George Adams, chairman of Synlait Milk. Photo / Supplied
George Adams has his work cut out.
Since May 1, he’s chaired the board of Synlait - a company that has seen a slew of changes at a management and directorship level, and a string of earnings downgrades.
The share price has slumped by 71 per cent over the past 12 months and its $180 million worth of NZX-listed bonds - which fall due in December - were last quoted at 95 per cent - so far out of whack that they rarely trade.
Adams, who was appointed as an independent director of Synlait in March, was made chairman after John Penno, the company’s co-founder and board-appointed director, stepped down.
In April, the cash-strapped dairy company won an extension for a $130m debt repayment after asset impairments plunged the company into a $96.2m loss for the first half to January 31.
As chief executive Grant Watson said at the time: “After a significant level of investment over a number of years, Synlait has far too much capacity and too much debt.”
Central to its issues is the company’s near-new plant at Pōkeno, which cost about $400 million to build but which has so far proven a drain on the company’s profitability.
In a package announced to the ASX yesterday, Synlait was thrown another lifeline by 39.01 per cent shareholder, China’s Bright Dairy.
Subject to shareholder approval, the company has agreed on the terms for a $130m loan with Bright, which had been due on July 15.
Synlait expects the drawdown to meet its repayment obligations to its senior lenders.
In its statement to the ASX, Synlait said it was unlikely to meet three of its banking covenants by July 31. “This reflects the timing of Synlait’s deleveraging and further weakening in its financial performance,” it said.
The syndicate had continued to support Synlait and was actively engaging with the company on the requested waivers.
The company said it now expects its full year 2024 ebitda to be at the lower end of a previously advised $45m to $60m range, excluding non-cash adjustments of $17m.
Synlait also noted that a “significant majority” of the company’s supplier base had submitted cessation notices “which is expected given its current performance”.
“Retention of milk supply remains a critical priority”.
Cessation notices become effective after two years, so notices lodged before the May 31 cut-off will take effect from 2026.
Meanwhile, Bright Dairy has in the past shown its support and has committed to participate in a future equity raise.
To the question of whether Synlait is salvageable, Adams has a long answer.
“With these things, there is a truckload of details, and Synlait certainly has that,” he told the Herald in an interview.
“We have a very profitable business in Dunsandel [in Canterbury] - it’s a really strong business.”
Likewise, the consumer-oriented Dairyworks, which Synlait wants to sell to pay down debt, is also very profitable, he adds.
“So we have got two core assets that do very well.
“We have good customer relationships at Dunsandel.”
The company’s milk price is competitive with Fonterra’s at $7.80 per kg of milk solids for the season just past, and $8.00/kg for the season ahead.
Adams said Synlait needed to address issues of profitability and, clearly, Pōkeno.
“And in reality, if we can get to a point where we can resolve Pōkeno, and I am confident that we will, then the profitability of the other two will not get sucked into Pōkeno, which is the issue,” he said.
“Ultimately, we need to recapitalise, which we are in the process of doing.
“We need to get across the July 31 [the $130m amount] deadline and I have every reason to believe that that will be sorted.
“The recapitalisation comes in after that, which also takes care of the bonds.
“What we are planning is a sufficient capital raise.
“We use the term ‘holding the nose’, but at that stage, if we deal with Pōkeno and we do what we are planning to do in terms of capital raise, then yes, it is positively salvageable.”
Relations between Synlait and infant formula marketer a2 Milk - which holds just under 20 per cent of its stock- have been strained in recent years.
Last year, relations took a turn for the worse when a2 said that it had cancelled the exclusivity agreement it has with Synlait regarding the manufacture of some products for sale in China, Australia and New Zealand. The matter is going to arbitration.
Adams, an Irishman, says relations with a2 Milk, at an operational level, are good.
“I would characterise the relationship as professional, long-term, and certainly one that I can work with.”
He says resolving issues at Pōkeno could involve a sale, or the plant taking on more customers, as the central problem is its under-utilisation.
Adams comes to Synlait with an enviable CV. He has 30 years of international business experience in the fast-moving consumer goods and telecommunications industries.
He trained as an accountant and worked for a big firm in Northern Ireland.
One of the firm’s clients was Coca-Cola, which he later joined.
When the Iron Curtain came down in the early 1990s, Adams was part of the United States firm’s big expansion eastward, to far-flung locations such as Siberia.
He was also part of Coke’s move into Nigeria, home to Africa’s biggest population.
After 11 years with Coke - much of it spent travelling - Adams took up a position with British Telecom in 2000, where he spent three years as chief financial officer.
Then came the opportunity to head up Coca-Cola Amatil in New Zealand, which he refers to as his second career.
“I came down here six weeks after the offer was made, with my family, and I’ve been here ever since.”
“In governance, I suspect this will be my third career.”
“I certainly have some experience and I’m using all of it with Synlait,” he said with a smile.
He has held a number of directorships in New Zealand and is the current chair of NZX-listed Bremworth Ltd, a director of NZX-listed ArborGen, and chair of the Business Leaders Health and Safety Forum.
“I’m not going to beat about the bush with you - we have got a significant deleveraging ahead of us.”
Adams noted that the business grew very quickly and the the relationship with a2 Milk in the boom years was pivotal.
“The opportunity to get into infant formula was highly value-add.”
At that stage, all Synlait’s manufacturing capacity was at Dunsandel in Canterbury.
“Post the Christchurch earthquakes, the analysts were saying that we had all our eggs in one basket and that that was a risk and a view that Synlait would outgrow its site.
“That strategic input was how Synlait Pōkeno happened, and it was probably the right decision at the time.”
The second decision concerned “concentration risk” - over-reliance on one big customer - and that’s when Synlait started looking beyond ingredients and nutrition - infant and adult.
“Then Covid came along and exposed the fragility of the export channels - particularly daigou out of Australia.”
Daigou, otherwise known as the suitcase trade, involved visiting Chinese nationals buying product in Australia for onsale back home.
With Covid-19, air travel essentially stopped, and so did the daigou trade, leaving a2 and Synlait high and dry.
“That left us with an asset [Pōkeno] that was not performing and not really needed, so we had spent about $400m for zero return.
On Synlait’s other acquisition, Dairyworks, Adams said: “Dairyworks is a good business, but would I have bought it? Probably not, because it’s not really core (to the) business,” he said.
“Effectively, it’s the assets in Pōkeno which are not performing.
“That will be a bitter pill to swallow for the people who worked extremely hard.
“There is nothing wrong with the asset, and there is nothing wrong with the people who run it. It’s just that we have not managed to get the demand to fill the sites.
“Therefore we need to get several hundred million dollars in debt off our balance sheet in short order.”
Adams said Bright Dairy had been supportive.
“Their directors have been in all the meetings that I have been in. They have put in a significant investment of time.”
For Pōkeno, it was a matter of selling it, getting more customers on board, or both.
“You have got a really strong milk pool in North Waikato, where Pōkeno is, and we would like to see more customers coming in.
“Whether we can do that in a short space of time I’m not sure. That’s why we have the review.”
That leaves Dunsandel - which makes a wide range of products from infant formula to milk powder to lactoferrin.
It’s a big site - so big that workers need bicycles to get around it.
The theory being kicked around investment banking circles that a2 could be a buyer is not being given much credence: Dunsandel makes hundreds of thousands of tonnes of product, not just infant formula.
If a2 Milk ended up with Dunsandel, it would have a lot of capacity that it has no use for.
The upbeat Adams is philosophical about the challenges that lie ahead for Synlait.
“You get economic, consumer cycles and sometimes you get relationship cycles.
“Part of what attracted me is that it is tough. It is challenging.”
“Everybody is working on this problem.
“There are quite a few red eyes around the board room - including my own.”
Synlait is only one of a small group of dairy companies to rival market leader, Fonterra.
“We all know now how important Synlait is to dairy in general in New Zealand, because I think it needs something like Synlait.
“I do genuinely think it is important that we succeed.”
For Synlait, as a listed company, its string of earnings downgrades have played out in a very public light.
“When things are going well, most listed companies really enjoy it, but when things are not, then most of them wish they were not.
“It’s much easier fixing things behind closed doors.
“But then the liquidity of a market affords you to actually respond to crises and issues, which is also valuable.
“It’s the price you pay for access to capital.”
And the bonds?
“That’s the market reality.
“You have to factor that in.
“It is a factual representation of what has happened.
“Clearly, there is limited market confidence, so all we can do is respond appropriately to that and be comfortable that we have funds to deal with the bonds at the appropriate time,” Adams said.
“It′s like everything else.
“The road to salvation is crooked.
“It’s never straight.”
- Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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