From U-turn to fast lane
Failed listing bid wasn’t a great start, but Synlait has more than made up for it, writes Andrea Fox
Synlait Milk didn’t get to be a sharemarket sweetheart by doing U-turns, but its chairman Graeme Milne remembers exactly where he did one on the Hamilton Auckland highway 10 years ago. It was 2009 and Synlait was in a corner.
The new dairy ingredients exporter had made a loss in its first year and had too much debt. It was under pressure from its banks and the global financial crisis (GFC) had paralysed debt markets.
But a golden opportunity in China was going begging. A food-safety scandal the previous year, when infant formula was poisoned with melamine, had fired huge demand for baby milk from safe producers like New Zealand.
“To get into the infant formula market — the most sensitive of all markets — takes years and years of trust to be built in the supply chain. But now the environment had changed and it looked like we could enter the infant formula market much faster than we’d otherwise have been able to,” recalls Milne from his home at Tamahere, near Hamilton.
Synlait needed equity to build a second, specialised dryer for infant formula — and fast.
But after the GFC, “debt was a bad word”.
So Synlait, owned by Japanese company Mitsui, with 20 per cent, and a clutch of small private investors, decided to try to list, “even though the environment was terrible”, says Milne.
“We were too fresh, too young, too new, but we needed to do something. And the banks were pushing us. We went for the big bang, tried to raise $150 million. It was a really bad time — the company wasn’t launching it off a strong platform. We only had one year of results and one dryer operating.
“But we couldn’t give up.” Long story short, Canterburybased Synlait got its $150m in bids but not enough competition to reach the desired share price.
“The share price would’ve been too low and our existing shareholders would’ve been diluted away. So we made the very difficult decision not to accept the offers, to pull the IPO. John [Penno, then managing director] had flown up from Christchurch to our investment bankers and I was on my way to Auckland to sign the papers.
“I did a U-turn on the motorway and came home.”
But within six months, global market sentiment began stabilising and “early investors were getting brave and coming back to the market”, Milne recalls.
Time for Synlait to go back to the private placement market for equity. This time there was strong interest from several companies and the upshot was that China’s Bright Foods paid $82m for a nearly 51 per cent stake.
“We were willing to sell control . . . to get enough equity into the company and to get to a situation where our shareholders weren’t diluted too much and sufficient funds to build the next dryer,” says the Opotiki-born, Hawke’s Bay-reared Milne.
“We built the second infant formula dryer and got ourselves into the bulk infant formula market. That went successfully so we built a third dryer and now we’re building a fourth.”
And Synlait has since listed successfully — on the NZX in 2013 when Bright’s stake was diluted to 39 per cent, and on the ASX in 2016.
Last year it was the best performing stock on the NZX and Synlait’s market capitalisation today is nudging $2 billion.
The company has been growing at 15-20 per cent a year since 2013, has moved from packaged bulk infant formula powder to consumer canned production, has a partnership with another sharemarket darling, a2 Milk — a 17 per cent shareholder — and is about to enter what it calls the “everyday” dairy market, producing homebrand milk and cream for supermarket chain Foodstuffs in the South Island.
The $125m plant being built at Synlait’s main site at Dunsandel, in Canterbury, to handle the move into the consumer dairy market can also make long-life cream, liquid infant formula and drinking yoghurts. Milne implies that Synlait is eyeing the North Island market but won’t elaborate.
Meanwhile, the company will
make its North Island debut this year as a raw milk processor at Pokeno in the Waikato, and it has inked a deal to buy the South Island’s Talbot Forest Cheese company for up to $40m in August. Its environmental protection and sustainability initiatives lead the $17b dairy industry.
Synlait has made spectacular progress look easy. But Milne, chairman since the company’s earliest days and probably in his last term, shares the U-turn story because he knows better.
Getting this far has involved sleepless nights, difficult decisions, a lot of hard work building export customer and investor relationships, analysing markets, acquiring talent and building teams, and at times, dollops of courage.
As Milne tells it, when the genesis of Synlait Milk emerged in 2006-07 from a small group of separatelyowned dairy farms, and contractors were engaged to build the first dairy factory, “we had nothing except a corner of one of the farms where we said we were going to build”.
“We didn’t have a pilot plant, we just built a commercial plant. So we didn’t have any samples from a pilot plant to say [to potential export customers] this is what the product will be like. We were going into a crowded market.”
But they had the dynamic and visionary John Penno, co-founder of the original Synlait Farms Ltd, founder of Synlait Milk and until last year, its managing director. He remains a director.
Penno did a fantastic job of meshing farmers, investors and the banks in those very early days when “everything was contingent on everything else”, says Milne, an experienced chief executive and director in a range of sectors, but with a solid pedigree in global dairy markets. He met Penno on a dairy industry advisory board and was asked for his ideas on making a dairy manufacturing debut.
Milne obliged with “one page of bullet points” and was asked to explain it to the fledgling Synlait board. “Next thing I was chairman”.
He’s kept a low profile — long his business style.
“Profile is for the company — for the benefit of the company and John was bloody good at that. I think the CEO is the front of the company.”
In 2019, Synlait is entering a new stage in its life. Now headed by exFonterra senior executive Leon Clements as chief executive, it is still a growing company but “now it’s more about execution and building on the strategy”, says Milne.
No dividend has been paid yet, and is unlikely to be anytime soon.
“There are no immediate plans to pay a dividend. Like I say, we are a growth company. I start every AGM pretty much saying that. The last AGM was the first I never got asked the question.
“In September [2016] we raised $100m in a rights issue to make sure we had the platform for investing further. We have $500m of investment ahead. [We want] more equity, less debt. Our history is a bit too leveraged, and personally, I like to run companies conservatively.
“When you pay a dividend it doesn’t make the company worth more — it makes it worth less. Paying a dividend or not is not a positive or a negative. It’s other people’s money and you need to treat it responsibly.
“How I judge it is, if we have good ideas that we think will bring a great return on investment, we’ll keep the money and invest it for you. If we haven’t, we’ll give it to you.”
Milne says Synlait can handle the projected investment in new plant and infrastructure in the next two or three years without needing to raise more equity.
“If another thing came around the corner we thought worth doing in the immediate future, we are comfortable funding that with debt and earnings. There’s a lot of cash coming into the company.”
At the time of the rights issue, Synlait’s share price was $3.62. It has climbed as high as $13 and yesterday was trading around $9.90. Milne says the stock moves around because it is held in big blocks and relatively thinly traded. It is sensitive to sentiment about China’s economy and export registration and approvals.
“We don’t have an opinion on the share price,” says Milne. “I say to the team, we run the company — not the share price. We run the top and bottom line of the company and the strategy; the sharemarket makes up its mind about what the share price is.”
As for Synlait being the best performing stock on the NZX last year, “I certainly don’t use those sort of statistics internally in the company”.
“We are building a company. It’s young and we are relatively exposed to infant formula, but we’re not just an infant formula company. We are building . . . in other categories and making sure we do that well so if there is a threat in one area, we have others. We want multiple sites in multiple sectors. But we don’t want to do too many things, we are a dairy company, but we do want to do things we can be very good at.
“We are not a yield stock and I tell shareholders that.”
Milne says that from day one he cautioned Synlait against entering the own-brand, fast-moving consumer goods market — and in 10 years the company hasn’t been tempted.
“Some people say you should capture as much of the value chain as possible and that’s true depending on what sector you’re in. But you’ve also got to cut your cloth and if you’re going to do things, you have to do them really well.
“We’ve done technical development of the product and we’ve done that well, so now we’re replicating that in the local market.
“I’m not saying we will never get into our own brand, but if we do it won’t be in sectors that compete with our own existing customers.
“There’s a desire to get into other parallel dairy-related sectors so that we can de-risk the company and at the same time work with branded partners. There’s profit to be made and we think we can do it well.
“If you’re entering a sector with existing players you have to be pretty damn sure you can do well and prosper. We did a lot of analysis.”
Looking ahead, Milne says he indicated last year that he doubted he would seek re-election in three years, but had agreed to stay on for the chief executive transition.
“There’s a general understanding [in governance] that if you’re there forever you can’t be independent. It’ll be a hard thing because Synlait is a nice company.” Meanwhile, there will be a “comprehensive” external review of the board this year.
External board reviews are regular at Synlait but this one will look at bit deeper, he says. “There’s an age and stage thing with everybody. We don’t want everyone shifting at once.”
Milne told the market Synlait should post a “substantial” lift in profit for the 2019 financial year but that the increase won’t be in the same league as last year’s 89 per cent.
Risk areas ahead include diversifying into new sectors as Synlait broadens into the crowded sports and adult nutrition sectors, and speed wobbles, he says.
“In a fast-growing company it’s easy not to service your employees as well as you should. Systems can get behind, there’s temporary accommodation and you could can easily disappoint staff.” Within the next year, Synlait’s staff is expected to swell to nearly 900. Ten years ago it had about four.
“With anything over 10 to 15 per cent annual growth you have challenges — we have been growing at 15 to 20 per cent for a long time.”
If we have good ideas that we think will bring a great return on investment, we’ll keep the money and invest it for you. If we haven’t, we’ll give it to you.