so on. So the equipment that we've got there is ideally suited, and the skills of the team we've got there ideally suited for this. So it's a perfect match. And our location in this hemisphere is a match for the markets as well. So it's a very good deal, okay? Other questions? I meant to be -- okay. I've got a question -- I'll take the questions here first.

Just the U.S. market [indiscernible]

What are we doing in the U.S. market?

The U.S. market, what are you doing?

Yes, yes, yes. I might flip that to...

The U.S. market was an attractive market for us, especially around infant nutrition. It's the second largest infant nutrition business in the world after -- or market in the world after China. And our historical plans there were to work with a well-established brand in Munchkin to launch a new grass-fed infant formula there. Some 18 months ago, we realized that the registration process for getting a new infant formula recipe was going to be very challenging. And in discussions with the Munchkin customer, we agreed to put that registration process on hold. There's been a lot of investment put into it. And subsequently, I guess, we've had somewhat of a rethink around the role that market access and market restrictions play in our infant nutrition process. It is a strongly regulated category. We have built a really strong position and relationship with a2, and that partnership, we'd love to continue. And in many respects, the new customer agreement that we've worked on was a conscious effort to start to focus on opportunities that would represent adjacent categories and formats for us to work with to give us greater diversification. So whilst it's taken somewhat of a pivot for us to look at that as we were building new facilities for infant nutrition, and it requires a bit more investment to do that, strategically, from a long-term perspective, the organization is far better off because we have diversification, both in nutritional format, bovine and plant-based in terms of the nutrition we provide for milk, but also in terms of the nature of the customer and the markets that we're exposed to that are less reliant on those regulatory controls.

Okay. [ Go on ], please.

There are significant environmental risks going forward in relation particularly to climate change, which will have an impact on your business. What mitigations have you considered going forward given tightened environmental regulations [indiscernible]?

Yes, good question. Obviously, we've strategically looked at our impact on the planet, and you can see that it's a key driver for Synlait. So with -- I'm going to get Hamish maybe to talk -- I'll -- Leon, up to you. What we've done is we've looked at our impact right from farm right through to delivery to customer. We've set targets and we've set about trying to achieve them. They're aggressive targets. We announced them 2 years ago. And we monitor and all of those targets, a significant number of them. And we produce what's called a sustainability report, which is a separate report to all shareholders and stakeholders, where we honestly show exactly what impact we've made and what improvements we've made. But would you like to speak to that in more detail?

Well, Synlait, under John's leadership, made a significant commitment to setting ourselves some goals to become a more sustainable organization around environmental aspects. And many of us, including myself and some of the leadership team here, have joined because of that commitment because we believe in driving better outcomes for people and planet as well as for profit in our organization, and that sits within our purpose and in the DNA that we operate. We have set ourselves some bold and aspirational goals that sits with the way that we approach things in terms of doing things differently. They are to both assess and manage our on-farm and off-farm footprint. So we look at both the scope of our farmers as part of their contribution to the environmental aspects as well as what we're doing through our industrial processing. Some of the things that we've done in recent years is the investment in an electrode boiler at our Dunsandel site for our liquids plant. That is an alternative to fossil-based process heat that gives us more sustainable outcomes and how we manage and present that. We're looking at further alternatives for how we can manage process heat for the remainder of our aspect -- of our energy sources. And from an on-farm perspective, much of New Zealand's contribution to greenhouse gas emissions comes through agriculture and the predominant contributor to that is the dairy industry. And our key goal there is to work with our farmers to prepare them for some of the changes from a regulatory aspect that are ahead and to work on a range of solutions through our Lead With Pride program that compel them or incentivize them to be committed to looking really carefully at their greenhouse gas footprint, what they're doing on farm around environmental activities. And we're attracting some amazing farmers who are really committed to changing the way that they farm. And our opportunity is start to share that within our community, continue to incentivize it. And whilst agricultural emissions will continue to be a large part of New Zealand's environmental footprint, the role that Synlait sees itself playing, albeit that we're only 4% of New Zealand's milk pool, is to influence others in our industry. So for us, this is a pretty competitive conversation. We're willing to share what we learn with other players so that ultimately, the total industry starts to benefit. We've got a long way to go. We're working hard on a range of solutions that Hamish is deep into. Our sustainability report will be out next week says Hamish. So that's a good read if you want to understand in a really transparent way some of the progress we're making on those metrics. Get everything?

Thanks for that question.

[indiscernible] help with training [indiscernible]

Got it. Do you want to talk to that?

That's a great summary. Hopefully, that's gone some way to answering your question. You asked about specific mitigations. We've got a whole portfolio of programs designed to reduce our climate impact, both on-farm and off-farm. And what is coming out of there is some really good progress. So we've set a minus 35% target by FY '28 versus our FY '18 base year. So far, we have reduced by 6.6% towards the 35%, so we made a really good start, but our big initiatives have yet to be employed here. So we're really confident about that target. Off-farm, we've targeted minus 50%, so halving our environmental impact by FY '28. So far, we've achieved minus 16% in 2 years. So we're on track to achieve that as well. But that's just been tweaking around the edges. We've got some really big initiatives coming, which will take us some big chunks towards those targets. So we feel like we're in pretty good shape. When we set those targets back in 2018, we weren't quite sure how we would get there. We set those targets anyway, and what's playing out is really strong confidence that we're going to, if not reach them, if -- we're going to reach them, but we may overachieve it so.

Thank you, Hamish. You can tell by the enthusiasm to answer that question is well embedded in Synlait. I've got a couple of questions here from the remote audience. First one is, can you please explain the rationale behind selling the ice cream business from Dairyworks? Dairyworks did have an ice cream business, and we just announced the sale just very recently. Well, 2 rationales. First -- there's probably about 5. But first 1 is that doing milk differently for a healthier world. Ice cream, it's got milk in it, but it's got a little sugar, and it's a bit of a treat. And it's not really where we're aimed at. We're aimed at healthy foods, higher nutrition foods. So there's -- we bought the company with ice cream manufacturer. So there's a little uncomfort -- discomfort there. And then secondly, it's a very competitive business in New Zealand just at the moment, and there's a few brands trying to establish themselves. And so there was the opportunity to sell the business into one of those competitors in a competitive way and get a little bit of early return on our investment. So that's the answer there. Anything to add, Tim? No. We covered it?

I'd love to come back as well, focus as well on [indiscernible] food business, which is a bit of cheese and butter in particular and allow us to come back into focus. So I was just saying, it also then allows us to come back to our core business. We're going into the fill up phase, as Leon presented earlier on, and that allows us to really focus on New Zealand, Australia and the growth that's going to come from there.

Great. Thanks, Tim. Right. And the second question is how effectively are we utilizing the UHT line and what expectations should we have going forward? I think I pretty much addressed that in my comments. Not very effectively is the answer, and it is disappointing. It's half of the, what we call Project White, which is our entrance into liquid everyday products. So half of the factory is going extremely well. And the other half was slow commissioning, as I said in my comments. And the first product is this UHT whipping cream, which is targeted at Asian market, but in particular, China. And like I say, the first shipment has just recently left, and we're very confident about the product. So we'll see what the customers think of it. And from then, we do have a series of product initiatives that we wish to run on that plant, which we'll announce in due course. Leon, anything to?

Yes, we are behind in terms of commissioning and getting products off that, and some of those have been COVID-19 related in terms of getting technical support and to provide that support. But we haven't changed our belief in the investment. We're still really excited around the long-term potential for entering into the UHT category and participating in high value categories. Where we see opportunities to work that mix, again, it's new capability that we have. And we have existing customers who see potential in that capability and capacity that we've got. And by leveraging that, we still remain really committed and still of a strong belief that there's strong potential there for us, of which the UHT whipping cream is the first cab off the rank.

Any other questions? There will be another opportunity at the end of the meeting. So okay. If there's not any other questions at the moment, then I'll proceed with resolutions that we wish to put to you, the shareholders, today.

So the first resolution relates to the auditors' fees and expenses, this is a reasonably regular resolution that we put, and that the Board be authorized to determine the fees that we pay the auditors and the expenses for the 2021 financial year. And the fees that we paid Deloitte, who are our auditor, and we propose to continue with them, that we paid last year all set out in the annual report. So I move that the Board be authorized to determine the auditors' fees and expenses for the 2021 year. So are there any other questions -- any questions on that resolution? I didn't expect there would be. It's fairly standard. So if you could -- right. So I invite you to fill in your marking -- marking your resolution card -- voting card, sorry. And for those in the electronic audience, if you could electronically vote, please. [Voting]

So move then to the second resolution. We've only got 2 resolutions at this meeting. And this is an important one. They're all important. But -- this relates to the election of Simon Robertson as a director of the company. So before I invite Simon to speak, I'd like to acknowledge and thank Bill Roest for his more -- we've thanked him a few times over the last couple of days, but this is a formal thank you. Bill has been with the company since April 2013 when we listed the company. So Bill was the CFO of Fletcher Building prior to joining us, and he had an extensive executive career before that, being the managing director of Fletcher Aluminum and another time at Fletcher Residential. So as well as serving on our Board, Bill has been a director of the Housing Foundation, of Metro Glass and Fisher and Paykel Appliances, among others. Bill has astutely chaired our Audit Committee since listing. He's chaired the due diligence committees for the 2016 $100 million capital raise, and for the $180 million bond issue that we did this time last year, and the current $200 million raise. These are not light duties. There are multiple meetings and lots of reading, and we need skilled people to be able to do that and ensure that we follow the regulations completely and put a genuine offer to shareholders and bondholders. And Bill led us all the way through that, and we thank him. He's -- I've got more to say. Yes. Not much more. He's a straightforward director and chair. He calls a spade a spade. He's been extremely valuable to Synlait, and we're very sad to lose him, but we do respect his decision to retire from the Board. So I'd like to -- if you are to join with me in thanking Bill. So now turning to Simon. So Simon has also extensive executive and governance experience and strategy, risk, operations, technology and stakeholder management. Simon's skills align with Synlait's strategic priorities, and the Board has every confidence that this will make him an asset to the Synlait Board. And we've just had 3 days of meetings, and Simon has been present and demonstrated those capabilities already to us. So the Board has assessed Simon to be an independent director, which in this company is important. We have to have 3 independent directors under the definition and the listing rules. And that's within the meaning of the NZX rules, as I say. So the Board supports Simon's election as a director, and I'd just like to invite Simon to address you for a couple of minutes before we put that proposal to you.

Good afternoon, everyone. And thanks for the opportunity to speak at this meeting regarding the resolution to appoint me as a director of Synlait. I'll briefly touch on 2 aspects that I think I bring to the role, passion and skills. For passion, I'm a strong believer in purpose. To be an engaged participant in any business and in any role, I believe it has helped by a reason for participating beyond the technical skills that you may bring to a role. For me, I strive to get involved in businesses where those entities are positively contributing to the wealth and prosperity of New Zealand. I have always loved the idea of taking a little piece of what we do well in New Zealand and selling it to the rest of the world. This has seen me working in industries like the marine industry, carpet manufacturing, tourism and more recently, in governance roles with land-based industries, providing quality food to the world. For skills, given my background as a former CFO of Auckland Airport, it is perhaps unsurprising that my governance career sees me take up roles as chair of audit and risk for all my directorships. But I believe it is the wider skills in governance, including strategy, technology, procurement, manufacturing and distribution that I believe I can fully contribute to the governance of Synlait. If shareholders decide to support my election to the Board of Synlait, I will apply my passion and skills to add value around the Board table, for the benefit of Synlait, for Synlait stakeholders and, of course, to you, the Synlait shareholders. Thank you.

Thank you, Simon. So are there any questions to Simon or about Simon? None online. That's fairly comprehensive. So I'll move that Simon Robertson be elected as a director of Synlait. So if there are no questions then, if you could fill in your voting forms accordingly, please, and those online as well. [Voting]

So thank you for that. Right. Well, that concludes the meeting's formal resolutions. So Computershare will now come and collect your ballot votes and the online voting will now close. And while we're doing that, I'll just open if there's any final questions about anything about Synlait. We're happy to take them.

So got a question online here, which says, do you have a daigou channel? And directly, we do not. So that's a question relating to the -- one of the very major ways of distribution for products into China. And it applies to the -- in particular, in our case, to the a2 Platinum infant formula, which we -- which a2 sells into this New Zealand and Australian market. And a lot of -- and there's a bit of a price differential and a product differential in terms of what's available. And so a lot of particularly Chinese people living in Australia make a business out of buying from supermarkets or distributors and posting to customers in China, and that's called a daigou, bought on behalf channel. Since COVID, this is a relevant question to us because since COVID, there's less Chinese students entering Australia to study at university and setting up these businesses as a way to pay for their education. They're not the only people that do it. But -- and that has lowered the quantity of sales that are going -- of a2 into China. And so that's why that -- shareholders ask that question. But no, Synlait does not, at the moment, produce products that are subject to daigou distribution, as far as I know. I don't think so. Anything to add to that? Right. So we have another question online. When -- this is a favorite question. I was surprised it took so long to come up. When will the directors decide to pay a dividend to shareholders? With current low interest rates, have the directors considered borrowing funds for capital expenditure? Yes. Well, we did $600 million worth of that. And we decided that, that was a little too much given the slower earnings profile. So we went back to shareholders and asked for $200 million worth of equity. However, we do have a very strong cash flow in the company, and that's what, to the large extent, has funded our capital investments to date. And that $600 million was mostly funded by cash flow that the company's got a strong cash flow engine. So my normal answer to every year for the last 8 years to this question has been we're a yield company -- we're a growth company, not a yield company. So we've got good ideas, and we're investing all those funds back into the business. But now I think we can say that in the next 2 or 3 years when maybe I'm not the Chairman, but I'm committing the future Board, those strong cash flows and what we see in front of us, which is fill it, not build it anymore, they'll produce cash in the company such that I think dividends will start to flow. So -- oh, he's going to qualify that now.

No, no, no. I think the question on considering debt as an option and the mix between equity and debt, as we've reset the equity aspects on our business, there is a commitment from management, and Angela is going to pick this up, to review our debt stack. We have a range of borrowings that are relatively short term, and there's an opportunity to take advantage of some of the market conditions at the moment and get more strategic around that as well. So that will be something we start to fall into our strategy going forward from a capital structure perspective.

As I said, one of the reasons for the equity raise was to make sure that in a COVID world, we had an appropriately structured with the right ratios of debt and equity and our balance sheet so that we can respond if things don't go positively. And we owe that to you, our shareholders, to make sure that the company is always resilient. So that was the primary purpose of the equity raise. Any other questions? Yes.

One question about the source of your ingredients for plant-based products. Are you having contracted farmers, your own farms yourself to produce them? Or are you going on open market?

They will be supplied by the multinational customer that we talked about. They're very, very, very specific, being developed over many years and the suppliers of those ingredients are already in place. We are taking those ingredients and manufacturing into the final product. Yes. So it won't in the first instance involve our farmers. Yes. Any other questions? Nothing online. I don't want to hold everybody away from the cheese selection that's just out the door unnecessarily. Okay. Thank you very much for your attendance and your lively questioning, and we do appreciate your support as shareholders. And we'll get on to that dividend as soon as possible. Thank you.