THE TRUE VALUE OF OUR MILK Synlait Milk Limited Annual Report 2013 it is our partnerships, our place, our process and our people that driVes our success. pARTnERsHIps bUILT On TRUsT We aim to be recognised for excellence, quality and innovation in everything we do. It all starts with relationships. We understand the value of having long-term sustainable partnerships throughout our entire value-chain. They underpin our ability to deliver quality products our customers demand. We regard our customers and our milk suppliers as our most important business partners. It’s our mutual understanding and cohesive way of working that drives our ability to all make more from milk. FROM OUR pLACE TO THE WORLD Our home is in the heart of Canterbury, New Zealand, nestled between the majestic Southern Alps and the South Pacific Ocean. The abundant water supply and the ability to irrigate year round coupled with the flat and mild nature of the landscape makes Canterbury ideal for dairy farming. That’s why we chose this location for our manufacturing facilities. It’s the unique and powerful blend of our environment, leading farming systems, and the quality and consistency of milk supply that drives our competitive advantage that we take to the world. DynAMIC AnD InnOVATIVE pROCEss To create world leading products for our customers we must be innovative throughout our value-chain. Lead With PrideTM, our internationally accredited ISO 65 dairy farm assurance system, demonstrates industry leadership in food safety and sustainability. It recognises and financially rewards our milk suppliers who achieve dairy farming excellence. By investing in superior specialist manufacturing facilities that allow for production flexibility we’re able to tailor make products to meet the unique individual needs of our customers. It’s thinking like this that our customers value and that sets us apart. pEOpLE THAT DELIVER VALUE It’s our people who are the driving force behind our organisation’s success. Our team has a wealth of experience in dairying, food safety, manufacturing, product development, sales and customer service. We share a passion for excellence and innovation and an overwhelming desire to deliver world- class outcomes. Driven by our vision of becoming the trusted supplier of choice for the world’s leading milk-based health and nutrition companies our people are empowered to be leaders in their field of expertise. The value they create directly contributes to the performance of our company and the relationships we have with our customers. COnTEnTs Trend Statement Chairman’s Report Pg 2 Pg 4 Managing Director’s Report Pg 8 Our Partnerships Pg 16 Bright Dairy Partnership FrieslandCampina Partnership Our Place Pg 20 Partnering With Our Community Business Relationship Recognition Sustainability Update Introducing Lead With PrideTM Looking After Our Place Bringing the Market to Our Place Synlait Milk Limted Annual Report 2013 I Our Process Pg 24 Night Milk Project Update A2 Milk Lactoferrin Upgrade Creating a Focus on Quality Our People Pg 28 Our Future Developing Our Leaders Our Remuneration Keeping Our People Safe Entrepreneurial Leadership Best Place to Work Meet Our Team Pg 31 Pg 34 Pg 36 Pg 40 Our Governance Board of Directors Senior Executive Team Pg 42 Our Financial Review Pg 44 Our Financial Statements Pg 46 Auditors Report Pg 89 Statutory Disclosures Pg 91 Directory Pg 98 page 1 Synlait Milk Limted Annual Report 2013 I TREnD sTATEMEnT Net Return on Capital Employed (Pre-Tax) 13.1% 7.3% FY2013 FY2012 Gross Profit Per MT (NZD) 751 594 FY2013 FY2012 page 2 i EBITDA (in millions NZD) 38.5 22.1 FY2013 FY2012 Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 Trend Statement Currency as stated (in millions) Financial Performance Revenue Gross Profit Earnings before net finance costs and income tax (EBIT) NPAT Revenue (USD per MT) Gross profit per MT (NZD) EBIT per MT sold (NZD) Net cash from / (used in) operating activities (13.8) Balance Sheet Total Assets Capital employed 1 Net return on capital employed (pre-tax) Foreign exchange rate (NZD:USD) Synlait contracted milk price (kg MS)2 346.1 231.0 13.1% 0.80 5.81 FY2013 FY2013 FY2012 FY2011 FY2010 FY2009 Actual PFI* Actual Actual Actual Actual 420.0 426.4 65.1 28.3 11.5 3,894 751 326 64.6 27.5 10.8 3,786 736 306 (8.3) 349.5 235.3 12.8% 0.81 5.80 376.8 46.0 13.4 4.4 3,644 594 174 29.8 277.3 195.3 7.3% 0.78 6.14 298.9 21.1 - (3.1) 3,848 385 (10) 14.5 245.3 170.8 0.0% 0.73 7.66 233.4 23.7 5.3 (11.7) 2,882 462 124 17.0 151.0 102.4 5.0% 0.64 6.21 111.3 6.8 (4.1) (14.2) 2,321 260 (131) (7.2) 152.1 113.0 (4.4%) 0.63 5.03 Key Operational Metrics FY2013 FY2013F FY2012 FY2011 FY2010 FY2009 Sales Ingredients Infant formula and Nutritionals Total Sales (MT) Production Ingredients Infant formula and Nutritionals Total Production (MT) Milk Purchases Milk purchased from Contracted supply Milk purchased from Fonterra and other suppliers Total Milk Purchases (kg MS in thousands) *Prospective Financial Information. 81,085 5,661 86,746 81,148 10,081 91,229 42,076 4,692 46,768 80,902 6,888 87,790 80,856 10,772 91,628 42,032 4,617 46,649 73,003 4,412 77,415 76,661 4,737 81,398 37,572 6,453 44,025 54,648 51,271 29,393 238 - - 54,886 51,271 29,393 53,807 49,729 33,197 608 294 - 54,415 50,023 33,19 24,934 4,524 29,458 21,865 4,525 26,390 14,404 4,101 18,505 **Note that the FY13 and FY12 periods have been completed based on the application of the monthly milk price accounting treatment. Prior years applied the annual milk price accounting treatment. 1For the purpose of calculating our return on capital employed the capital employed at the end of FY13 has been reduced for working capital adjustments of 36.4m as further described in the ‘Financial Review’ section of this Annual Report on page 44-45. 2Base milk price for Synlait Milk suppliers on standard milk supply contract, excludes premiums paid. page 3 Synlait Milk Limted Annual Report 2013 I CHAIRMAn’s REpORT Graeme Milne CHAIRMAN “ the board and management are proud of what we haVe achieVed since inception. we continue to gather a skilled and inspirational team of people who haVe been instrumental in achieVing the business growth throughout the 2013 financial year. ” page 4 i Synlait Milk Limted Annual Report 2013 Synlait Milk Limted Annual Report 2013 I It is a pleasure to report to our shareholders on the fifth year of operations for Synlait Milk Limited. operating performance Through this turbulence we have continued to ‘Make More from Milk’ by adding value to our dairy ingredient products while developing our nutritional strategy. The key attributes embedded in our products are quality and trust which is especially so for our infant formula business. This year was the first full year of production from our purpose built infant formula and nutritional facility. We added several new customers for nutritional products and increased sales at a rapid rate, albeit slightly below plan. Nevertheless, the growth I am pleased to announce an after tax profit for the FY13 year was an impressive achievement as developing relationships of $11.5 million, ahead of the prospective financial information in these markets do take time. Customer relationships will (PFI) and a significant increase on last year‘s $4.4 million. endure as long as we fulfil our trust and quality promise. To Total sales for the FY13 year were $420 million, slightly this end during the year we recruited key new staff in quality behind our PFI of $426 million however, well ahead of last assurance, improved our quality systems and prepared for year’s $377 million. further investments in quality assurance technologies. It was a turbulent year across our international markets. Prices for whole milk powder at the start of the year were milk supply relatively low at US$2,700 per tonne, but by April 2013 Quality suppliers of products and services are key to our they had risen to exceed US$5,000 and remained relatively strong at this level until the financial year end. These returns combined with the variability of the NZD exchange rate would have translated, on a monthly basis, into a farm gate price for milk of $NZ4.50 per kg MS at the start of the year and to a $8.72 per kg MS milk price by the end of the financial year, resulting in an average Synlait Milk base milk price of $5.81 per kg MS for the FY13 year. The near nationwide drought in New Zealand was a major factor in the sudden rise in global dairy prices in April 2013. success, particularly our 148 farmer milk suppliers as at the end of the FY13. This year we held our inaugural suppliers conference where all suppliers were invited to hear presentations from our team and also an impressive bench of our international customers. The connection of all participants in our value-chain is a key strategy in achieving extra commitment we are seeking for joint success. Also during the year the ISO accredited Lead With PrideTM program was introduced for milk suppliers. This provides them with a dairy farm assurance system which is comprehensively In addition to the drought there is growing pressure on the targeted around social, environmental, animal health and balance between supply and demand for dairy products in welfare as well as milk quality. our international markets. Higher prices will inevitably lead to consumer resistance people away from dairy, while at the same time in Europe and the Staff numbers grew to 171 in FY13. Careful recruitment, United States of America higher prices are encouraging induction and training are key to executing our business increased production. Global grain prices, which have eased, strategy. Many of our team have joined Synlait Milk for a are expected to encourage increases in supply out of the chance to participate in an enterprise where they can truly United States of America. The removal of milk quotas in make a difference. Team culture and pride continues to the European Union in 2015 will see production increases, grow and develop within the Company. All the team have however as Western market economies continue to stabilise contributed to this year’s result, but a special mention and and recover and emerging markets continue to grow we will thanks must go to John Penno, Managing Director, and Nigel also see increased demand. Greenwood, Chief Financial Officer. A special mention must also go to Nigel’s finance team, who took on the brunt of the considerable time and effort it takes to successfully go through the Initial Public Offering process. page 5 Synlait Milk Limted Annual Report 2013 I health and safety We are also re-focusing our efforts in relation to Health and Safety. Our current primary safety measure is Lost Time Injuries (LTI’s), with an annual target of zero. For the 12 months to 31 July 2013 we had 1 LTI. We are moving to the more internationally accepted best practice measure of Total Recordable Injury Frequency rate (TRIFR) and are In relation to our dividend policy, we confirm that with our present focus firmly on growing the Company, no dividend will be payable for the financial year ending 31 July 2013, nor for period ending 31 July 2014. This is consistent with statements made in the Investment Statement and Prospectus at the time of listing. also introducing a more fully integrated approach to health, board changes safety and wellness. More details can be found in the ‘our governance’ section of this Annual Report. initial public offering The highlight of the financial year was our listing on the New Zealand Stock Exchange on 23 July 2013. The listing raised $68.9 million, after capital raising costs, of new capital which together with an enhanced debt facilities package will be used to fund our growth initiatives that are outlined in further detail in the ‘our future’ section of this Annual Report. As a consequence of the Initial Public Offering, shareholdings changed and consequently there were movements in the directorship. Ben Dingle, company founder and original director stood down to make way for independent appointments. We thank Ben for his vision, foresight and strong contribution to Synlait Milk’s progress to date. David Zheng, a Bright Dairy appointed director for the last two years, also stood down to allow for the Bright Dairy appointment of a New Zealand resident director. We thank David for his contribution. Special thanks also to Ruth Richardson who chaired Synlait Limited (the holder, until The listing also enabled some of our existing shareholders to the Initial Public Offering, of the 49% non- Bright held sell down part or all of their holdings by way of a further sale shareholding in Synlait Milk) through the Initial Public of $37 million worth of shares. It was gratifying to see many Offering process. On the other hand a warm welcome of the original shareholders in Synlait Limited rewarded for to Bill Roest and Sam Knowles who joined the board in their belief, in what was at the start, a concept, a vision and the pre-listing period and have already both made major little else. It is also pleasing to see many of these longer term contributions. John Penno, previously the CEO, now also shareholders remaining on the register. joins the Board as Managing Director. We also welcome our new shareholders. We are particularly pleased that FrieslandCampina have become a shareholder outlook with an initial holding of 7.5%. FrieslandCampina are a The immediate future for Synlait Milk will be focused on key customer for us and their investment is expected delivering quality added value ingredients and nutritional to strengthen our business to business and strategic products to an expanding customer base and executing on relationship with them. The Board were very encouraged by the growth initiatives as detailed in the Investment Statement the high level of participation by staff and directors buying and Prospectus and updated in this Annual Report. We shares at the initial offer. Over 30% of our staff acquired remain confident in our strategy. Synlait Milk shares, a vote of confidence that we are on the right track and evidence we have a very committed team of Kind regards people working in the business. shareholder returns In terms of financial performance for our shareholders, we have made good progress as set out in more detail in the section ‘our financial review’ and in our Financial Statements. It is early days as a listed Company however, we have made a positive start with our share price closing at $2.61 on 31 July 2013, reflecting a total shareholder return (TSR) for the 9 day period of 18.6%. Graeme Milne CHAIRMAN page 6 i Synlait Milk Limted Annual Report 2013 i Synlait Milk Limted Annual Report 2013 Synlait Milk Limted Annual Report 2013 i page 7 MAnAgIng DIRECTOR’s REpORT John Penno MANAGING DIRECTOR we are clearly focused on our Value added milk powder and nutritional powder business and building a reputation for Quality and technical eXcellence. ” “ page 8 i Synlait Milk Limted Annual Report 2013 Synlait Milk Limted Annual Report 2013 I Over the last six years Synlait Milk has been focused on establishing a strong platform on which to execute our simple value-added dairy manufacturing strategy. This platform is based on supplying value-added dairy based products to a strong group of targeted customers, with a focus on quality throughout the supply chain, including working closely with our contract supplying dairy farmers. We operate a business to business sales strategy. Our Over 50% of our ingredient milk powder sales are now non- standard products that generate value-added margins and the volume continues to grow every year. After years of planning and business development FY13 was our first full year of infant formula manufacture with sales of 5,661 MT of infant formula and nutritional products. The year on year infant formula and nutritional volume increase of 28% significantly understates the development of this business. A high proportion of the FY12 production volume was low specification product sold at low margins to ensure sufficient volume to commission the plant late in FY12. Much of the sales volume occurred in the second half of FY13 as market development came to fruition. This is further illustrated by the fact that the volume manufactured in FY13 was over 10,000 MT as stocks were built to deliver on customer requirements in the early months of FY14. These products were manufactured from 46.8 million kg MS comprising 42.1million kg MS purchased from our 148 supplying farms (there are 156 farms contracted for the promise of not competing with our customers is important to FY14 season) and 4.7million kg MS purchased from other developing our value-chain focused business partnerships. processors. Synlait Milk contract suppliers received an In FY13 we sold 81,085 MT of ingredient milk powders and anhydrous milk fat (AMF), up 11% on the previous year. An increasing proportion of these ingredient products were sold to preferred customers, with 90% of our total ingredients average base milk price of $5.81 per kg MS. An additional $0.08 per kg MS was paid as seasonal and value-added premiums to provide an average total milk price of $5.89 per kg MS. business being sold to only 10 customers. Increasingly our Annual revenue of $420 million was up 11.5% based on milk powders are focused on skim and whole milk powder for additional sales volumes however, more importantly, strong infant formula production, and milk powders manufactured margin growth delivered a 74% increase in EBITDA and for leading brand owners who market milk powder for a 161% increase in NPAT to $38.5 million and $11.5m home consumption. Sales Volumes (MT) respectively. Growth 100,000 80,000 60,000 40,000 20,000 0 FY2009 FY2010 FY2011 FY2012 FY2013 FY2013F Ingredients Infant formula and Nutritionals 161% 74% 11.5% NPAT EBITDA Annual Revenue page 9 Synlait Milk Limted Annual Report 2013 I If there is a single measure of the strength of our simple strategy going forward business model it is that in FY13 the Company achieved a pre-tax return on capital employed of 13.1%. It is worth considering that this is ahead of the expected volume growth in the high returning infant formula and nutritional products we are now focused on achieving. Executing the Initial Public Offering late in the year was the final building block in our six year journey to establish the Company. The equity raised, alongside expected earnings, will ensure that the business remains conservatively geared as we now invest to accelerate the development of our infant formula and nutritionals business. Gross Profit Per MT (NZD) An analysis of our five year history provides strong evidence of consistent margin growth from a gross profit of $260 per MT in FY09 to $751 per MT in FY13. This is the result of a relentless focus on targeting the best markets, the best customers and the highest margin products for those customers. Growing our margins from here will be delivered by achieving two objectives; 1. Continuing to migrate our ingredient milk powder and cream products to higher returning markets, customers and products. 2. Capitalising on our strong start, to build our infant formula and nutritional volumes. All our recruitment, training and retention programs, market and customer development, capital investment, quality systems and process improvement activity is focused on achieving these two objectives. 260 462 385 594 751 736 FY2009 FY2010 FY2011 FY2012 FY2013 FY2013F page 10 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 capital inVestment to increase Value and Volume A comprehensive overview of our development plans for our Dunsandel manufacturing site was provided in the June 2013 Investment Statement and Prospectus, and a brief update on these developments is provided in the ‘our future’ section of this Annual Report. Each of these projects is specifically designed to either enhance our value proposition and build volume with targeted infant formula and nutritional customers, or enable us to continue providing volume to valued ingredient business customers. Our proposed blending and canning line has been evaluated and approved by some important future customers and we are confident that what we are developing will not only meet their requirements, but will genuinely be built to world best standards. We have made a decision to build all our new onsite warehouse facilities now, rather than undertake the warehouse expansion as a two stage process. This was based on the large capital cost savings that became apparent through the tender process. By the start of next season, this new facility will provide complete supply chain integrity on our site, with all inwards raw materials coming directly to site and finished goods being packed for shipment on site before leaving site for export. market deVelopment Global infant formula consumption is driven by the vast demographic changes that are occurring in China, including higher standards of education, increased urbanisation and multigenerational households. Euromonitor International estimates that at a retail level the Chinese infant formula Our lactoferrin project continues to progress well. We have market in 2017 will be 40% larger than the entire international now manufactured spray dried product on a pilot scale market was in 2007. On this basis, our infant strategy will which has proved both our unique manufacturing system inevitably have a strong China focus. That said we are working with potential customers in a range of markets. Post the melamine contamination incident of 2008 consumer preference has changed the Chinese infant formula market from being 70% reliant on locally produced product to 70% imported product. Recently, the Chinese Government has openly stated that they are looking to reverse this trend and rebuild confidence in local infant formula brands. They are working to achieve this by imposing strict quality standards on locally produced and imported product and driving consolidation within the Chinese industry. and provided samples for customer evaluation. This has further increased our confidence of overcoming the technical challenges that are inherent in this project. Infant Formula Market 40% WORLD infant formula market CHINA infant formula market 2007 2017 page 11 Synlait Milk Limted Annual Report 2013 I The Chinese Government has also instigated a range of 1) We operate a batch processing plant with very high investigations into the excessively high retail prices being hygiene standards and accurate control systems which demanded by some brands. These changes are already leads to high quality products with high yields and high underway. Our expectations are that the plethora of small product grading rates. brands that are locally produced and imported will be progressively forced out of the market. In addition, product pricing, particularly of products manufactured outside China, will be reduced. Lower prices, and a reduced number of brands in the market, will drive volume growth for the surviving brands. Our investment in people, plant and systems has positioned our business to supply partially and fully finished infant formula products manufactured to world leading standards. This has supported the development of Shanghai based Bright Dairy’s ‘Pure CanterburyTM’ infant formula brand to become one of the fastest growing in the Chinese market. This brand has enjoyed rapid growth over the last quarter as lesser brands have been removed from the market, and as consumers continue to be concerned about real and 2) We use fresh milk as the base to manufacture our infant formula products where many manufacturers use reconstituted powders. In part, this is enabled by the consistent yield and composition of milk produced on irrigated farms in Canterbury. 3) We operate a very large scale infant formula and nutritional manufacturing plant. It is two or three times larger than most infant formula and nutritional spray dryers leading to larger runs and lower capital and labour costs per MT of product produced. 4) We achieve high levels of plant utilisation by using the spray dryer for both infant formula and nutritional products and high specification milk powders. perceived quality issues. We believe our model of local 5) The New Zealand / China Free Trade Agreement provides brand and channel to market ownership, combined with New Zealand with a preferential tariff position. This is high quality international supply fits with the Chinese particularly important when exporting high value fully Government’s desire to see confidence rebuilt in the local finished infant formula products in consumer packs. industry. Now that we are fully operational we have concentrated our attention on using these advantages to secure large international customers who are focused on quality and cost. While these leading companies are generally cautious and slow to accept new suppliers, they each have the potential to bring large volumes of new business. Over the last year we have signed supply agreements with other Chinese companies, in different regions across China, and expect these sales relationships to develop along similar lines to the growth pattern as we have enjoyed with Bright Dairy. As pricing pressure enters the market, we believe large international brands will increasingly look to manufacturers who can provide high quality product for the Chinese market, at competitive pricing. During our entry to the Chinese market we have established the ability to maintain margins while pricing competitively. This is based on several key factors built into the Synlait Milk manufacturing model; page 12 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 products of integrity Underpinning our entire strategy is ensuring that our products are leaders in terms of food safety and product quality. This was the motivation behind developing our Lead With PrideTM dairy farm assurance system that is profiled on our website and later in this report. We are pleased with the strong support this has received from our supplier base and within 12 months we expect to have put together sufficient volume of certified milk to form the base for differentiated products for leading customers. Quality standards are increasing all the time. In recognition growing and concentrating our milk supply (additional Volume) of this, a review of our quality systems early in FY13 Our Lead With PrideTM farm assurance program is also identified the opportunity to make further improvements expected to drive our milk procurement program going by establishing our own product testing capability and forward. We believe that our commitment to the program restructuring the quality team under a new position of GM and the financial incentives that are offered will attract the Quality reporting to the Managing Director. We were very pleased to appoint Michael Stein to this role with over 20 years of infant formula quality management experience including roles with Nestle, Nutricia and most recently as Director of Quality for Mead Johnson, Asia Pacific. This is of course essential when consumers are offering their children formulated milk products. Our own market research in the last year clearly showed that consumers want products of integrity, where the value of the product is defined not only by the measurable nutritional and quality attributes of the product, but also by the back story – who stands behind the product and where and how the product was produced. growing number of farmers who are looking to differentiate themselves from their peers on the basis of the integrity of their production systems. As the Company has become more established, we have found it increasingly straight forward to attract supply from the right farmers, with large operations within close proximity to our Dunsandel site. page 13 Synlait Milk Limted Annual Report 2013 I Our plan had been to recruit a small number of new I would also like to thank our key advisors over the last year, farmers close to our site to replace the farmers who had with special mention to the teams from Deloitte, EY New been supplying Synlait Milk under the Oceania Contracts Zealand, Minter Ellison Rudd Watt, First New Zealand Capital from South Canterbury. However, recent changes to and Goldman Sachs. our manufacturing plant which have increased peak manufacturing capacity means that we will be working to attract 15 more farmers than we had been planning for the FY15 season. This will allow increased production volumes in FY15 and help manage the transition to the increased capacity that will come with the planned commissioning of Dryer 3 in FY16. thanks In closing, I would like to thank my Board and staff. Executing an Initial Public Offering, in addition to the constant growth and change that is business as usual at Synlait Milk, has required a heavy time commitment from all directors and senior staff. I would like to particularly mention Graeme Milne who continues to chair the Company with a steady hand, and provide me with invaluable advice and support. Most especially I would like to thank you – our shareholders. Many of you have supported the Company over a long period of time and have walked beside management as we have weathered the ups and downs that are inevitable as a company develops from infancy. I also acknowledge the many new shareholders and thank you for your support and for your confidence in our future. My commitment to all of you is to continue to focus on ‘making more from milk’, and to take what we have started and help it mature into a great New Zealand company. I would like to acknowledge the work of my senior team as they continued to not only operate the business, but meet Kind regards our business improvement targets as Nigel Greenwood, Chief Financial Officer and I focused on the Initial Public Offering over the last six months. Milk Purchases John Penno MANAGING DIRECTOR 50,000 40,000 30,000 20,000 10,000 0 page 14 i FY2009 FY2010 FY2011 FY2012 FY2013 FY2013F Milk purchased from contracted supply Milk purchased from Fonterra and other suppliers Synlait Milk Limted Annual Report 2013 i Synlait Milk Limted Annual Report 2013 case studies and Business PeRFORMance A yEAR OF VALUE CREATIOn Synlait Milk Limted Annual Report 2013 i page 15 page 16 i Synlait Milk Limted Annual Report 2013 Synlait Milk Limted Annual Report 2013 I OUR pARTnERsHIps bright dairy partnership Bright Dairy is a major dairy industry participant in China, specialising in the development, production and sale of milk and dairy products, management of dairy farming operations, logistic distribution and the development, production and sale of health and nutrition products, including infant formula. Bright Dairy have a number of well-known dairy brands in the Chinese market including a growing infant formula business, and are listed on the Shanghai stock exchange with a Pure CanterburyTM is positioned as premium infant formula product. To date the distribution of Pure CanterburyTM has been focused on 3,000 Shanghai retail outlets. Shanghai is a significant market for infant formula with a total population of 23 million and with approximately 200,000 babies born in 2012. In 2012, China had a total population of approximately 1.34 billion and with approximately 25.8 million babies born market capitalisation of NZ$5billion dollars. in 2012. Bright Dairy has a long term plan to expand the Bright Dairy is part of the Bright Food Group. The Bright Food Group is a major agriculture, food processing, distribution distribution of Pure CanterburyTM to 40 major cities with 20,000 retail distribution channels. and retail participant in China and has been investing The Pure CanterburyTM brand story is mainly focused internationally with interests including majority shareholdings in Weetabix Food Company in the United Kingdom and Manassen Foods in Australia. on the source of its raw milk supply provided by Synlait. Pure CanterburyTM packaging features the green grass of the Canterbury plains and the majestic snow-capped Bright Dairy has been a customer of Synlait Milk for the last Southern Alps. two years. The Pure CanterburyTM infant formula brand owned and distributed by Bright Dairy was the first infant formula product to be made in our purpose built state-of-the-art infant formula and nutritional dryer in November 2011. We have worked alongside Bright Dairy to provide expertise in product development, quality testing and logistics. Over the coming year our team will work alongside Bright Dairy to assist with their marketing and promotion requirements of the Pure CanterburyTM brand. With the success of Pure CanterburyTM, we have recently developed with Bright Dairy product line extensions of the range, including a pregnant mother formula and two additional infant formula products. The additional infant formula products will be positioned in the premium end of the market however, they will sit below the original Pure CanterburyTM range price point to make the brand accessible to a new range of premium consumers. In addition, to our business as usual operations we have worked with Bright Dairy on a number of industry good events. These include senior executives from Bright Dairy attending our Dryer 2 opening ceremony in Dunsandel and our senior executives attending the launch of Pure CanterburyTM in Shanghai in late 2011. In the last financial year Bright Dairy executives spoke and attended our inaugural milk supplier conference and currently we are working with Bright Dairy to develop a Synlait Milk tradeshow stand to compliment the Bright Dairy stand at a significant Shanghai food expo. We look forward to further developing this relationship over the coming years. page 17 Synlait Milk Limted Annual Report 2013 I OUR PARTNERSHIPS CONT... frieslandcampina partnership Every day Royal FrieslandCampina provides around 1 billion consumers all over the world with food that is rich in valuable nutrients. Friesche Vlag, Mona, Optimel, Vifit, Milner, Frico, Botergoud, Valess, Appelsientje, DubbelFrisss, CoolBest, Landliebe, Fruttis, Joyvalle, Yazoo, Milli, Pöttyös, Napolact, NoyNoy, Dutch Lady, Frisian Flag, Foremost, Friso, Peak, Rainbow, Debic Valess, DMV, Kievit, Domo, Creamy Creation and Nutrifeed. The Company is fully owned by Zuivelcoöperatie FrieslandCampina With annual revenue of 10.3 billion euro FrieslandCampina U.A, with 19,487 member dairy farmers in the Netherlands, is one of the world’s five largest dairy companies. Germany and Belgium is one of the world’s largest dairy FrieslandCampina supplies consumer products such as cooperatives. dairy-based beverages, infant & toddler nutrition, cheese and desserts in many European countries, in Asia and in Africa. FrieslandCampina has been a customer of Synlait Milk since 2008. We have worked together to develop new products and Products are also supplied to professional customers, over the years have moved our product offering for them from including cream and butter products to bakeries and catering ingredient products to value-added ingredient products. companies. FrieslandCampina also supplies ingredients and half-finished products to manufacturers of infant & toddler nutrition, the food industry and the pharmaceutical sector around the world. We regularly meet with FrieslandCampina in market and likewise, they make the long journey to New Zealand several times a year in order to develop our business relationship. Most recently, Hans Laarkakker, Director of They have offices in 28 countries and employs a total of Business Development at FrieslandCampina travelled from 19,946 people. FrieslandCampina’s products find their way to the Netherlands to speak at our supplier conference held in more than 100 countries. The Company’s central office is in Ashburton. At the conference Mr. Laarkakker showed a video Amersfoort, Netherlands. FrieslandCampina’s activities are divided into four market- oriented business groups: 1. Consumer products Europe. 2. Consumer products international. 3. Cheese, butter. 4. Milk powder and ingredients. FrieslandCampina has a number of well-known brands including but not limited to: Campina, Chocomel, Fristi, that showcases the leading nature of FrieslandCampina’s business. You can view this view by visiting YouTube and searching ‘the story of milk’. Over the last five years FrieslandCampina have become our largest customer by volume and we look forward to further developing our business relationship with them during the current financial year. page 18 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 OUR PARTNERSHIPS CONT... business relationship recognition The success of our global business partnerships were formally recognised during the last financial year by winning two prestigious New Zealand business awards. In September 2012, we were delighted to win the Champion Global Operator (Medium to Large Enterprise) at the Canterbury Chamber of Commerce, Champion Canterbury Awards. We are pleased to announce that we have made the finals for this category again for the pending 2013 awards. In May 2013, we were honoured to win the New Zealand China Trade Association (NZCTA) Supreme Award and the DLA Phillips Fox Award for Successful Investment with China, inward or outward at the HSBC NZCTA China Business Awards. We are also pleased to announce that we have been nominated as a finalist in the pending New Zealand Trade and Enterprise International Business Awards in the category of ANZ Best Business Operating Internationally over $50 million. The award wins and nominations recognise the significant achievements our team have made in both creating and developing our global business relationships. partnering with our community Our single business site sits just south of Dunsandel, a small Mid-Canterbury township with a population of approximately 450 people. The Dunsandel community has close affiliations with dairy farming and rural industry, so naturally we have a close relationship with the Dunsandel township and support their local events and charities. We are proud to be the principal naming rights sponsor of the Dunsandel / Irwell Rugby Football Club and sports ground. Together, we have been able to grow the number of teams playing in the mens and ladies senior competition, and raise the clubs profile to become a focal point of the local community. In May of this year we celebrated with the club when they held their 125th jubilee. Recently, we have supported the Dunsandel Volunteer Fire Brigade with the purchase of a rapid response vehicle. The community of Dunsandel is nestled beside State Highway One and the volunteer brigade are kept very active attending road accidents and community related call outs, in addition to their standard fire-fighting duties. The rapid response vehicle will enable the fire brigade to attend emergencies much faster than they have been able to in the past. We look forward to our continued partnership with the rugby club, the fire brigade and other local charity and community groups in the future. page 19 Synlait Milk Limted Annual Report 2013 I page 20 i Synlait Milk Limted Annual Report 2013 Synlait Milk Limted Annual Report 2013 I OUR pLACE sustainability update We are fortunate to live and work in one of the most beautiful The program is audited by the New Zealand Government places in New Zealand. This is our home. owned AsureQuality. The positive financial impacts of the system have been modelled by the Agribusiness and Economics Research Unit at Lincoln University. Dr Andrew West, Vice-Chancellor at Lincoln University said ‘The analysis has shown that certification is likely to lead to significant improvements in farm profitability for the majority of suppliers.’ In addition, to the supplier financial benefits, Lead With PrideTM enables us to demonstrate to our customers our industry leadership in incentivising food safety and sustainability initiatives intended to enhance the integrity, safety and quality of milk produced on certified farms. Our first supplier farm to receive Lead With PrideTM accreditation was ‘Trinity Holdings’ owned and operated by Lance and Wendy Main. It is expected we will have 20 accredited Lead With PrideTM suppliers by the end of current financial year. To find out more about Lead With PrideTM please visit www.synlait.com. You can also view the Lead With PrideTM supplier promotional video by visiting YouTube and searching ‘Lead With PrideTM.’ We are committed to our environment. We are in the process of developing a comprehensive environmental and sustainability plan, which will balance the needs of our business with the protection and care for the environment. We will be reporting in more detail on our achievements against this plan in our next Annual Report. In the meantime, there are several key initiatives that we are proud of. introducing lead with pridetm In April 2013, we launched our internationally accredited ISO 65 dairy farm assurance system called Lead With PrideTM. Lead With PrideTM recognises and financially rewards suppliers who achieve dairy farming best practice. Suppliers must meet criteria that we have developed including, in some cases, exceeding our assessment of industry best practice across the four pillars of dairy farming: environment, animal health and welfare, milk quality and social responsibility. In return, they are paid a financial incentive above the standard milk price depending on the certification level they are awarded. page 21 Synlait Milk Limted Annual Report 2013 I OUR PLACE CONT... looking after our place At the start of the last financial year we implemented a company wide recycling initiative to reduce our impact on the environment. With milk only being 13% milk solids our manufacturing plant returns more water to the environment than it uses to operate. The project has taken us from 96% waste (1,230 metric tonnes) and 4% recycling (46.5 metric tonnes) in the 2012 financial year, to 8% waste (65 metric tonnes) and 92% recycling (759 metric tonnes) in the 2013 financial year. We have also engaged a dedicated full- time Mastagard employee to be based on-site We have worked with industry experts Waterforce, ICS, Babbage and Specialty Seeds to develop a automated irrigation system for the disposal of our clean waste-water. The dedicated waste-water disposal area located on our business site is sewn in a deep root pasture system, pasture which grows to manage the program. Before the implementation of well under wet conditions, the area is also not grazed the initiative, recycling at our Dunsandel site was or fertilised to limit nutrient leaching and minimises effects on the environment. The irrigation of the water is controlled via a system which adjusts the rate of water applied with the soil infiltration capabilities. The system reports on the volume and application rates to each sector of the disposal area which our environmental team monitors. We look forward to developing and implementing further initiatives such as these in the coming year. limited due to recycling services not being available to the rural area. In addition, to the recycling program we have also developed a new approach to our clean waste water. page 22 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 OUR PLACE CONT... − Standard Foods Corporation, a major Taiwanese food company, and − Bright Dairy, a significant Chinese based food manufacturing company. In addition, the conference featured presentations from Netherlands based dairy consultant Mark Voorbergen, ANZ economist Con Williams and senior Synlait Milk executives including Chairman Graeme Milne and Managing Director John Penno. Following the day, a gala dinner was held at the Ashburton Aviation Museum and was hosted by television comedian Paul Ego. The inaugural conference was well received and is now due to be a regular fixture on our events calendar. bringing the market to our place On Friday 12 July 2013, approximately 400 Synlait Milk suppliers and rural professionals attended our inaugural milk supply conference held at the Ashburton Event Centre. Themed ‘SOAR’ the event aimed to connect our suppliers with our global customers to develop mutual understanding in order to lift our industry to new heights. A number of senior executives from our international customer base spoke at the event, including: − Hoogwegt International, part of Hoogwegt Group B.V., the world’s largest privately owned dairy trading company. − FrieslandCampina, one of the world’s largest dairy cooperatives. − A2 Corporation, listed on the New Zealand stock exchange. page 23 Synlait Milk Limted Annual Report 2013 I page 24 i Synlait Milk Limted Annual Report 2013 Synlait Milk Limted Annual Report 2013 I OUR pROCEss night milk project update WellSleep, the University of Otago sleep investigation centre based in Wellington, has undertaken a unique clinical trial for our ‘Night Milk’ a natural milk product aimed at beating sleeplessness. The product is made by collection of milk produced by cows during the hours of darkness and subjecting it to specialised processing at our state-of-the-art nutritional plant. Synlait Milk Research Manager, Dr. Simon Causer, explains that cows produce a sleep-promoting hormone called melatonin during the hours of darkness and just as with human mothers, this hormone is expressed in the milk. ‘Melatonin plays a key role in helping humans regulate day- night cycles and by selectively collecting milk produced by cows during the night we can create a natural sleep aid,’ says Causer. Participants in the clinical trial were required to drink a glass of ‘night milk’ 30 minutes before going to bed and sleep quality was compared to sleep following the consumption of conventional milk. Most adults have experienced sleeplessness at some point in their lives with an estimated 30-50% of the population affected by insomnia and 10% having chronic insomnia. It takes a huge toll on people’s energy, mood, health and ability to function during the day. The clinical trial yielded very positive results and we will be looking to publish these in the medical and scientific literature in order to support the selling of this product to customers. a2 milk In April 2012, we announced an agreement with A2 Corporation (A2C) for the supply and processing of A2 Milk into infant formula. Standard milking herds produce milk containing both A1 and A2 beta-casein proteins. A2 milk is collected from cows that only produce the A2 beta-casein protein. A2C market their products on this point of difference and the proposed health benefits of A2 milk. During the last financial year we have worked with our supply base to put in place 11 accredited A2 herds. In addition, we have identified and are working with a number of additional suppliers who have a view to converting their herd genetics to the A2 variety. In addition, to securing milk supply we have implemented a number of processes and quality checks that ensure during collection, processing and packaging that the A2 milk is kept completely separate from our regular supply of milk. A2C Managing Director Geoffrey Babidge said the agreement ‘with a highly reputable supplier of nutritional powders,’ was a key step in their plan to launch infant formula products into high growth Asian markets - particularly China. In June 2013, A2C launched A2 Platinum infant formula at a ceremony in Auckland. Our nutritional and quality teams have worked alongside A2C to develop the Platinum range to their exact specifications. page 25 Synlait Milk Limted Annual Report 2013 I OUR PROCESS CONT... lactoferrin upgrade In May this year we announced a $15 million upgrade to our Special Milks Dryer which will enable us to become one of only two manufacturers in the world to produce lactoferrin as a spray dried powder, and will also allow us to manufacture dairy ingredients to a pharmaceutical standard. Lactoferrin is a bioactive protein extracted from milk that provides significant antibacterial protection and other health benefits for people of all ages. It is in demand globally for health foods including infant formula and adult nutritional powders. We expect production to reach 23 metric tonnes within four years of commissioning the plant in early 2014. Our lactoferrin process has been designed to achieve high levels of bio-actively and solubility. Our spray dried product is already receiving considerable interest from customers looking for improved properties when used in infant formula products. The market for lactoferrin has grown from 45,000 kilograms in 2001 to 185,000 kilograms in 2012 and is projected to grow to 262,000 kilograms in 2017. On the current market lactoferrin is priced at between US$500 to US$1,000 per kilogram. You can read more about the lactoferrin upgrade project in the ‘our future’ section of this Annual Report. SPECIAL MILKS DRYER page 26 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 OUR PROCESS CONT... creating a focus on Quality To support our company vision to become the supplier of choice to the world’s leading milk-based health and nutrition companies, a decision was made to invest in a state-of-the-art quality testing laboratory at our Dunsandel site. This investment is one of our strategic growth initiatives that will support our position as a supplier of high quality, premium dairy ingredients, infant formula and nutritional products. We currently perform the majority of our quality testing at contracted external laboratories. It has become evident that if we are to meet our company vision, we will need to invest in a fully equipped on-site quality testing laboratory to undertake the activities that we are currently outsourcing. There are several key benefits for us that justify the significant investment in an on-site quality testing laboratory, including: − It ensures we can achieve our high quality standards in a consistent and efficient manner. Turnaround time for quality testing will be reduced to allow for more immediate availability of data for analysis. This will provide for better response time and communication between the quality and operations teams and will speed up release of products to our customers. − It allows us to create a technical ‘center of excellence’ that can be staffed with the industry’s leading scientists and food technologists. This will become essential as we expand our presence in the infant formula and nutritional products category. − It strengthens our reputation with both our customers and the regulatory bodies governing the markets we serve by establishing an on-site quality testing laboratory that is accredited to international standards. China currently requires all in-country infant formula manufacturers to conduct quality testing on-site and additional benefits can be gained with our customers that may have the same expectations of the benefits that in-house quality testing The strategy for our quality testing laboratory will be to build provides. in-house capabilities to support the testing requirements for the products we produce. This will include facilities to conduct chemical, microbiological and physical property testing using the latest technologies. In addition, to the quality testing function, there will also be integrated facilities for product development, support including conducting pilot − It provides for a cost effective model that not only allows for efficient management and greater control of the quality testing process, but also reduces additional costs associated with external testing including laboratory fees and courier costs. scale trials and sensory analysis to ensure the needs of our We will engage expert external consultants specialising customers are met. in laboratory operations during the design, validation and start-up of the quality testing laboratory. It is anticipated that the laboratory will be operational before the end of the 2014 calendar year. You can read more about the laboratory upgrade project in the ‘our future’ section of this Annual Report. page 27 Synlait Milk Limted Annual Report 2013 I page 28 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 OUR pEOpLE deVeloping our leaders keeping our people safe It’s our people who make us what we are and we are committed to developing our leaders. Developing our leaders is based on a solid foundation of four key competencies: Managerial, Customers, Personal Leadership and Leading Others. These competencies can be applied across the business at operational, tactical and strategic levels. This also allows us to grow and support our current leaders in addition to nurturing our future leaders. In March 2013 we introduced a new leadership development program, Blanchard’s Situational Leadership II (SLII), as part of our wider training program at Synlait Milk. The Blanchard model complements our core leadership framework and equips our leaders with the tools to analyse, diagnose, think and apply a leadership style that is adaptable to a range of people and situations. Currently 12 Synlait Milk managers have completed facilitator training and have become certified trainers of SLII, and over 25 people leaders from our wider team have now completed the training. Our approach to workplace safety is ‘everybody safe home every day.’ We have continued to build on our current robust systems and process to ensure high employee participation and a proactive approach to safety. Our continued work in this area was recognised in June 2013, when we became accredited as a secondary partner under ACC’s Workplace Safety Management Practices program. For more information on our commitment to health, safety and wellness, see the section in ‘our governance’. entrepreneurial leadership Congratulations to our Managing Director, John Penno who recently won the products category at the EY Entrepreneur of the Year Awards. John is now competing for the overall title of New Zealand Entrepreneur of the Year which will be announced on the 17th of October 2013. The winner of the overall category will be invited to compete in the World Entrepreneur of the Year Awards in Monte Carlo in June 2014. page 29 Synlait Milk Limted Annual Report 2013 I OUR PEOPLE CONT... best place to work Since 2011 we have participated in the Kenexa Best Workplaces Survey to assist us in understanding and measuring the engagement of our staff. Brad Harden has recently become our Dryer 2 Production Manager. Brad is one of our original employees, who joined the Company in early 2008 as a Process Leader. Brad’s natural leadership ability and understanding of our stringent production systems has seen him elevated to a senior position in our manufacturing team. Brad is a trained chef, has lead forestry gangs, but has found his calling in the dairy industry over the last 12 years. We are also helping Brad tick an item off his bucket list by supporting him in the Coast to Coast multisport event. Lisa Stewart has recently been promoted to Lead Dispensary Operator on our infant formula and nutritionals plant. Lisa joined our team in late 2011 as a Dispensary Operator. Her attention to detail and her leadership ability has seen her promoted to her current position. Lisa recently was awarded the ‘Emerging Talent’ award at our recent manufacturing team building day. Bryce Happer joined our team back in 2008 as an AMF Process Operator. Bryce’s easy going nature and ability to problem solve makes him a valuable member of our team. Bryce was awarded our ‘Operator of the Year’ award at our recent manufacturing team building day for his efforts in training the new AMF staff and his focus on AMF quality performance. Outside of work you can find Bryce playing rugby for our local Dunsandel Irwell Rugby Football Team at Synlait Park. Our recently completed third survey has shown that, even with our significant growth, we have continued to increase our overall staff engagement (from 38.8% in 2012 to 42.4% in 2013) and importantly, we have continued to decrease our levels of staff disengagement – now down to 5%. We are extremely pleased with this result and we continue to ensure that we have strong initiatives in this area to ensure that we continue to deliver against our vision of being a great place to work. meet our team Meet Gareth Lepper, Planning and Scheduling Analyst at Synlait Milk. Gareth joined us approximately one year ago as a fresh faced graduate from the University of Canterbury with a major in Management Science. From the get-go Gareth impressed the team with his enthusiastic attitude and aptitude for understanding the software elements of his role. Gareth is now working on our automatic planning and automatic scheduling project assisting in the design and implementation from a planning and scheduling viewpoint, in order to improve our planning system and optimise production. page 30 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 OUR FUTURE In the initial public offering prospectus we outlined a series of growth initiatives that we have planned to undertake to expand our capacity and product offerings. We are pleased to update you on the status of these projects below. On the map included in this document those areas in darker blue are commenced projects with those in lighter blue still in the planning. 1. Blending and Consumer Packaging 2. 22,500m2 Dry Store Update: The project commenced on schedule in August 2013 with construction expected to start in October 2013. The commission date has been moved forward to June 2014, from the originally planned August 2014. All contracts for this project have now been awarded. Current Status: Design review underway Major contracts awarded Customer reviews complete Preparation of building consent Update: Due to build and economic efficiencies, the dryer three dry store will now be included in this project bringing the additional storage capacity onsite to 22,500m2, up from the originally planned 12,500m2. The increased size of the warehouse and approval process required for that change has resulted in an extended construction period for this project. The total project will cost $16.9 million up from the $13 million originally planned, however this generates a saving of $2.4 million on the dryer 3 warehouse build cost that was allowed for in the dryer 3 project. Expected Capacity: 17,500 MT per annum Current Status: Expected Total Cost: $27.5 million Project Start Date: August 2013 Detailed design complete Building consent submitted Major contracts awarded Construction started Expected Commissioning Date: Major Contracts: June 2014 Project Managers – Babbage Consultants Ltd Construction – Apollo Projects Ltd Canning equipment – PLF International Ltd Blending equipment – Powder Projects Ltd Expected Capacity: 22,500m2 Expected Total Cost: $16.9 million Construction Start Date: August 2013 Expected Commissioning Date: Major Contracts: March 2014 Project Managers – Babbage Consultants Ltd Construction – Calder Stewart Industries Ltd page 31 Synlait Milk Limted Annual Report 2013 I 3. Lactoferrin Extraction and Purification Facility 5. Dryer 3 Update: The project commenced on schedule in May 2013 with construction of the plant now underway. Production will commence in early 2014 as per our original plan. Current Status: Detailed design complete Building consent submitted Major contracts awarded Pilot scale production complete Expected Capacity: 23MT per annum Expected Total Cost: $15.1 million Update: Resource consent is being sought and the plant technical specification is in progress. Note, that the cost of the third dry store associated with the build of dryer 3 has been brought forward and accounted for in the 22,500m2 dry store (project 2) outlined above. Current Status: Project Start Date: May 2013 Expected Capacity: Expected Commissioning Date: Late January 2014 Major Contracts: Civil – Bradfords Building Ltd Expected Total Cost: Resource consent planning (lodgement November 2013) Conceptual design Customer consultation underway 5-6MT per hour (Infant Formula) 8-10MT per hour (Ingredients) $103.5 million (now excluding dry store 3) Construction Start Date: April 2014 Expected Commissioning Date: August 2015 6. Ammix Butter Plant Update: Design for this plant will begin in February 2014. Current Status: Planning Expected Capacity: 7MT per hour (25,000 MT pa or 40,000 MT pa with external cream source). Expected Total Cost: $15 million Construction Start Date: August 2014 Expected Commissioning Date: May 2015 Mechanical - NDA Group Automation and Electrical – Industrial Controls Ltd Process Equipment – GEA Process Engineering Ltd – Powder Projects Ltd 4. Quality Testing Laboratory and Admin Building Update: With the steady increase in staff numbers, we will now incorporate the laboratory ($3.9 million) with a new administration building ($4.5 million). Architectural design is underway with an expected construction start date in March 2014. The commissioning date is expected to be August 2014, updated from the originally planned March 2014. This will result in some operational savings in FY14 related to start-up costs that are now deferred until FY15. Current Status: Resource consent planning Architectural design underway Expected Total Cost: $8.4 million Construction Start Date: March 2014 Expected Commissioning Date: August 2014 page 32 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 environmental loadout area DRYSTORE 3 PROPOSED COLD STORE proposed forklift corridor proposed walkway canning proposed packing 3 proposed office extension and laboratory blending proposed dryer 3 proposed butter lactoferrin proposed maintenance store & workshop proposed reception 2 proposed boiler 3 proposed security control page 33 Synlait Milk Limted Annual Report 2013 I OUR REMUnERATIOn We seek to ensure our remuneration framework and policies attract and retain the best people we can for our business. We are intending to have the following share incentive plans in place for our staff (not including Directors other than the Managing Director): − Senior Executive IPO Incentive Scheme: This scheme provides an incentive to retain senior executives post- IPO for a period of three years, vesting a set number of Synlait Milk shares in each of them depending on the We aim to be fair, consistent, hire excellence, and provide number of performance hurdles which have been met in a great place to work, learn and develop. We reward team- each year. The maximum value opportunity per senior work and value excellence. To ensure we remain competitive executive participating in the scheme is 75% of their base in the market, we use information from an independent remuneration as at 1 August 2013. They can receive up remuneration adviser ‘Strategic Pay’ to establish applicable to a maximum value of 25% of their base salary, by way bands for a position. Remuneration is then set based on of rights to shares valued at the IPO price, which will only performance, experience and overall value to the Company vest at the end of the three year period, post IPO, on the and is reviewed annually. The Remuneration and Governance Committee oversees the condition that they are still employed at Synlait Milk and that the share price at that point is above the IPO price. operation of our remuneration policy, and monitors the overall The performance hurdles are split into two separate Company budgets for all employees. The Committee also recommends goals. The first is ensuring the Company over-performs on our to the Board for approval the remuneration and bonus budgeted net profit after tax by 10% or more, and the second arrangements for our Senior Management Team. is that certain annual compound growth targets in total Our Directors and our employees’ remuneration details shareholder returns (TSR) reaches the following set targets: (including the Managing Director’s) are set out in the TSR ‘Statutory Information’ section. We also assess our Directors Annual entitlement as a % of base salary performance and fees bi-ennially. 20% or more 15% 12% Less than 12% 25% 18.75% 6.25% 0% page 34 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 If all the targets were met, then we have provisioned for the transfer of shares worth an issue price of approximately $3.3m. superannuation We participate in KiwiSaver, and pay the employer contribution of 3% for all employees participating in KiwiSaver. − Staff Short Term Incentive Share Scheme: The scheme applies to all our non-senior management employees who are eligible to participate. Each employee will earn $2,000 worth of Synlait Milk shares (net of any PAYE tax that may be payable) should we over-perform on our budgeted net profit before tax by 20% or more for FY2014. If all the eligible employees receive these incentive shares, then we have anticipated the value to be approximately $450,000. short term incentiVe scheme – (sti) We have a short term performance bonus scheme operating at various levels across our organisation. For employees below senior management level the STI opportunity ranges from 5% to 15% of the base remuneration and is based on a mixture of Company profit, team and individual objectives. At senior manager level the STI opportunity ranges from 20% of based remuneration for direct reports to the Managing Director and 40% of base remuneration for the Managing Director. The STI is awarded based on exceeding budgeted NPAT (40%), shared Company objectives (20%) and personal performance hurdles (40%). page 35 Synlait Milk Limted Annual Report 2013 I cOMPanY stRuctuRe WE’RE bUILDIng A WORLD CLAss bUsInEss page 36 i Synlait Milk Limted Annual Report 2013 Synlait Milk Limted Annual Report 2013 I OUR gOVERnAnCE You will already know that Synlait Milk Limited is a limited table. Sam and Bill were appointed prior to our listing on the liability company under the Companies Act 1993 and that we NZX to bolster our independent Director credentials. are listed on the Main Board of the NZX (see the code ‘SML’ on www.nzx.com ). All our Directors are profiled on pages 40-41 of this Annual Report. A third of our independent directors will retire each But what you might not know, is the detail behind our very year and Bright Dairy may appoint their Directors as they wish strong governance framework, which is designed to ensure (but one must always be a New Zealand resident, experienced we are a professionally run organisation you can trust in. Director). More details can be found in our Constitution, at the We are proud of what we have achieved to date and the way our Company is managed. following link www.synlait.com/site/uploads/2013/07/Synlait- Milk-Limited-Constitution.pdf our board Our Board is responsible for the overall corporate governance of Synlait Milk including strategic direction, determination of policy, approval of significant contracts / projects, capital our board committees An important part of good governance is ensuring an organisation has specialised groups focused on the essential parts of the corporate landscape. and operating budgets and overall stewardship of our We have established the following permanent Board organisation. Our Board is committed to ensuring we not only Committees: make ‘More from Milk,’ but also make more from ourselves, in efficiently and effectively managing Synlait Milk to deliver on the results we all expect. − Audit and Risk Committee – chaired by independent Director Bill Roest (other members – Dong Zongbo, Graeme Milne). It is charged with monitoring our internal We were listed on the NZX on 23 July 2013, and this meant control and risk management systems, financial reporting quite a few changes to our then governance structure as we obligations, independent audit process and ensuring we prepared for listing. We are a non-standard Company in terms of NZX listing requirements – and have certain waivers from the NZX to this comply at all times with all applicable laws, regulations, Listing Rules and our own Company Policies and procedures. effect. More details on the NZX waivers are detailed in our − Remuneration and Governance Committee – chaired Statutory Information section. Our Board has up to eight Directors, and while our major shareholder Bright Dairy holds at least 37% of our shares, Bright Dairy may appoint up to four of those Directors - one of whom must be a New Zealand resident who is an experienced director. We are fortunate to have one of our long-serving Board members The Honourable Ruth Richardson to fulfil this role. We also must have a Managing Director who cannot be a Bright Dairy Director (John Penno), and three independent directors (Sam Knowles, Graeme Milne and Bill Roest). Our independent Directors not only satisfy these requirements, but also bring considerable expertise and experience to the Board by Ruth Richardson (other members – Graeme Milne, Li Ke, Sam Knowles). It is charged with ensuring our commitment to health and safety, best practice employment and fair and proper remuneration is maintained at all times. The Committee is also responsible for ensuring all training and development and proper governance structures are in place and being properly used at all levels of the Company. Both Committees have Charters governing their operation, membership and remit to ensure that Synlait is optimally managed and governed at all times. Both Committees meet at least four times a year, but are also available at any stage to consider any issue within their responsibility. page 37 Synlait Milk Limted Annual Report 2013 I OUR gOVERnAnCE COnT... We also have a standing Committee appointed: − Sales Policy: This sets out our internal commercial − Disclosure Committee – chaired by the Managing Director (other members being the Chair of the Board and position with respect to our sales of products to customers, in terms of pricing, volumes, reporting and forecasting. the CFO, with an alternate member being the Chair of − Continuous Disclosure Policy: This ensures we always Audit and Risk Committee). It monitors compliance by the immediately inform the market of any material information Company and staff in relation to our Share Trading Policy and have in place proper management processes to ensure and Guidelines and ensures that all ‘material information’ this is a discipline throughout the whole organisation. which is required to be disclosed to the market under the The Disclosure Committee is responsible for monitoring NZX Listing Rules is immediately disclosed. compliance with this policy. polices and charters − Securities Trading Policy and Guidelines: This is to ensure all our staff and Directors appreciate the special role Our Board believes in good governance and has ensured we they hold and ensure they operate ethically and properly have in place the following essential corporate governance in relation to any personal activity. This includes express documents (amongst others): − Board Charter: This is the ‘guide book’ for our Board in terms of objectives and rules to make sure we always ‘black-out’ periods for special classes of our staff with in-depth financial and Company knowledge. It also has a detailed reporting regime to ensure compliance. follow our Constitution, statutory duties and other − Directors’ Conflict of Interest Policy: This ensures all corporate obligations. − Board Code of Ethics: This sets the moral compass for our Directors in all Synlait Milk matters – ensuring our Directors appreciate and know how to manage and mitigate any impact on our Synlait Milk operations relative to their own personal affairs. professionalism, ethical conduct and best practice is − Related Transaction Policy: This ensures any major maintained at the Board table and beyond by all our shareholders are treated purely on an arms-length basis Directors. An important part of the Code is the use of and in the best interests of Synlait Milk at all times. Company information by Directors, which safeguards Company confidential information. − Delegated Authorities Policy: This is the operational guide for our Board and all staff in the day-to-day − Audit & Risk Committee Charter and Remuneration & Governance Committee Charter: For each Committee, operations of Synlait Milk, ensuring a proper degree of accountability and control is maintained at all times and its Charter sets out the objectives, authorities, roles and allowing risk to be properly apportioned and managed. responsibilities and operational rules for the respective members to ensure they deliver on their governance requirements. − Employee Handbook: Apart from the operational aspects of working at Synlait Milk, this Handbook has the professional obligations and ethics expected of all − Treasury Management Policy: Is our internal policy staff and also a protected disclosures regime (whistle- for managing our forex, debt, interest rates and related blowers provisions) – ensuring any major problems can financial activities. This is actively managed and forms part be immediately brought to senior management’s or the of our essential internal controls. Board’s attention without fear of any negative reaction. page 38 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 OUR gOVERnAnCE COnT... All the above Policies, Charters and Codes are to be reviewed health and safety at least annually by the Board or applicable Board Committee to ensure they continue to deliver the optimal structure for governing our Company going forward. We have many other internal policies and procedures to ensure we are an efficiently and effectively run organisation. We appreciate that the success of our business depends on our excellent staff, and so their wellbeing is of vital importance to us. Accordingly, we are committed to health, safety and wellness at Synlait Milk. Our vision is: Everybody safe home every day. For more information on our publicly available Policies and Charters, please visit our investor relations section on our Our objectives are: website at www.synlait.com/investors/corporate-governance/ - Zero exposure to uncontrolled risks. The Directors’ disclosures of interests are set out in Statutory - Fatal (critical) risk focus. Information section. our operations - Zero injury accidents. - Healthy and well; living life in balance. All of our Board members have access to all relevant Synlait We are developing a fully integrated approach to health & Milk information, and are fully briefed before each Board safety matters – maintaining our present focus of strong meeting. They are provided with minutes of past meetings, operational systems and procedures, and continuing our and have available the Synlait Milk Company Secretary and emphasis on rehabilitation in the event of injury or incident. Synlait Milk management to answer any questions or to respond to any issues at any time. Over the next three years we have committed as an organisation to migrate our present Workplace Safety Our Board has determined we are in compliance with all NZX Management Practices approach into a wider Synlait Milk Listing Rules and applicable legal requirements. Safety Management System. This will be achieved through a our focus for 2014 We are focusing on improving our corporate risk management practices and looking at extending our enterprise-wide risk strategies. Our internal audit function still needs to be further developed (as we have just become a listed entity in July 2013) and this is something we are working towards as we grow as a listed Company. comprehensive review of all health, safety and wellness risks using the ‘Bow Tie’ risks and control measures assessment approach, and by us implementing a new system to capture risks, hazards and incidents. Included in our safety initiatives is a review of our safety on-boarding processes and information; rollout training in ICAM root cause investigation methodology (Incident, Cause, Analysis, Method); review of our employee participation systems and a move to a focus on measuring total recordable injury frequency rate (TRIFR). We will report on our TRIFR We are also focusing on developing a sustainability policy and achievement in our next Annual Report. environmental policy that we will be able to report on in our next Annual Report. page 39 Synlait Milk Limted Annual Report 2013 I bOARD OF DIRECTORs Zongbo Dong Ke Li Graeme Roderick Milne Willem (Bill) Jan Roest BRIGHT DAIRY APPOINTED DIRECTOR BRIGHT DAIRY APPOINTED DIRECTOR CHAIRMAN (independent) NON-ExECUTIvE DIRECTOR Li was appointed a director of Synlait Milk in August 2010. Li has worked for Bright Dairy for over 12 years. During this time, she has mainly been responsible for sales and marketing. During her years at Bright Dairy, Li has made significant contributions to the growth of many different brands of the company, including the Bright brand. Li is also leading a team tasked with promoting Pure CanterburyTM infant formula products in China. This brand has achieved remarkable growth in China in the last few years. Li is currently the vice president of Bright Dairy & Food Co., Ltd and the head of marketing. She also heads the public relations department at Bright Dairy. Li is currently a director (and in the last five years has been a director) of a number of Bright Dairy subsidiaries. Before working for Bright Dairy, she was the sales manager for Shanghai Jia Qi Children clothes Co., Ltd and Shanghai NiceKid Clothes Co., Ltd. Li is also currently a director of SML New Zealand Limited and Synlait Milk Finance Limited. Li holds a Master of Business Administration from La Trobe University. Graeme joined the Synlait Group as a director in 2006. Graeme brings extensive international dairy industry experience to the Board. He has spent most of his career in the dairy industry working in New Zealand, Australia and Europe. Graeme’s first role as a CEO was for Bay Milk Products in 1992. Later he was CEO of the New Zealand Dairy Group prior to the formation of Fonterra and thereafter held various interim roles as CEO of Richmond Limited and Bonlac Limited in Australia. Graeme is now a farmer and company director in a range of sectors. Graeme’s other Chairmanships are currently Waikato District Health Board, Terracare Fertilisers Limited, New Zealand Pharmaceuticals Limited, Johnes Disease Research Limited and the Rural Broadband Initiative National Advisory Committee. Graeme is also currently a director for a number of organisations including but not limited to Genesis Power Limited, FMG and Alliance Group Limited. Graeme is a member of the Massey University School of Advanced Engineering and Technology Advisory Board. (independent), CHAIR Of THE AUDIT AND RISK COMMITTEE Bill was appointed to the Synlait Milk Board in May 2013. Prior to joining Synlait Milk, Bill had a long and varied career with the Fletcher Group including the last 12 years as Chief Financial Officer of Fletcher Building Limited, from which he retired in April 2013. Bill had several leadership roles in the New Zealand corporate sector before joining Fletcher Challenge Limited upon the acquisition of Group Rentals in 1986. Bill was Managing Director of Fletcher Residential and Fletcher Aluminium before taking up a role with Fletcher Building on the separation of Fletcher Challenge in 2001. Bill’s other board appointments include director of SML New Zealand Limited, Synlait Milk Finance Limited, Fisher and Paykel Appliances Holdings Limited where he chairs the Audit Committee and director of Housing Foundation Limited, the not-for-profit New Zealand Housing Foundation which assists low income families into first home ownership. In the past five years Bill has been an executive officer of Fletcher Building Limited and in that capacity was a director of Fletcher Building Limited subsidiaries and associate companies. Dong was appointed a director of Synlait Milk in August 2010. Dong entered the dairy business in 1985 and has worked in accounting and finance roles in the dairy industry since then. Dong led the finance team in the establishment of the Shanghai No. 8 Dairy Plant in 1988, which later became the largest yoghurt plant in Asia. He was appointed vice general manager and CFO of Shanghai Danone Yogurt and Cheese Co., Ltd. in the 1990s. He also organised the merger of sixteen subsidiaries of Bright Group and their entering into the Bright Dairy & Co., Ltd. structure. After a number of years in leading finance roles in different subsidiaries, Dong became CFO for Bright Dairy & Food Co., Ltd in 2007. Dong is currently a director (and in the last five years has been a director) and supervisor of a number of Bright Dairy subsidiaries, including two major production facilities and several distribution companies. Dong is also currently a director of SML New Zealand Limited and Synlait Milk Finance Limited. Dong is a member of the Institute of Public Accountants (Australia) and has certification granted by China Association of Chief Financial Officers. FROM LEFT TO RIGHT ; ZONGBO DONG KE LI GRAEME RODERICK MILNE WILLEM (BILL) JAN ROEST JOHN WILLIAM PENNO RUTH MARGARET RICHARDSON SAM KNOWLES SIHANG YANG page 40 i i Bill is a member of the Institute of Directors, a Fellow of the Association of Chartered Certified Accountants (UK) and a member of the Association of Chartered Accountants (NZ). John William Penno MANAGING DIRECTOR (non-independent) John co-founded the Synlait Group in 2000 and has been a full-time executive for the Synlait Group for the last 11 years. With the appointment of Graeme Milne as an independent chairman of Synlait Limited in 2006, John stood down from his initial role as executive chair to focus on the Managing Director role. After completing an Agricultural Science degree, John commenced his career in the dairy industry as a consulting officer for the New Zealand Dairy Board before joining Dexcel as a research scientist where he completed a PhD in animal science. As a scientist and research program leader he worked to enable New Zealand dairy farmers to increase productivity and profit. In 2000, John was appointed General Manager of the NZ National Dairy Industry Extension Program which serviced farm owners, workers and rural professionals. John was appointed as Managing Director of Synlait Milk on 21 June 2013. John is also currently a director of SML New Zealand Limited, Synlait Milk Finance Limited, Synlait Farms Limited (which is a supplier of raw milk to Synlait Milk), Synlait Farms Finance Limited, Robindale Dairies Limited, Thorndale Dairies Limited and Riverlands Four Limited. In the past five years John has also been a director of Dairy Insight, Axe Brasil Limited, Synlait Limited and a number of companies associated with the Synlait Group and / or dairy farms. John was the inaugural Chairman of the Dairying and Environment Leadership Group. John is a member of the New Zealand China Council Advisory Board. In 2009, John received an emerging leaders award from the Sir Peter Blake Trust and was also awarded the Federated Farmers inaugural agribusiness person of the year. Ruth Margaret Richardson NON-ExECUTIvE DIRECTOR, CHAIR Of REMUNERATION AND GOvERNANCE COMMITTEE Ruth is a professional company director specialising in agribusiness, the commercialisation of innovation, information technology and finance. Ruth joined the Synlait Group as their first independent director in 2004. Ruth was elected as the Member of Parliament for Selwyn (Synlait Milk’s base) in 1981 and served as New Zealand’s Minister of Finance from 1990 to 1993. sector governance including over 10 years on boards of NZX listed companies. Subsequent to her political career, Ruth established an international practice as a public policy consultant and assumed an extensive range of corporate governance responsibilities both in New Zealand and internationally. Ruth is currently Chairman of Jade Software Corporation Limited, Synlait Limited, Syft Technologies Limited, Kiwi Innovation Network Limited (Kiwinet - commercialisation of publicly funded innovation) and the Kula Fund (a Pacific Private Equity fund) and is a director of SML New Zealand Limited, Synlait Milk Finance Limited, The New Zealand Merino Company Limited, Robindale Dairies Limited and Ruth Richardson (NZ) Limited. Ruth’s previous directorships include Dairy Brands, the Reserve Bank of New Zealand and Wrightson Limited amongst others. Ruth holds a Bachelor of Laws (with honours) from the University of Canterbury. Sam Knowles NON-ExECUTIvE DIRECTOR (independent) Sam has held senior executive positions in major banks in both Australia and New Zealand and has extensive experience in strategy, marketing, organisational capability building and private and public Sam is perhaps best known for his role in establishing Kiwibank and subsequently leading the company over 10 years through its transition from start-up to a large successful business. Since leaving Kiwibank in 2010 Sam has taken governance roles in growth businesses. His NZX listed companies are Chairman of Xero and a Director of TrustPower and SLI Systems. Sam’s other governance roles include Chairman of Partners Life, OnBrand Partners and Fingertapps and a Director of Magritek and Rangatira. Sihang Yang BRIGHT DAIRY APPOINTED DIRECTOR Yang was appointed a director of Synlait Milk in August 2010. Before working for Bright Dairy, Yang worked for Heilongjiang Dairy Group as the director of technology and subsequently as the director of quality assurance. Following those roles, Yang was appointed the secretary-general of Heilongjiang Dairy Industry Association and a director of China Dairy Industry Association. Yang is currently the director of strategy and research at Bright Dairy & Food Co., Ltd. He is currently a director (and in the past five years has been a director) of a number of Bright Dairy subsidiaries. He is also a director of SML New Zealand Limited, Synlait Milk Finance Limited and Zhejiang Hai Hua Dairy Co., Ltd. Yang holds a master’s degree in food science and engineering and has worked for more than 15 years in the dairy industry. page 41 i sEnIOR MAnAgEMEnT TEAM During his career, Michael also held quality, food safety and laboratory leadership roles with Nestle Nutrition, Nestle USA and Nutricia, Inc. Michael earned his Bachelor of Science degree in Microbiology from the Ohio State University. Mike Lee GENERAL MANAGER / INGREDIENT SALES Mike joined Synlait Milk in September 2011 and leads the Ingredients business for sales, business development and overall category profitability. Mike worked for Fonterra and the NZ Dairy Board for 14 years in sales, marketing and business development roles in the international ingredient business, including working for 10 years in Europe, Asia and Australia. Mike has worked extensively with both commodity and added value ingredients. Mike worked for seven years in two research and innovation organisations involved in environmental research and biomaterials, leading the business and technology commercialisation functions including various start- up and growth businesses. Mike has a degree in Food Technology and a Diploma in Business and is really enjoying his return to the international dairy industry. Matthew Foster GENERAL MANAGER SUPPLY CHAIN Matthew joined Synlait Milk in February 2012 and is responsible for managing and developing Synlait Milk’s supply chain activities from farmer to customer. He brings a wealth of supply chain management and dairy industry experience to Synlait Milk after a 20 year career with the New Zealand Dairy Board and Fonterra where he held senior management positions in the United Kingdom, Australia, Japan, the Americas and New Zealand. Before joining Synlait Milk, Matthew was CEO at NZL Group and prior to that General Manager Commercial for Tasman Orient Line. Matthew is a member of the New Zealand Institute of Chartered Accountants and holds a Bachelor of Management Studies from the University of Waikato. Tony McKenna GENERAL MANAGER NUTRITIONALS Tony joined Synlait Milk in August 2009 with the objective of developing Synlait Milk’s nutritional powder and special milks business portfolio with a particular focus on infant formula. Tony has significant experience in R&D management, product development, new business development, dairy ingredient sales and general management. Prior to joining Synlait Milk, Tony held positions including CEO of LactoPharma, Technical Manager of Fonterra’s Bioactives and Health global portfolio, Senior Researcher and R&D Portfolio Manager for the New Zealand Dairy Research Institute and GM Technical and Nutritionals at Tatura Milk (Australia). While at Tatura, Tony developed and implemented its infant formula growth strategy into Australasia and Asia. Tony was formerly a director of Dairy Innovation Australia, Dairy Technical Services and the Australian Co-Operative Research Centre for Innovative Dairy Products. Tony holds a PhD in Food Technology and a Diploma in Management. Michael Stein GENERAL MANAGER QUALITY Michael Stein joined Synlait Milk in June 2013 and is responsible for providing strategic leadership for quality across the Synlait Milk business. Michael leads a team of quality assurance and other professionals with the objective of ensuring that Synlait Milk continuously improves its quality systems to deliver safe, high quality dairy ingredients and nutritional products that meet our customer’s expectations and regulatory requirements in the markets we serve. Michael brings to Synlait Milk over 20 years of global quality management experience in the infant formula, nutritional products and medical foods business. His most recent role was Director of Quality for Mead Johnson Nutrition, Asia-Pacific where he led quality and technical teams at business units and manufacturing sites across China, South East Asia, Oceania and the Middle East. FROM LEFT TO RIGHT ; MICHAEL STEIN MIKE LEE MATTHEW FOSTER TONY MCKENNA JOHN PENNO NIGEL GREENWOOD NATALIE LOMBE MICHAEL WAN NEIL BETTERIDGE page 42 i i John is also currently a director of SML New Zealand Limited, Synlait Milk Finance Limited, Synlait Farms Limited (which is a supplier of raw milk to Synlait Milk), Synlait Farms Finance Limited, Robindale Dairies Limited, Thorndale Dairies Limited and Riverlands Four Limited. In the past five years John has also been a director of Dairy Insight, Axe Brasil Limited, Synlait Limited and a number of companies associated with the Synlait Group and / or dairy farms. John was the inaugural Chairman of the Dairying and Environment Leadership Group. John is a member of the New Zealand China Council Advisory Board. In 2009, John received an emerging leaders award from the Sir Peter Blake Trust and was also awarded the Federated Farmers inaugural agribusiness person of the year. John Penno CHIEf ExECUTIvE OffICER & MANAGING DIRECTOR John co-founded the Synlait Group in 2000 and has been a full-time executive for the Synlait Group for the last 11 years. With the appointment of Graeme Milne as an independent chairman of Synlait Limited in 2006, John stood down from his initial role as executive chair to focus on the Managing Director role. After completing an Agricultural Science degree, John commenced his career in the dairy industry as a consulting officer for the New Zealand Dairy Board before joining Dexcel as a research scientist where he completed a PhD in animal science. As a scientist and research program leader he worked to enable New Zealand dairy farmers to increase productivity and profit. In 2000, John was appointed General Manager of the NZ National Dairy Industry Extension Program which serviced farm owners, workers and rural professionals. John was appointed as Managing Director of Synlait Milk on 21 June 2013. Nigel Greenwood Michael Wan CHIEf fINANCIAL OffICER MARKETING & COMMUNICATIONS Nigel has had extensive experience in finance, having held senior executive finance roles with various New Zealand companies. As CFO, Nigel is responsible for finance, funding, legal, information technology and strategy. Prior to joining Synlait Milk in April 2010, Nigel held CFO roles with Crane Distribution NZ Limited, Gough Group Limited and Lyttelton Port Company Limited. Nigel is a member of the New Zealand Institute of Chartered Accountants and the Institute of Directors. Nigel has a Bachelor of Commerce (majoring in accounting) and has completed the General Manager Programme at the University of Michigan. Natalie Lombe GENERAL MANAGER HUMAN RESOURCES Natalie joined Synlait Milk in January 2011 and is responsible for leading initiatives to develop fully enabled and engaged staff as well as facilitation of strategic planning process. Natalie also oversees the human resource, payroll and health and safety functions. Prior to joining Synlait Milk, Natalie held senior human resource positions with Christchurch International Airport, Goodman Fielder, Mainland Products and Allied Telesys, together with extensive human resource and change management experience working in a number of fast moving consumer goods industries in Australia. Natalie holds a Post Graduate Diploma in Dispute Resolution and a Bachelor of Business majoring in human resources and industrial relations and is a member of the Human Resources Institute of New Zealand. MANAGER Michael joined Synlait Milk in August 2011 and brings significant strategic and operational experience having spent the previous 10 years in marketing and management roles across a broad range of industries operating in both the public and private sectors. Michael is responsible for providing strategic leadership for all areas of Synlait Milk’s marketing and communications, including brand development and management, advertising, media and PR, marketing collateral, events, sponsorship and corporate citizenship. Michael holds a First Class Honours degree in Management, a Bachelor of Commerce and Administration majoring in marketing and management and a Bachelor of Arts majoring in Economics. He is also a member of the Marketing Association of New Zealand and a Professional Member of the Chartered Institute of Marketing UK. Neil Betteridge GENERAL MANAGER MANUfACTURING Neil joined Synlait Milk in 2007 after 10 years with Fonterra. Neil currently leads a manufacturing team of more than 80 people and is responsible for the execution of sound manufacturing processes across the entire Synlait Milk plant. He also leads the development of our Infant Formula and Nutritional product manufacturing capabilities. Neil has been involved with the design and construction of the various phases of the Synlait Milk site. Since completing a Bachelor of Chemical & Process Engineering with honours from the University of Canterbury and a Post Graduate Diploma in Dairy Science & Technology, Neil’s career has included working with manufacturing processes for a variety of dairy products. Neil is a member of the New Zealand Institute of Food Science and Technology and a Chartered Professional Engineer. page 43 i OUR FInAnCIAL REVIEW Our revenue for FY13 at $420 million was up 11.5% on last year’s $377 million which was primarily due to the higher volume of products shipped. Total volume shipped for FY13 being 86,746 MT against last year’s 77,415 MT. However, revenue was slightly down on our prospectus forecast of $426 million due to slightly lower infant and nutritional product sales than anticipated. Overall our gross profit at $65.1 million was up 42% on last years $46 million due to the higher product margins we achieved on both our ingredient and infant and nutritional product categories. This was in line with our prospectus forecast margin at $64.6 million. In the determination of our gross profit the largest impact is the cost of milk purchased, which represents 78% of our total cost of sales against all products manufactured. Our final average base milk price for the season was $5.81 per kg MS, which compares with last season’s average base milk price of $6.14 per kg MS. In addition, we paid $0.08 per kg MS in seasonal and value-added premiums to increase the average total milk price to $5.89 per kg MS compared with last years $6.22 per kg MS. EBITDA at $38.5 million was up 74% on last years $22.1 million and in line with our prospectus forecast of $37.5 million. The significant uplift on last year’s EBITDA being driven by the gross increase in profit and well controlled The reduction in infant and nutritional sales at 5,661 MT overhead costs. against 6,888 MT forecast was primarily due to the impact of impending changes in Chinese Government regulations associated with infant products. This caused many of our Chinese based customers to put orders on hold while they came to terms with the impact of the impending changes in the regulatory environment in China. This is anticipated to only have a short term impact on of our sales of infant nutritional products into this market. It is noted that almost all our products are exported and are transacted in US dollars. As a result our financial performance can be significantly affected by the difference between our annual average NZ dollar exchange rate against the US dollar, when compared with the annual average NZ dollar exchange rate applied in the calculation of the farm gate milk price. For the year ended 31 July 2013 our annual average NZ dollar: US Net finance costs at $12.3 million were up on last years $9.2 million and in line with our prospectus forecast of $12.4 million. The increase over last year being mainly caused by the result of bearing the interest expense impact associated with the build of our second dryer for a full year. In addition, we experienced $714k of ineffective interest rate swaps, which resulted from debt repaid on receipt of the net Initial Public Offering proceeds. Our NPAT at $11.5m was 161% above FY12 at $4.4 million and slightly ahead of our prospectus forecast at $10.8 million. The improvement over our forecast NPAT was due to a combination of the after tax net benefit of the insurance proceeds we received related to earthquake damage on our plant of $700k, plus slightly higher margins on our product sales. dollar exchange rate was 0.8043 and this was applied against This result delivered a basic and diluted earnings per share $290 million of net US dollar receipts. (EPS) of 19.74 cents, on a weighted average basis, against 8.59 cents in FY12. It also generated a pre-tax return on average page 44 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 capital employed (ROCE) of 13.1% compared with 7.3% in FY12. It is noted that the FY13 ROCE was calculated after adjusting down our year end net debt by $34.6m related to one off items that are discussed further below. capital raise and debt refinancing cash flow We had a net cash outflow for operating activities for the year of $13.8 million (FY12 net cash inflow of $29.8 million). The primary causes of the net cash outflow were due to a number of one off items, the primary cause being the increase in our advance rates paid to our farm milk suppliers above the level that we would normally have paid. The increase was In support of the Company’s growth strategy we embarked on made due to competitive pressure associated with the severe a capital raising process in combination with a refinancing of drought conditions experienced throughout New Zealand over our bank facilities in the last quarter of FY13. This resulted in the summer months and increased our cash outflows by $20.5 the Company raising $68.9m of new capital after share issue million in the period to 31 July 2013. There were also impacts costs. In addition, we also negotiated new Bank facilities with on our trade finance facility related to higher commodity our existing Bank syndicate to assist with the funding of our prices and product shipments in the last quarter of FY13 of growth initiative programme over the next three years. approximately $14.1 million. The total of these one off items at The impact of our capital raise enabled us to pay down $38.8 million are all expected to unwind during FY14. existing debt facilities and finish the year with a gearing ratio Our net debt position as at the end of FY13 at $105.6 million of 39.2% compared with FY12’s ratio of 55.4%. This provides was slightly lower than our prospectus forecast net debt of a strong balance sheet position to embark on our growth $107.1 million, which was dominated by final payment for initiative programme where we have forecast to invest $186 Dryer 2. These amounts being prior to the adjustment for $34.6 million in 6 core projects over the next three years. The largest million of one off items, noted above, which caused our year of these projects is the build of our third dryer at an estimated end net debt to be higher than would normally be expected. cost of $103.5 million with the build due to start in the last quarter of FY14 and be commissioned at the start of the FY16. The new finance facilities package includes a $75 million revolver term loan to be used for all the growth initiative projects except the build of the dryer 3, which will be financed by a $110 million term loan. In addition, we have a seasonal working capital facility of $85 million. The revolver term loan expires at the end of FY16; the dryer 3 term loan expires at the end of FY17, while the working capital facility is renewed capital eXpenditure We had a reasonably light year for investment in capital items with a total spend of only $6.6 million, compared to $36.0 million in FY12. There has been some initial expenditure ($1.4 million) associated with the build of our lactoferrin plant which is on schedule to be completed by January 2014. The majority of the balance of capital expenditure was related to the purchase of on farm vats as well as enhancements to our on an annual basis. We have negotiated very competitive fees and margins and have commercial banking covenants plant. in place. We were in compliance with all of our banking covenants at the end of July 2013. page 45 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I tHe FinanciaLs OUR VALUE In DOLLARs AnD CEnTs page 46 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I synLAIT MILK LIMITED FInAnCIAL sTATEMEnTs FOR THE yEAR EnDED 31 JULy 2013 contents Directors’ Responsibility Statement Financial statements Statement of Comprehensive Income Statement of Changes in Equity Statement of Financial Position Statement of Cash Flows Notes to the financial statements 1 Reporting Entity 2 Basis of preparation 3 Summary of significant accounting policies 4 Change in accounting policies 5 Critical accounting estimates and judgements 6 Segment information 7 Revenue 8 Expenses 9 Finance Income and Expenses 10 Income tax 11 Current assets - Cash and cash equivalents 12 Current assets - Trade and other receivables 13 Current assets - Inventories 14 Non-current assets - Property, plant and equipment 15 Non-current assets - Intangible assets 16 Trade and other payables 17 Advances from Subsidiary 18 Loans and Borrowings 19 Deferred tax assets and liabilities 20 Share Capital 21 Reserves and retained earning 22 Reconciliation of profit after income tax to net cash inflow from operating activities 23 Financial risk management 24 Derivatives 25 Contingencies 26 Commitments 27 Related party transactions 28 Investments in subsidiaries 29 Comparison of Prospective Financial Information 30 Events occurring after the reporting period Auditors’ report page 48 49 50 52 53 54 54 54 60 61 62 62 62 63 63 65 65 66 67 69 70 70 70 71 73 74 74 75 81 81 81 82 84 84 88 89 page 47 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I DIRECTORs’ DECLARATIOn As AT 31 JULy 2013 directors’ responsibility statement The Directors are pleased to present the financial statements for Synlait Milk Limited and its subsidiaries set out on pages 49 to 88 for the year ended 31 July 2013. The Directors are responsible for ensuring that the financial statements give a true and fair view of the financial position of Synlait Milk Limited and its subsidiary (together ‘the Group’) as at 31 July 2013 and the financial performance and cash flows for the year ended on that date. The Directors consider that the financial statements of the Group have been prepared using appropriate accounting policies, consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed. The Directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of the Group and facilitate compliance of the financial statements with the Financial Reporting Act 1993. For and on behalf of the Board. Graeme Milne CHAIRMAN 23 September 2013 John Penno MANAGING DIRECTOR 23 September 2013 page 48 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 sTATEMEnT OF COMpREHEnsIVE InCOME FOR THE yEAR EnDED 31 JULy 2013 Group Year ended 2013 $’000 2012 $’000 Parent Year ended 2013 $’000 Notes 7 8 7 8 8 9 9 9 10 14 Revenue Cost of sales Gross profit Other income Sales and distribution expenses Administrative and operating expenses Earnings before net finance expense and income tax Finance expenses Finance income Net finance costs Profit before income tax Income tax (expense) / benefit Net Profit after tax for the period Other comprehensive income Items that will not be reclassified subsequently to profit and loss Revaluation of property, plant and equipment Income tax on income and expenses recognised directly in equity Total items that will not be reclassified subsequently to profit and loss Items that may be reclassified subsequently to profit and loss Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income 10 Total items that may be reclassified subsequently to profit and loss Other comprehensive income for the year, net of tax Total comprehensive income for the year 420,010 376,771 420,010 (354,862) (330,817) (354,862) 65,148 1,587 45,954 501 65,148 1,587 (23,478) (21,337) (23,478) (14,978) 28,279 (13,525) 1,272 (12,253) 16,026 (4,498) 11,528 (14,978) 28,279 (13,525) 1,272 (12,253) 16,026 (4,498) 11,528 - - - (11,717) 13,401 (10.626) 1,461 (9,165) 4,236 148 4,384 11,056 (3,048) 8,008 2012 $’000 376,771 (330,817) 45,954 501 (21,337) (11,717) 13,401 (10,626) 1,461 (9,165) 4,236 148 4,384 - - - 11,056 (3,048) 8,008 (3,387) (1,408) (1,633) (1,408) (337) 169 (1,386) 1,043 (2,681) (2,681) 8,847 347 (892) 7,116 11,500 845 (2,174) (2,174) 9,354 169 347 (892) 7,116 11,500 Earnings per Share Basic and diluted earnings per share (cents) 20 19.74 8.59 19.74 8.59 The accompanying notes form part of and are to be read in conjunction with these financial statements. page 49 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I sTATEMEnT OF CHAngEs In EqUITy FOR THE yEAR EnDED 31 JULy 2013 Notes 4 Share Capital $’000 103,648 - 103,648 Group Equity as at 1 August 2011 Change in accounting policy Restated Equity at the start of the period Profit or loss for the year Other comprehensive income Revaluation of property, plant and equipment Income tax on income and expenses recognised directly in equity Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Issue of new shares Share issue costs 20 20 Total contributions by and distributions to owners Hedging reserves Revaluation reserve Retained earnings $’000 1,740 - 1,740 - - - (1,408) 169 347 (892) - - - $’000 - - - - 11,056 (3,048) - - - 8,008 - - - $’000 (30,570) (27) (30,597) 4,384 - - - - - - - - - Total equity $’000 74,818 (27) 74,791 4,384 11,056 (3,048) (1,408) 169 347 7,116 - - - - - - - - - - - - - Equity as at 31 July 2012 103,648 848 8,008 (26,213) 86,291 Group Equity as at 1 August 2012 Profit or loss for the year Other comprehensive income Revaluation of property, plant and equipment Income tax on income and expenses recog- nised directly in equity Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Issue of new shares Share issue costs Total contributions by and distributions to owners Equity as at 31 July 2013 Notes Share Capital $’000 103,648 - - - - - - - 20 20 75,000 (6,100) 68,900 172,548 Hedging reserves Revaluation reserve Retained earnings $’000 848 $’000 8,008 - - - (3,387) (337) 1,043 (2,681) - - - - - - - - - - - - - $’000 (26,213) 11,528 - - - - - - - - - (1,833) 8,008 (14,685) Total equity $’000 86,291 11,528 - - (3,387) (337) 1,043 (2,681) 75,000 (6,100) 68,900 164,038 The accompanying notes form part of and are to be read in conjunction with these financial statements. page 50 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 sTATEMEnT OF CHAngEs In EqUITy FOR THE yEAR EnDED 31 JULy 2013 Notes 4 Share Capital $’000 103,648 - 103,648 Parent Equity as at 1 August 2011 Change in accounting policy Restated Equity at the start of the period Profit or loss for the year Other comprehensive income Revaluation of property, plant and equipment Income tax on income and expenses recognised directly in equity Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Issue of new shares Share issue costs 20 20 Total contributions by and distributions to owners Hedging reserves Revaluation reserve Retained earnings $’000 1,740 - 1,740 - - - (1,408) 169 347 (892) - - - $’000 - - - - 11,056 (3,048) - - - 8,008 - - - $’000 (30,570) (27) (30,597) 4,384 - - - - - - - - - Total equity $’000 74,818 (27) 74,791 4,384 11,056 (3,048) (1,408) 169 347 7,116 - - - - - - - - - - - - - Equity as at 31 July 2012 103,648 848 8,008 (26,213) 86,291 Parent Equity as at 1 August 2012 Profit or loss for the year Other comprehensive income Revaluation of property, plant and equipment Income tax on income and expenses recognised directly in equity Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Issue of new shares Share issue costs Total contributions by and distributions to owners Equity as at 31 July 2013 Notes Share Capital $’000 103,648 - - - - - - - 20 20 75,000 (6,100) 68,900 172,548 Hedging reserves Revaluation reserve Retained earnings $’000 848 $’000 8,008 - - - (1,633) (1,386) 845 (2,174) - - - - - - - - - - - - - $’000 (26,213) 11,528 - - - - - - - - - (1,326) 8,008 (14,685) The accompanying notes form part of and are to be read in conjunction with these financial statements. Total equity $’000 86,291 11,528 - - (1,633) (1,386) 845 (2,174) 75,000 (6,100) 68,900 164,545 page 51 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I sTATEMEnT OF FInAnCIAL pOsITIOn As AT 31 JULy 2013 Current assets Cash and cash equivalents Trade and other receivables Goods and services tax refundable Income accruals and prepayments Inventories Current tax receivables Derivative financial instruments Total current assets Non-current assets Property, plant and equipment Intangible assets Investments in subsidiary Derivative financial instruments Total non-current assets Total assets Current liabilities Working capital facility Trade and other payables Trade finance facility Advances from subsidiary Loans and borrowings Derivative financial instruments Total current liabilities Non-current liabilities Loans and borrowings Deferred tax liabilities Derivative financial instruments Advances from subsidiary Total non-current liabilities Total liabilities Equity Share capital Reserves Retained earnings/(deficit) Total equity attributable to equity holders of the Company Total equity and liabilities Group 2013 $’000 Notes 11 12 13 24 14 15 28 24 18 16 18 17 18 24 18 19 24 17 20 21 2,365 59,134 2,917 570 65,025 - 1,138 131,149 210,780 4,052 - 86 214,918 346,067 33,079 57,535 46,924 - - 4,379 141,917 27,917 11,755 440 - 40,112 182,029 172,548 6,175 (14,685) 164,038 346,067 2012 $’000 666 20,884 3,492 159 30,747 231 4,109 60,288 214,099 2,871 - - Parent 2013 $’000 31,487 59,134 2,917 570 65,025 - 1,138 160,271 210,780 4,052 1 - 216,970 277,258 214,833 375,104 2,344 70,620 13,617 - 21,000 2,582 - 57,421 46,924 63,926 - 2,980 110,163 171,251 70,768 8,302 1,734 - 80,804 190,967 103,648 8,856 (26,213) 86,291 277,258 - 11,953 - 27,355 39,308 210,559 172,548 6,682 (14,685) 164,545 375,104 2012 $’000 666 20,884 3,492 159 30,747 231 4,109 60,288 214,099 2,871 - - 216,970 277,258 2,344 70,620 13,617 - 21,000 2,582 110,163 70,768 8,302 1,734 - 80,804 190,967 103,648 8,856 (26,213) 86,291 277,258 The accompanying notes form part of and are to be read in conjunction with these financial statements. page 52 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 sTATEMEnT OF CAsH FLOWs FOR THE yEAR EnDED 31 JULy 2013 Cash flows from operating activities Cash receipts from customers Cash paid for milk purchased Cash paid to other creditors and employees Goods and services tax refunds Income tax refunds Group Year ended 2013 $’000 Notes 415,907 (289,268) (141,231) 575 229 Net cash inflow / (outflow) from operating activities 22 (13,788) Cash flows from investing activities Interest received Acquisition of property, plant and equipment Acquisition of intangible assets Net cash inflow / (outflow) from investing activities Cash flows from financing activities Proceeds from issue of shares (net) Repayments of borrowings Receipt of borrowings Interest paid Movement in advances from subsidiary Net cash inflow / (outflow) from financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the financial year Cash and cash equivalents at end of year 11 1,272 (6,437) (1,607) (6,772) 68,900 (33,786) 670 (13,525) - 22,259 1,699 666 2,365 Parent Year ended 2013 $’000 414,859 (289,268) (141,345) 575 229 (14,950) 1,272 (7,989) (55) (6,772) 68,900 (94,782) 670 (13,525) 91,280 52,543 30,821 666 31,487 2012 $’000 399,048 (262,264) (107,977) 1,003 10 29,820 53 (29,499) (3,260) (32,706) - (8,656) 27,947 (8,063) - 11,228 8,342 (7,676) 666 2012 $’000 399,048 (262,264) (107,977) 1,003 10 29,820 53 (29,499) (3,260) (32,706) - (8,656) 27,947 (8,063) - 11,228 8,342 (7,676) 666 The accompanying notes form part of and are to be read in conjunction with these financial statements. page 53 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 1 reporting entity Synlait Milk Limited (the ‘Company’) and its subsidiary (together ‘the Group’) is domiciled in New Zealand, registered under the Companies Act 1993 and listed on the New Zealand Stock Exchange. The Company is an issuer for the purposes of the Financial Reporting Act 1993 and its financial statements comply with that Act. Synlait Milk Limited is primarily involved in the manufacture and sale of milk powder and milk powder related products. are considered when assessing whether the Group controls another entity. The Group also assesses existence of control where it does not have more than 50% of the voting power but is able to govern the financial and operating policies by virtue of de-facto control. In June 2013 a subsidiary, Synlait Milk Finance Limited, was set up primarily for holding all banking facilities for the Group and related interest rate swaps. Funding is loaned to Synlait Milk Limited and appropriate interest is charged. 2 basis of preparation These financial statements have been prepared in accordance with New Zealand generally accepted accounting practice (NZ GAAP). They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS), and other applicable New Zealand Financial Reporting Standards, as appropriate for profit-oriented entities. They also comply with International Financial Reporting Standards. The Company and Group have previously applied NZ IFRS with differential reporting exemptions but in the 2013 financial year, since becoming an issuer, the Company and Group now apply full NZ IFRS. The only differential reporting exemptions applied in the past related to disclosure requirements. These consolidated financial statements have been approved for issue by the Board of Directors on 23 September 2013. Basis of Measurement These financial statements have been prepared on the historical cost basis except for the following: - Revaluation of available-for-sale financial assets - Financial assets and liabilities (including derivative instruments) at fair value - Land, buildings, plant and equipment Critical accounting estimates The preparation of financial statements in conformity with NZ IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 5. (a) principles of consolidation (i) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible (b) segment reporting The Company and Group operate in one industry, being the manufacture and sale of milk powder and milk powder related products. The Board makes resource allocation decisions based on expected cash flows and results of the Company’s operations as a whole and the Group therefore has one segment. Although the Group exports to many different countries, for management reporting purposes the Company and Group operate in one principal geographical area being New Zealand. 3 summary of significant accounting policies (a) foreign currency translation (i) Functional and presentation currency Items included in the financial statements of the Company and the Group are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements are presented in New Zealand Dollars ($), which is the Company’s functional currency and are rounded to the nearest thousand ($000). (ii) Transactions and balances Transactions in foreign currencies are translated to the functional currency at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. (b) revenue recognition (i) Sales of goods Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, discounts and allowances. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, and the associated costs and possible return of goods can be estimated reliably. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. page 54 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (ii) Interest income Interest income is recognised using the effective interest method. When a loan or receivable is impaired, the Company and Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate. (c) government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Company or Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the statement of comprehensive income over the period necessary to match them with the costs that they are intended to compensate. (d) research and development Expenditure on research activities, undertaken with the prospect of obtaining new scientific or technical knowledge and understanding, is recognised in the statement of comprehensive income as an expense when it is incurred. longer probable that the related tax benefit will be realised. Tax consolidation group Synlait Milk Limited and its wholly-owned New Zealand controlled entities form a tax consolidation group. (f) goods and services tax (gst) The profit and loss component of the statements of comprehensive income have been prepared so that all components are stated exclusive of GST. All items in the financial position are stated net of GST, with the exception of receivables and payables, which include GST invoiced. (g) leases Leases on terms where the Company or Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments with a corresponding liability to the lessor included in the statement of financial position as a finance lease obligation. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Lease payments are apportioned between finance charges and reduction in the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. (e) income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of comprehensive income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Other leases are operating leases and the leased assets are not recognised on the Company or Group’s statement of financial position. Operating lease payments are recognised as an expense on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern over which economic benefits from leased assets are consumed. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. (h) impairment of non-financial assets The carrying amounts of the Company and Group’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the revaluation of land to the extent that any revaluation is unlikely to affect the tax base of the asset. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that are largely independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to page 55 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. - cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits that are repayable on demand and form an integral part of the Company and Group’s cash management. - trade and other receivables Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. The recoverable amount of the Company and Group’s receivables which are carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. Impairment losses on an individual basis are determined by an evaluation of the exposures on an instrument by instrument basis. All individual instruments that are considered significant are subject to this approach. For trade receivables which are not significant on an individual basis, impairment is assessed on a portfolio basis based on numbers of days overdue, and taking into account the historical loss experienced in portfolios with a similar amount of days overdue. (k) inventories (i) Raw materials and stores, work in progress and finished goods Inventories are measured at the lower of cost and net realisable value on a first in, first out basis. The cost of inventories includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, - investments in subsidiaries and associates Investments in subsidiaries and associates in the Parent financial statements are stated at cost less impairment. (m) investments and other financial assets Classification The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and ‘cash and cash equivalents’ in the statement of financial position (notes 3(i) and (j)). (iii) Available for sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period. Recognition and measurement A financial instrument is recognised if the Company or Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the contractual rights to the cash flows from the financial assets expire or if the Company or Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Company or page 56 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Company or Group’s obligations specified in the contract expire or are discharged or cancelled. Impairment of financial assets (i) assets carried at amortised cost The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For the loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated statement of comprehensive income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated statement of comprehensive income. (ii) Assets classified as available for sale The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt securities, the Group uses the criteria referred to in (i) above. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses recognised in the statements of comprehensive income on equity instruments are not reversed through the statements of comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the statements of comprehensive income. (n) derivatives The Company and Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk, including forward exchange contracts and interest rate swaps. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance date, The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated as effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments are designated as cash flow hedges by the Company or Group. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. (i) Hedge accounting The Company and Group designates certain hedging instruments in respect of foreign currency risk as cash flow hedges. Hedges of foreign currency exchange risk on firm commitments are accounted for as cash flow hedges. At the inception of the hedge relationship, the Company or Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Company or Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item. page 57 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income and accumulated as a separate component of equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in Finance costs. Amounts recognised in the hedging reserve are classified from equity to profit or loss (as a reclassification adjustment) in the periods when the hedged item is recognised in profit or loss, in the same line as the recognised hedged item. Hedge accounting is discontinued when the Company or Group revokes the hedging relationships, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies as hedge accounting. Any cumulative gain or loss recognised in the hedging reserve at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in the hedging reserve is immediately recorded in profit or loss. (iii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the statement of comprehensive income. (o) fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Company and Group use a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. (p) property, plant and equipment Recognition and measurement Property, plant and equipment are initially measured at cost less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When a self-constructed asset meets the definition of a qualifying asset under NZ IAS 23 ‘Borrowing Costs’, borrowing costs directly attributable to the construction of the asset are capitalised until such a time as the asset is substantially ready for its intended use or sale. When major components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Revaluations Land is stated at market valuation as determined on a cyclical basis, not exceeding three years, by an independent registered valuer. Buildings and plant and equipment are stated at valuation as determined on a cyclical basis, not exceeding three years, by an independent registered valuer the basis of which valuation is the depreciated replacement cost method. Any increase in the value of land, buildings, plant and equipment is recognised in other comprehensive income and presented in the revaluation reserve in equity unless it offsets a previous decrease in value recognised in the profit or loss, in which case it is recognised in the profit or loss. A decrease in value is recognised in the profit or loss where it exceeds the increase previously recognised in equity. Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company or the Group and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation of property, plant and equipment purchased on new acquisitions is recognised in profit or loss on a straight line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: page 58 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 - Buildings - Plant and equipment - Fixtures and fittings 10 - 50 years 3 - 33 years 2 - 20 years value is recognised in the profit and loss component of the statement of comprehensive income over the period of the borrowings using the effective interest method. Depreciation methods, useful lives and residual values are reassessed at the reporting date. (q) intangible assets (i) Trademarks Separately acquired trademarks are shown at historical cost. Trademarks acquired in a business combination are recognised at fair value at the acquisition date. Trademarks have an indefinite useful life and are carried at cost and are not amortised subject to annual impairment test. (ii) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on a straight line basis over their estimated useful lives of three to ten years. Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Company and Group are recognised as intangible assets. (iii) Customer contracts Customer contracts acquired as part of a business combination are recognised separately from goodwill. Customer contracts have a finite life and are carried at their fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method based on the timing of projected cash flows of the contracts over their estimated useful lives, which currently vary from one to three years. (r) trade and other payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method. (s) interest bearing liabilities Interest bearing liabilities are recognised initially at fair value, net of transaction costs incurred. Interest bearing liabilities are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption (t) employee benefits (i) Defined contribution plan Obligations for contributions to defined contribution pension plans, including KiwiSaver, are recognised as an expense in the profit or loss when they are due. (ii) Profit‑sharing and bonus plans Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (u) share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction from the proceeds. Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. (v) earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to shareholders by the weighted average number of shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to shareholders and the number of shares outstanding to include the effects of all potential dilutive shares. (w) borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for use. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. page 59 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (x) standards, amendments, and interpretations effective in 2012 - IAS 1 (Amendment), ‘ Financial statement preparation – presentation of other comprehensive income’ (effective 1 January 2012). The amendment requires profit or loss and other comprehensive income (OCI) to be presented, either in a single continuous statement or in two separate but consecutive statements. There is little noticeable change from the current requirements. However, the format of the OCI section is required to be changed to separate items that might be recycled from items that will not be recycled. The changes do not affect the measurement of net profit or earnings per share; however, they change the way items of OCI are presented. (y) standards, amendments and interpretations to existing standards that are not yet effective Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 August 2013 or later periods but which the Group has not early adopted: - NZ IFRS 9 ‘Financial Instruments: Classification and measurement’ (effective 1 January 2015). NZ IFRS 9 amends the requirements related to the classification and measurement of financial assets and financial liabilities. This standard becomes effective in the Group’s 2016 financial statements. The Group does not plan to adopt this standard early and the extent of the impact has not yet been determined. - IFRS 10 ‘Consolidated Financial Statements’, NZ IFRS 11 Joint Arrangements, NZ IFRS 12 Disclosure of Interests in Other Entities, revised NZ IAS 27 Separate Financial Statements and NZ IAS 28 Investments in Associates and Joint Ventures (effective 1 January 2013). - NZ IFRS 10 develops a single consolidation model applicable to all investees. The standard provides that an investor consolidates an investee when it has power, exposure to variability in returns, and a linkage between the two. This standard becomes effective in the Group’s 2014 financial statements. The Group does not plan to adopt this standard early and the extent of the impact has not yet been determined. - IFRS 11 Joint Arrangements. This standard separates the arrangement into either a joint operation or joint venture. If the arrangement is a joint operation then the joint operation is consolidated in relation to its interest in the joint operation. If the arrangement is a joint venture then the joint venturer recognises an investment and accounts for that investment using the equity method. This standard becomes effective in the Group’s 2014 financial statements. The Group does not plan to adopt this standard early and there will be no impact on the financial statements from the change in standard. - IFRS 12 Disclosure of Interests in Other Entities. This standard replaces existing requirements for disclosure of subsidiaries and joint ventures (now joint arrangements), and makes limited amendments in relation to associates. The standard becomes effective in the Group’s 2014 financial statements. The Group does not plan to adopt this standard early and there will be no impact on the recognition or measurement of the financial statements from the change in standard. - NZ IFRS 13 Fair Value Measurement (effective 1 January 2013). NZ IFRS 13 provides a framework for determining fair value and clarifies the factors to be considered in estimating fair value in accordance with IFRS. It provides guidance on certain valuation approaches and techniques. The standard becomes effective in the Group’s 2014 financial statements. The Group does not plan to adopt this standard early and the extent of the impact has not yet been determined. - There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. (z) comparative balances Comparative balances have been reclassified and restated to conform with changes in presentation and classification adopted in the current period. (Note 4) 4 change in accounting policies Adoption of Monthly Milk Price During the year ended 31 July 2013, the Company changed it’s accounting policy for calculating the value of inventory from the Annual Milk Price to the Monthly Milk Price. The cost of dairy product manufactured from milk is established by using the Monthly Milk Price calculated for the month when the dairy product was manufactured. The Monthly Milk Price is determined using a milk pricing model and is benchmarked against the Farmgate Milk Price announcements during the year and against the farmgate milk price statement when this is released annually. The change in milk price methodology is a change in measurement basis from an average cost inventory approach to a First In First Out basis. This has been done to align with industry best practice and because it enhances comparability. The Directors have determined that this change in measurement basis constitutes a change in accounting policy and therefore the comparative periods have been restated. page 60 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 The comparative figures for the period ended 31 July 2012 have been restated using the Monthly Milk Price methodology. The restatement has reduced reported NPAT by $1.9 million, resulting in an adjusted NPAT of $4.4 million both for the Group The impact of the restatement of the monthly milk price adjustment on the opening Financial Position at 1 August 2011 was a lower retained earnings of $27k, $38k reduction in inventory and $11k of deferred tax. and the Company. Statement of Comprehensive Income For the year ending 31 July 2013 2012 Original 2012 Restated Variance Revenue Cost of sales Gross Profit Other income Other expenses Profit before tax Income tax Profit after tax Statement of Financial Position For the year ending 31 July 2013 Inventories Other current assets Non-current assets Total assets Trade and other payables Other current liabilities Deferred tax Other non-current liabilities Total liabilities Current profit Retained earnings Other Equity Total equity 5 critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) critical accounting estimates and assumptions The preparation of the consolidated financial statements in conformity with NZ IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates and assumptions. $’000 376,771 $’000 376,771 (328,143) (330,817) 48,628 45,954 501 501 (42,219) (42,219) 6,910 (600) 6,310 33,841 29,541 216,970 280,352 (71,002) (39,543) (9,061) (72,502) 4,236 148 4,384 30,747 29,541 216,970 277,258 (70,620) (39,543) (8,302) (72,502) (192,108) (190,967) (6,310) 30,570 (4,384) 30,597 (112,504) (112,504) $’000 - 2,674 2,674 - - 2,674 (748) 1,926 3,094 - - 3,094 (382) - (759) - (1,141) (1,926) (27) - (88,244) (86,291) (1,953) Estimates and assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Key sources of estimation uncertainty relate to assessment of impairment of inventory, standard costs used for measuring inventory and the industry milk price. Inventories are valued at the lower of cost and net realizable value. Estimates are required in relation to net realisable value which is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Reviewing the net realisable values is carried out by management on a periodic basis and any reduction to cost is provided by way of stock provision. page 61 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 The use of a standard cost methodology for inventory requires management estimation in determining the Monthly Milk Price to be applied which forms a key component of the product standard cost. The estimate of the industry milk price is a key assumption applied by management in the financial statements. This industry price is used for milk purchased or received from other processors during the year. 6. segment information (a) description of segments The Company and Group operate in one industry, being the manufacture and sale of milk powder and milk powder related products. The Board makes resource allocation decisions based on expected cash flows and results of the Company’s operations as a whole and the Group therefore has one segment. Although the Group exports to many different countries, for management reporting purposes the Company and Group operate in one principal geographical area being New Zealand. Revenues of approximately 56% are derived from the top three external customers. 7 reVenue Milk powder and milk powder related products Total Revenue Insurance proceeds Other sundry income Management fees Total other income Group Year ended Parent Year ended 2013 $’000 420,010 420,010 1,304 245 38 1,587 2012 $’000 376,771 376,771 - 388 113 501 2013 $’000 420,010 420,010 1,304 245 38 1,587 2012 $’000 376,771 376,771 - 388 113 501 The insurance proceeds relate to minor damage caused by the earthquake in September 2010. Repair costs to date associated with this damage total $596,211 and are included in Repairs and Maintenance within Cost of Sales. Remaining repairs are to be completed during the 2014 financial year. 8 eXpenses Group Year ended Parent Year ended 2013 $’000 8,966 6,589 3,109 1,216 54 312 1,355 364 2012 $’000 7,697 4,745 2,151 970 10 1,076 1,098 85 2013 $’000 8,966 6,589 3,109 1,216 54 312 1,355 364 2012 $’000 7,697 4,745 2,151 970 10 1,076 1,098 85 The following items of expenditure are included in cost of sales Depreciation and Amortisation Employee benefit expense Repairs and maintenance The following items of expenditure are included in sales and distribution expenses Depreciation Donations Research and development Rent expense Repairs and maintenance page 62 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 The following items of expenditure are included in administrative and operating expenses Employee benefit expense Defined benefit contributions - KiwiSaver Directors fees Deloitte services included in administrative operating expenses and share capital Audit IPO Taxation advice Financial modelling assurance Other Total 7,010 138 346 105 473 121 215 40 954 5,913 76 327 125 - 29 535 213 902 7,010 138 346 105 473 121 215 40 954 5,913 76 375 125 - 29 535 213 902 Research and development expenses have decreased substantially from last year. In 2012 these costs contained a portion of the overhead costs that related to product testing of the special milks dryer. In 2013 the overhead costs were fully allocated to products. 9 finance income and eXpenses Interest income on bank deposits Settlement of ineffective portion of cash flow hedges Total finance income Group Year ended Parent Year ended 2013 $’000 103 1,169 1,272 2012 $’000 53 1,408 1,461 2013 $’000 103 1,169 1,272 2012 $’000 53 1,408 1,461 Interest and facility fees (net of capitalised interest) (12,811) (10,626) (12,811) (10,626) Ineffective portion of cash flow hedges Total finance costs Net finance costs 10 income taX (a) income tax expense Current tax on profits for the year Adjustments in respect of prior years Total current tax Temporary differences Additional prior year tax losses brought forward Other prior year adjustments Total deferred tax (note 18) Income tax (expense) / benefit (714) (13,525) (12,253) - (10,626) (9,165) (714) (13,525) (12,253) - (10,626) (9,165) Group Year ended 2013 $’000 - - - (4,498) - - (4,498) (4,498) 2012 $’000 - 14 14 (1,423) 1,704 (147) 134 148 Parent Year ended 2013 $’000 - - - (4,498) - - (4,498) (4,498) 2012 $’000 - 14 14 (1,423) 1,704 (147) 134 148 page 63 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (b) reconciliation of effective tax rate Profit before income tax Income tax using the Company’s domestic tax rate - 28% Reduction in tax rate of buildings Tax exempt income Other non deductible costs Total permanent differences Additional prior year tax losses brought forward Other prior year adjustments Total prior period adjustments Total income tax (expense) / benefit Group Year ended Parent Year ended 2013 $’000 16,026 (4,487) - - (11) (4,498) - - - (4,498) Group Year ended 2013 $’000 2012 $’000 4,236 (1,187) (41) (3) (203) (1,434) 1,704 (122) 1,582 148 2012 $’000 2013 $’000 16,026 (4,487) - - (11) (4,498) - - - (4,498) Parent Year ended 2013 $’000 2012 $’000 4,236 (1,187) (41) (3) (203) (1,434) 1,704 (122) 1,582 148 2012 $’000 (c) imputation credits Imputation credits at the end of the period - 231 - 231 (d) income tax recognised in other comprehensive income The tax (charge)/credit relating to components of other comprehensive income is as follows: Tax (expense)/ benefit Before tax After tax $’000 $’000 $’000 - (3,724) (3,724) 11,056 (1,239) 9,817 - (3,019) (3,019) - 1,043 1,043 (3,048) 347 (2,701) - 845 845 - (2,681) (2,681) 8,008 (892) 7,116 - (2,174) (2,174) Group 31 July 2013 Revaluation of property, plant and equipment Cash flow hedges Other comprehensive income 31 July 2012 Revaluation of property, plant and equipment Cash flow hedges Other comprehensive income Parent 31 July 2013 Revaluation of property, plant and equipment Cash flow hedges Other comprehensive income page 64 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 31 July 2012 Revaluation of property, plant and equipment Cash flow hedges Other comprehensive income 11 current assets - cash and cash eQuiValents 11,056 (1,239) 9,817 (3,048) 347 (2,701) Group 2013 $’000 2012 $’000 Parent 2013 $’000 8,008 (892) 7,116 2012 $’000 Cash and cash equivalents 2,365 666 31,487 666 (a) risk exposure The Group’s exposure to interest rate risk is discussed in note 23(a). The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents mentioned above. (b) fair value The carrying amount for cash and cash equivalents equals their fair value. 12 current assets - trade and other receiVables Trade receivables Other receivables Total receivables Group Parent 2013 $’000 59,090 44 59,134 2012 $’000 20,580 304 20,884 2013 $’000 59,090 44 59,134 2012 $’000 20,580 304 20,884 The increase in trade receivables from 2012 is primarily due to a larger number of sales transactions taking place in July 2013 combined with increased commodity prices compared to 2012. page 65 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (a) impaired receivables As of 31 July 2013, trade receivables of $3.5m were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The majority has since been collected but $0.8m remains unpaid which is expected to be collected in the 2014 financial year. The ageing analysis of these overdue trade receivables is as follows: 0 to 30 days 30 to 60 days Total trade receivables Group Parent 2013 $’000 391 3,093 3,484 2012 $’000 828 - 828 2013 $’000 391 3,093 3,484 2012 $’000 828 - 828 The other classes within trade and other receivables do not contain impaired assets. (b) bad and doubtful trade receivables The Company and Group have recognised no loss (2012: $nil) in respect of bad and doubtful trade receivables during the year ended 31 July 2013. (c) trade and other receivables Accounts receivable are amounts incurred in the normal course of business. Receivables denominated in other currencies other than the functional currency comprise NZ$47.3 m (2012: $19.3 m) of USD and Euro denominated trade receivables and accruals. 13 current assets - inVentories Raw materials and consumables at cost Finished goods at cost Total inventories Group Parent 2013 $’000 16,047 48,978 65,025 2012 $’000 8,587 22,160 30,747 2013 $’000 16,047 48,978 65,025 2012 $’000 8,587 22,160 30,747 Both raw materials inventory and finished goods inventory increased from last year as higher infant formula product and raw mate- rials were on hand at the end of the financial year to meet demand at the beginning of the 2014 financial year. page 66 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 14 non-current assets - property, plant and eQuipment Group Cost or valuation Cost Revaluation Balance at 1 August 2011 Additions Disposals Reclassification / transfer Revaluation Balance at 31 July 2012 Additions Disposals Reclassification / transfer Revaluation Land $’000 3,042 - 3,042 - - - 170 3,212 5 - - - Buildings Plant and equipment Fixtures and fittings Construction in progress $’000 $’000 $’000 $’000 Total $’000 21,723 85,265 - - 21,723 85,265 4,536 (29) 5,229 1,761 2,439 (13) 95,795 10,272 1,830 - 1,830 566 - - - 33,220 193,758 2,396 - - - - 3,290 (195) 75 - 165 - (152) - 80,043 191,903 - 80,043 28,450 - (104,176) - 4,317 3,132 - 77 - - 191,903 35,991 (42) (3,152) 12,203 236,903 6,592 (195) - - Balance at 31 July 2013 3,217 33,220 196,928 2,409 7,526 243,300 Accumulated depreciation Cost Balance at 1 August 2011 Depreciation Disposals Revaluation Balance at 31 July 2012 Depreciation Disposals Revaluation - - - - - - - - - 2,283 2,283 959 (18) 180 3,404 1,110 - - 10,556 10,556 6,720 (10) 967 18,233 8,360 (40) - 886 886 281 - - 1,167 286 - - Balance at 31 July 2013 - 4,514 26,553 1,453 - - - - - - - - - - 13,725 13,725 7,960 (28) 1,147 22,804 9,756 (40) - 32,520 Carrying amounts At 31 July 2012 At 31 July 2013 3,212 3,217 29,816 28,706 175,525 170,375 1,229 956 4,317 7,526 214,099 210,780 page 67 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Parent Cost or valuation Cost Revaluation Balance at 1 August 2011 Additions Disposals Reclassification / transfer Revaluation Balance at 31 July 2012 Additions Disposals Reclassification / transfer Revaluation Land $’000 3,042 - 3,042 - - - 170 3,212 5 - - - Buildings Plant and equipment Fixtures and fittings Construction in progress $’000 $’000 $’000 $’000 Total $’000 21,553 85,265 - - 21,553 85,265 4,536 (29) 5,229 1,931 2,439 (13) 95,795 10,272 1,830 - 1,830 566 - - - 33,220 193,758 2,396 - - - - 3,290 (195) 75 - 165 - (152) - 80,043 191,733 - 80,043 28,450 - (104,176) - 4,317 3,132 - 77 - - 191,733 35,991 (42) (3,152) 12,373 236,903 6,592 (195) - - Balance at 31 July 2013 3,217 33,220 196,928 2,409 7,526 243,300 Accumulated depreciation Cost Balance at 1 August 2011 Depreciation Disposals Revaluation Balance at 31 July 2012 Depreciation Disposals Revaluation Balance at 31 July 2013 Carrying amounts At 31 July 2012 At 31 July 2013 - - - - - - - - - - 2,283 2,283 959 (18) 180 3,404 1,110 - - 10,556 10,556 6,720 (10) 967 18,233 8,360 (40) - 886 886 281 - - 1,167 286 - - 4,514 26,553 1,453 - - - - - - - - - - 13,725 13,725 7,960 (28) 1,147 22,804 9,756 (40) - 32,520 3,212 3,217 29,816 28,706 175,525 170,375 1,229 956 4,317 7,526 214,099 210,780 (a) Valuations of land and buildings Land, buildings, and plant and equipment were independently valued as at 31 July 2012 by Jones Lang LaSalle using either the depreciated replacement cost method (for buildings and plant and equipment) or market based valuation (for land). The method applied by the valuer is described in note 3(p). Land, buildings, and plant and equipment was valued at $208.6m as at 31 July 2012. If the cost model had been used, the carrying value of land, buildings and plant and equipment would have been $197.5m at 31 July 2012, resulting in a revaluation of $11.1m ($12.2m at cost less accumulated depreciation of $1.1m). There has been no independent valuation undertaken in 2013. (b) impairment During the period, property, plant and equipment have been examined for impairment. No indicators of impairment have been identified and no material items of property, plant and equipment are considered to be impaired. (c) construction in progress Assets under construction includes capital expenditure projects, until they are commissioned and transferred to fixed assets. page 68 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (d) capitalised borrowing costs During the year, the Group has capitalised borrowing costs amounting to $nil (2012: $2.56m) on qualifying assets. 15 non-current assets - intangible assets Group Year ended 31 July 2012 Opening net book amount Transfer from construction in progress Additions Amortisation charge Closing net book amount Year ended 31 July 2013 Opening net book amount Reclassification / transfer Additions Amortisation charge Closing net book amount Parent Year ended 31 July 2012 Opening net book amount Transfer from construction in progress Additions Amortisation charge Closing net book amount Year ended 31 July 2013 Opening net book amount Reclassification / transfer Additions Amortisation charge Closing net book amount Patents, trademarks and other rights Computer software $’000 $’000 Brand $’000 Supplier contracts Intangibles in progress $’000 $’000 59 - 6 - 65 65 - 8 - 73 - 3,152 - (619) 2,533 2,533 273 - (336) 2,470 - - 102 - 102 102 - 55 - 157 259 - - (88) 171 171 - - (90) 81 - - - - - - (273) 1,544 - 1,271 Patents, trademarks and other rights Computer software $’000 $’000 Brand $’000 Supplier contracts Intangibles in progress $’000 $’000 59 - 6 - 65 65 - 8 - 73 - 3,152 - (619) 2,533 2,533 273 - (336) 2,470 - - 102 - 102 102 - 55 - 157 259 - - (88) 171 171 - - (90) 81 - - - - - - (273) 1,544 - 1,271 Total $’000 318 3,152 108 (707) 2,871 2,871 - 1,607 (426) 4,052 Total $’000 318 3,152 108 (707) 2,871 2,871 - 1,607 (426) 4,052 page 69 Synlait Milk Limted Annual Report 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 16 trade and other payables Trade payables Accrued expenses Employee entitlements Total trade and other payables Group Parent 2013 $’000 31,671 24,199 1,665 57,535 2012 $’000 35,880 33,614 1,126 70,620 2013 $’000 31,671 24,085 1,665 57,421 2012 $’000 35,880 33,614 1,126 70,620 Payables denominated in other currencies other than the functional currency comprise NZ$2.8 m (2012: $4.6 m) of USD and AUD denominated trade payables and accruals. 17 adVances from subsidiary Current liabilities Advances from Synlait Milk Finance Limited Non current liabilities Advances from Synlait Milk Finance Limited Group 2013 $’000 2012 $’000 Parent 2013 $’000 2012 $’000 - - - - - - 63,926 63,926 27,355 - - - The term of the advances from subsidiary have been loaned on the same terms as the banking facilities. The interest rates used are the market rates and therefore the carrying value of the advances represent fair value. 18 loans and borrowings Group Year ended Parent Year ended 2013 $’000 33,079 46,924 - 80,003 28,596 (679) 27,917 2012 $’000 2,344 13,617 21,000 36,961 71,230 (462) 70,768 2013 $’000 - 46,924 - 46,924 - - - 2012 $’000 2,344 13,617 21,000 36,961 71,230 (462) 70,768 Current liabilities Working Capital Facility Trade Finance Facility Secured bank loans Total Non-current liabilities Bank loans Loan facility fees Total page 70 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (a) terms of loans and borrowings The secured bank loans and working capital facility within Synlait Milk Limited are secured under the terms of the General Security Deed dated 26 June 2013, by which all present and future property is secured to the ANZ National Bank and Bank of New Zealand. The working capital facility has a right of offset with the deposit accounts. The Company facilities include: - A secured Revolving Credit Facility of $75m that matures on 31 July 2016 - A secured Term Facility of $110m that matures on 31 July 2017 to fund the construction of Dryer 3 - A secured Working Capital Facility of $85m that matures on 31 July 2014 (but expected to be extended annually) - An unlimited and unsecured Trade Finance Facility from Mitsui & Co. Limited that matures on 31 July 2015 The carrying value of loans and borrowings approximates fair value. The Group is subject to capital requirements imposed by its bank through covenants agreed as part of the lending facility arrangements. The Group has met all externally imposed capital requirements for the twelve months ended 31 July 2013 and 31 July 2012. Nominal Year of Carrying Carrying Interest rate % maturity amount 2013 amount 2012 Secured Revolving Credit Facility - ANZ / BNZ Secured Working Capital Facility - ANZ / BNZ Trade Finance Facility - Mitsui & Co. Limited 4.20 3.85 1.45 2016 2014 2015 27,917 33,079 46,924 91,768 2,344 13,617 The nominal interest rate is calculated by adding the BKBM rate and the marginal rate, it excludes line fees and swap costs. 19 deferred taX assets and liabilities The balance comprises temporary differences attributable to: Assets Derivatives Other items Tax losses carried forward Total deferred tax assets Liabilities Property, plant and equipment Derivatives Other items Total deferred tax liabilities Total deferred tax Group 2013 $’000 713 278 4,382 5,373 2012 $’000 - 163 5,641 5,804 Parent 2013 $’000 515 278 4,382 5,175 2012 $’000 - 163 5,641 5,804 (17,108) (13,760) (17,108) (13,760) - (20) (17,128) (11,755) (330) (16) (14,106) (8,302) - (20) (17,128) (11,953) (330) (16) (14,106) (8,302) page 71 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Balance 1 Aug 2011 Recognised in profit or loss Recognised in other comprehensive income $’000 (7,643) (677) 400 2,174 (5,746) $’000 (3,069) - (253) 3,467 145 Balance 31 July 2012 $’000 (13,760) (330) 147 5,641 $’000 (3,048) 347 - - (2,701) (8,302) Balance 1 Aug 2012 Recognised in profit or loss Recognised in other comprehensive income Balance 31 July 2013 $’000 (13,760) (330) 147 5,641 (8,302) $’000 (3,348) - 111 (1,259) (4,496) $’000 $’000 - (17,108) 1,043 - - 713 258 4,382 1,043 (11,755) Balance 1 Aug 2011 Recognised in profit or loss Recognised in other comprehensive income $’000 (7,643) (677) 400 2,174 (5,746) $’000 (3,069) - (253) 3,467 145 Balance 31 July 2012 $’000 (13,760) (330) 147 5,641 $’000 (3,048) 347 - - (2,701) (8,302) Movements - Group Property, plant and equipment Derivatives Other items Tax losses carried forward Total Property, plant and equipment Derivatives Other items Tax losses carried forward Total Movements - Parent Property, plant and equipment Derivatives Other items Tax losses carried forward Total page 72 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Balance 1 Aug 2012 Recognised in profit or loss Recognised in other comprehensive income $’000 (13,760) (330) 147 5,641 (8,302) $’000 (3,348) - 111 (1,259) (4,496) Property, plant and equipment Derivatives Other items Tax losses carried forward Total 20 share capital (a) share capital Number of ordinary shares On issue at beginning of period Share split Issue of shares Total Balance 31 July 2013 $’000 (17,108) 515 258 4,382 $’000 - 845 - - 845 (11,953) 2013 Shares 2013 $’000 51,022,858 103,648 61,227,429 34,090,910 146,341,197 - 68,900 172,548 The share split was to ensure there was the desired number of shares in Synlait Milk Limited prior to the IPO. The issue of new shares were as part of the IPO of the Company on 23 July 2013 and the value reflects gross proceeds less issue related costs. The weighted average number of shares during the year is used to calculate the Earnings per Share. (b) ordinary shares All issued shares are fully paid and have no par value. The holders of Ordinary Shares are entitled to receive dividends as declared from time to time. Ordinary shares are entitled to one vote per share at meetings of the Company. All Ordinary Shares rank equally with regard to the Company’s residual assets. (c) capital risk management The Company and Group’s capital includes share capital, retained earnings and reserves. The Company and Group’s policy is to maintain a sound capital base so as to maintain investor and creditor confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Company recognised the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Company and Group are subject to various security ratios within the bank facilities agreement. The Company and Group’s policies in respect of capital management and allocation are reviewed by the Board of Directors. page 73 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 21 reserVes and retained earnings (a) nature and purpose of reserves (i) Property, plant and equipment revaluation reserve The revaluation reserve arises on the revaluation of land, buildings, plant and equipment. Where a revalued asset is sold, that portion of the reserve which relates to that asset, and is effectively realised, is recognised in retained earnings. (ii) Hedging reserve ‑ cash flow hedges The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cashflow hedging instruments relating to hedged transactions that have not yet occurred. (iii) Dividends No dividends were declared by the Company or the Group during the year. 22 reconciliation of profit after income taX to net cash inflow from operating actiVities Profit for the year Non-cash and non operating items: Depreciation and amortisation of non-current assets Interest costs classified as financing cash flow Interest received classified as investing cash flow Deferred tax Movements in working capital: Group Year ended Parent Year ended 2013 $’000 11,528 10,182 13,525 (1,272) 4,496 2012 $’000 4,384 8,639 10,626 (1,461) (145) 2013 $’000 11,528 10,182 13,525 (1,272) 4,496 2012 $’000 4,384 8,639 10,626 (1,461) (145) (Increase) / decrease in trade and other receivables (38,586) 21,316 (39,634) 21,316 (Increase) / decrease in trade finance facility (Increase) / decrease in prepayments (Increase) / decrease in inventories (Increase) / decrease in other current assets (Decrease) / increase in trade and other payables Net cash inflow from operating activities 33,307 (411) 111 349 33,307 (411) 111 349 (34,279) (18,305) (34,279) (18,305) 806 (13,084) (13,788) 1,012 3,293 29,820 806 (13,198) (14,950) 1,012 3,293 29,820 The difference between the Group and the Parent movements in trade and other payables relates primarily to the intercompany balance between Synlait Milk Limited and Synlait Milk Finance Limited. Mitsui & Co NZ is Synlait Milk Limited’s export sales agent. Under this arrangement Mitsui pays Synlait Milk the amounts invoiced to export customers within an agreed period after shipment of products. The amounts received from Mitsui are included within receipts from customers. page 74 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 23 financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures. (a) market risk (i) Foreign exchange risk The Group enters into derivative arrangements in the ordinary course of business to manage foreign currency risk. The Board coordinates risk policies on a regular basis. The Group is exposed to foreign currency risk on it’s sales, which are predominantly denominated in US dollars. The Group is also exposed to foreign currency risk on the purchase of capital equipment from overseas. The Group has a Board approved treasury policy that sets the parameters under which foreign exchange cover is to be taken. The Group’s exposure to foreign currency risk at the reporting date was as follows: Trade receivables, being Statement of Financial Position exposure before hedging activities 31 July 2013 31 July 2012 USD $’000 37,803 Euro $’000 3 USD $’000 15,606 Euro $’000 - The Group holds derivative contracts with notional balances of $159m (31 July 2012: $126m) in respect of future sale transactions. The Group’s exposure to foreign currency in the period ended 31 July 2013 is limited to it’s sales of milk powder, purchases of raw materials for production and capital equipment purchases. (ii) Interest rate risk Interest rate risk is the risk that the value of the Group’s assets and liabilities will fluctuate due to changes in market interest rates. The Group is exposed to interest rate risk primarily through its bank overdrafts and borrowings. The Group manages it’s interest rate risk by using interest rate swaps to hedge it’s floating rate debt. The Group has a Board approved treasury policy that sets the parameters to the extent of the cover taken. As at the reporting date, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: Less than 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years 31 July 2013 31 July 2012 Weighted average interest rate % 4.32% 5.23% 4.89% 4.04% - Balance $’000 105,129 57,527 39,000 20,000 - Weighted average interest rate % 4.81% 4.32% 5.23% 4.89% 4.04% Balance $’000 93,000 105,129 57,527 39,000 20,000 The above balances include forward start swap contracts for various periods and do not reflect the current active contracts held at any one point in time. page 75 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (iii)Sensitivity analysis In managing interest rate risks, the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer-term, however, changes in interest rates will have an impact on profit. The following table summarises the sensitivity of the Group’s profit and equity to interest rate risk and foreign exchange risk. Consolidated 31 July 2013 1% increase in interest rate 1% decrease in interest rate Group Parent 2013 2012 2013 2012 Profit $’000 - - Equity $’000 (473) 473 Profit $’000 - - Equity $’000 (1,070) 1,070 Profit $’000 Equity $’000 Profit $’000 Equity $’000 - - - - - - - - 5% increase in exchange rate 19 (4,627) 1,239 (3,305) 19 (4,627) 1,239 (3,305) 5% decrease in exchange rate (18) 4,187 (1,121) 2,990 (18) 4,187 (1,121) 2,990 (b)credit risk The Group’s exposure to credit risk is mainly influenced by its customer base and banking counterparties. Management has a credit policy in place under which each new customer is rigorously analysed for credit worthiness. Investments and derivatives are only made with reputable financial banks. The carrying amount of financial assets represents the Group’s maximum credit exposure. Synlait Milk Limited guarantees all facilities held by Synlait Milk Finance Limited. (c)liquidity risk Liquidity risk represents the Group’s ability to meet its contractual obligations. The Group evaluates its liquidity requirements on an ongoing basis. The Group has negotiated banking facilities sufficient to meet it’s medium term facility requirements. The Group has internal limits in place in order to reduce exposure to liquidity risk, as well as having committed lines of credit. It is the Group’s policy to provide credit and liquidity enhancements only to wholly owned subsidiaries. Less than 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total $’000 $’000 $’000 $’000 $’000 33,605 57,536 47,697 2,054 4,379 145,271 5,141 70,619 13,997 25,258 2,582 117,597 357 - - 2,836 440 3,633 - - - 70,768 1,037 71,805 - - - 29,686 - 29,686 - - - - 697 697 - - - - - - - - - - - - 33,962 57,536 47,697 34,576 4,819 178,590 5,141 70,619 13,997 96,026 4,316 190,099 Group At 31 July 2013 Working Capital Facility Trade and other payables Trade finance facility Loans and borrowings Derivative financial instruments Total At 31 July 2012 Working Capital Facility Trade and other payables Trade finance facility Loans and borrowings Derivative financial instruments Total page 76 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Parent At 31 July 2013 Trade and other payables Trade finance facility Advances from subsidiary Derivative financial instruments Total At 31 July 2012 Working Capital Facility Trade and other payables Trade finance facility Loans and borrowings Derivative financial instruments Total (d)financial instruments by category Less than 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years $’000 $’000 $’000 $’000 57,421 47,697 66,506 2,980 174,604 5,141 70,619 13,997 26,473 2,582 118,812 - - 3,193 - 3,193 - - - 73,825 1,037 74,862 - - 29,124 - 29,124 - - - - 697 697 - - - - - - - - - - - Group Financial assets as per financial position At 31 July 2013 Cash and cash equivalents Derivative financial instruments Trade and other receivables Total At 31 July 2012 Cash and cash equivalents Derivative financial instruments Trade and other receivables Total Assets at fair value through profit or loss Derivatives used for hedging Loans and receivables Held to maturity investments Available for sale $’000 $’000 $’000 $’000 $’000 - 1,224 - 1,224 - 4,109 - 4,109 - - - - - - - - 2,365 - 59,134 61,499 666 - 20,884 21,550 - - - - - - - - - - - - - - - - Total $’000 57,421 47,697 98,823 2,980 206,921 5,141 70,619 13,997 100,298 4,316 194,371 Total $’000 2,365 1,224 59,134 62,723 666 4,109 20,884 25,659 page 77 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Parent Financial assets as per financial position At 31 July 2013 Cash and cash equivalents Derivative financial instruments Trade and other receivables Total At 31 July 2012 Cash and cash equivalents Derivative financial instruments Trade and other receivables Total Group Derivatives used for hedging Assets at fair value through profit or loss Loans and receivables Held to maturity investments Available for sale $’000 $’000 $’000 $’000 $’000 - 1,138 - 1,138 - 4,109 - 4,109 - - - - - - - - 31,486 - 59,134 90,620 666 - 20,884 21,550 - - - - - - - - - - - - - - - - Derivatives used for hedging Liabilities at fair value through profit or loss At amortised cost $’000 $’000 $’000 Financial liabilities as per financial position At 31 July 2013 Derivative financial instruments Working Capital Facility Trade Finance Facility Trade and other payables Loans and borrowings Total At 31 July 2012 Derivative financial instruments Working Capital Facility Trade Finance Facility Trade and other payables Loans and borrowings Total 4,819 - - - - 4,819 4,316 - - - - 4,316 page 78 i Total $’000 31,486 1,138 59,134 91,758 666 4,109 20,884 25,659 Total $’000 4,819 33,079 46,924 57,535 27,917 4,316 2,344 13,617 70,620 91,768 - 33,079 46,924 - - - - 57,535 57,535 170,274 27,917 107,920 - 2,344 13,617 91,768 107,729 - - - - - - 70,620 70,620 182,665 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Parent At 31 July 2013 Derivative financial instruments Trade Finance Facility Trade and other payables Advances from subsidiary Total At 31 July 2012 Derivative financial instruments Working Capital Facility Trade Finance Facility Trade and other payables Loans and borrowings Total Derivatives used for hedging $’000 Liabilities at fair value through profit or loss $’000 At amortised cost $’000 2,980 - - - - 46,924 - - - - 57,421 91,281 Total $’000 2,980 46,924 57,421 91,281 2,980 46,924 148,702 198,606 4,316 - - - - 4,316 - 2,344 13,617 - - - - 70,620 4,316 2,344 13,617 70,620 91,768 91,768 107,729 - 70,620 182,665 (e) fair value estimation The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1). Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). The following table presents the Group’s assets and liabilities that are measured at fair value at 31 July 2013. Group At 31 July 2013 Assets Derivative financial instruments Total assets Liabilities Derivative financial instruments Total liabilities At 31 July 2012 Assets Derivative financial instruments Total assets Liabilities Derivative financial instruments Total liabilities Level 1 Level 2 Level 3 Total balance $’000 $’000 $’000 $’000 - - - - - - - - 1,224 1,224 4,819 4,819 4,109 4,109 4,316 4,316 - - - - - - - - 1,224 1,224 4,819 4,819 4,109 4,109 4,316 4,316 page 79 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Parent At 31 July 2013 Assets Derivative financial instruments Total assets Liabilities Derivative financial instruments Total liabilities At 31 July 2012 Assets Derivative financial instruments Total assets Liabilities Derivative financial instruments Total liabilities Level 1 Level 2 Level 3 Total balance $’000 $’000 $’000 $’000 - - - - - - - - 1,138 1,138 2,980 2,980 4,109 4,109 4,316 4,316 - - - - - - - - 1,138 1,138 2,980 2,980 4,109 4,109 4,316 4,316 The fair value of financial instruments traded in active markets is based on quoted market prices at the balance date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in Level 1. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. Specific valuation techniques used to value financial instruments include: Quoted market prices or dealer quotes for similar instruments; The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance date, with the resulting value discounted back to present value; Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments. Note that all of the resulting fair value estimates are included in Level 2. page 80 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 24 deriVatiVes Derivative balances comprise of: Foreign currency forward contracts Interest rate swaps Balance at end of period Classified as: Non current asset Current asset Non current liabilities Current liabilities Balance at end of period 25 contingencies Group Year ended Parent Year ended 2013 $’000 (1,841) (1,754) (3,595) 86 1,138 (440) (4,379) (3,595) 2012 $’000 3,756 (3,963) (207) - 4,109 (1,734) (2,582) (207) 2013 $’000 (1,842) - (1,842) - 1,138 - (2,980) (1,842) 2012 $’000 3,756 (3,963) (207) - 4,109 (1,734) (2,582) (207) As at 31 July 2013 the Parent entity and Group had no contingent liabilities or assets (2012:$Nil). 26 commitments (a) capital commitments Capital expenditure contracted for at the end of the reporting period but not yet incurred is as follows: Lactoferrin project Blending plant Canning line Drystore 3 Total Group Parent 2013 $’000 9,790 4,947 10,428 13,557 38,722 2012 $’000 - - - - - 2013 $’000 9,790 4,947 10,428 13,557 38,722 2012 $’000 - - - - - The above balances have been committed for completion in the 2014 financial year in relation to future expenditure on capital projects. Amounts already spent have been included as work in progress (i)Operating lease commitments – group/company as lessee Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years Greater than five years Total Group 2013 $’000 578 144 - 722 2012 $’000 840 - - 840 Parent 2013 $’000 578 144 - 722 2012 $’000 840 - - 840 The operating leases relate to the leasing of warehouse space, vehicles and printers. All terms are reviewed on a regular basis. All leases are subject to potential renewal. page 81 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 27 related party transactions (a) parent entity The parent entity is Bright Dairy Holding Limited and the ultimate parent is Bright Dairy and Food Limited which is domiciled in the Peoples Republic of China. Bright Dairy Holding Limited hold 39.12% of the shares issued by the Company (2012: 51%) (b) other related entities Synlait Farms Limited was a wholly owned subsidiary of Synlait Limited who supplied milk on an arms length basis to Synlait Milk Limited. As of 28 February 2013 Synlait Farms Limited is no longer a subsidiary of Synlait Limited. In June 2013 a subsidiary of Synlait Milk Limited, Synlait Milk Finance Limited, was set up primarily for holding all banking facilities for the Group and related interest rate swaps. Funding is loaned to Synlait Milk Limited and appropriate interest is charged. (c) key management and personnel compensation Other than their salaries and bonus incentives, there are no other cash benefits paid or due to directors and executive officers as at 31 July 2013. The total short-term benefits paid to the key management and personnel is set out below. Short-term benefits 2013 $’000 2012 $’000 2,848 960 d) other transactions with key management personnel or entities related to them Information on transactions with key management personnel or entities related to them, other than compensation, are set out below. (i) Loans to directors There were no loans to directors issued during the period ended 31 July 2013 (2012: $nil). (ii) Other transactions and balances Key management personnel subscribed in cash for new ordinary shares issued by the Company and Group during the year. The shares were acquired on the same terms and conditions that applied to other shareholders. Directors of the Company control 3.8% of the voting shares of the Company at balance date (2012: 13.3% indirectly through their shareholdings in Synlait Limited) (e) subsidiaries Interests in subsidiaries are set out in note 27. (f) directors and key management personnel Disclosures relating to directors and specified executives are set out in the Statutory Information section. page 82 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 (g) transactions with related parties Purchase of goods and services Bright Dairy and Food Co Ltd - Directors fees Synlait Farms Limited - Purchase of raw milk Sale of goods and services Bright Dairy and Food Co Ltd - Sale of milk powder products 8,470 Bright Dairy and Food Co Ltd - Reimbursement of costs Synlait Farms Limited - Management fees received Finance costs Synlait Milk Finance Limited 87 33 - Group Year ended Parent Year ended 2013 $’000 183 42,420 2012 $’000 165 32,804 4,604 181 113 2013 $’000 183 42,420 8,470 87 33 2012 $’000 165 32,804 4,604 181 113 - 114 - Note that as at 28 February 2013 Synlait Farms Limited ceased to be a related party due to divestment from Synlait Limited. (h) outstanding balances The following balances are outstanding at the reporting date in relation to transactions with related parties: Receivables Bright Dairy and Food Co Ltd - Sale of milk powder products Bright Dairy and Food Co Ltd - Reimbursement of costs Synlait Farms Limited - Management fees received Payables Bright Dairy and Food Co Ltd - Directors fees Synlait Farms Limited - purchase of raw milk Synlait Milk Finance Limited Group Year ended 2013 $’000 325 58 - - 4,439 - 2012 $’000 481 (39) 8 14 6,817 - Parent Year ended 2013 $’000 325 58 - - 4,439 91,281 2012 $’000 481 (39) 8 14 6,817 - page 83 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 28 inVestments in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2(a): Name of entity Country of incorporation Class of shares Equity holding Synlait Milk Finance Limited New Zealand Ordinary 2013 % 100 2012 % - In June 2013 a subsidiary, Synlait Milk Finance Limited, was set up primarily for holding all banking facilities for the Group and related interest rate swaps. Funding is loaned to Synlait Milk Limited and appropriate interest is charged. 29 comparison of prospectiVe financial information Prospective Statement of Comprehensive Income For the year ending 31 July 2013 Revenue Cost of sales Gross Profit Other income Sales and distribution expenses Administrative and operating expenses Earnings before net finance expense and income tax1 Add back depreciation and amortisation expense1 Earnings before net finance expese, income tax, depreciation and amortisation1 Net financing costs Profit before income tax Income tax expense Profit for the year Group Group Year ended Year ended 2013 2013 Notes Actual Prospectus Variance a b c d e $’000 420,010 (354,862) 65,148 1,587 (23,478) (14,978) 28,279 10,182 38,461 $’000 426,426 (361,827) 64,599 195 (23,079) (14,230) 27,485 9,963 37,448 (12,253) (12,431) 16,026 (4,498) 11,528 15,054 (4,215) 10,839 $’000 (6,416) 6,965 549 1,392 (399) (748) 794 219 1,013 178 972 (283) 689 Items that may be reclassified subsequently to profit and loss Effective portion of changes in fair value of cash flow hedges (3,387) (2,350) (1,037) Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total comprehensive income for the year (337) 1,043 8,847 643 743 9,875 (980) 300 (1,028) 1 The above Non GAAP financial information was included in the prospectus and therefore has been included in these financial statements for comparative purposes. page 84 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Explanation of variances (a) Revenue for the year was lower than PFI by $6.4m, primarily due to a reduction in Infant Formula and Nutritional volumes sold. Demand for Infant formula products were affected in the last quarter of the financial year primarily due to proposed regulatory changes announced in China causing product order and delivery delays as customers absorbed the impact of these changes. (b) Gross profit was up $0.5m compared to PFI due primarily to higher prices achieved on ingredients products and higher margins achieved on nutritional products. (c) Earthquake insurance proceeds received of $1.3m are included in Other Income, while the associated earthquake repair costs of $0.6 are included in manufacturing costs. (d) Sales and distribution expenses are higher than PFI due to additional warehouse rent. (e) Administration and operating expenses are above PFI due to higher than anticipated travel costs, computer expenses, and internal costs that were unable to be capitalised. Prospective Statement of Changes in Equity For the year ending 31 July 2013 Group Group Year ended Year ended 2013 2013 Notes Actual Prospectus Variance Equity at the start of the period Accounting policy change to monthly milk price Restated Equity at the start of the period Profit for the year Items that may be reclassified subsequently to profit and loss Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on income and expenses recognised directly in equity f f Total other comprehensive loss Issue of new shares Share issue costs Total contributions by and distributions to owners Equity at the end of the period $’000 88,244 (1,953) 86,291 11,528 $’000 88,244 (1,953) 86,291 10,839 $’000 - - - 689 (3,387) (2,350) (1,037) (337) 1,043 (2,681) 75,000 (6,100) 68,900 643 743 (964) 75,000 (6,175) 68,825 (980) 300 (1,717) - 75 75 164,038 164,991 (953) Explanation of variances (f) Movement in reserves due to the mark to market value of derivatives being higher than PFI. page 85 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Prospective Financial Position As at 31 July 2013 Assets Current assets Cash and cash equivalents Trade and other receivables Goods and services tax refundable Income accruals and prepayments Inventories Derivative financial instruments Total current assets Non‑current assets Property, plant and equipment Intangible assets Derivative financial instruments Total non-current assets Total assets Liabilities Current liabilities Working Capital Facility Trade and other payables Trade Finance Facility Derivative financial instruments Total current liabilities Non‑current liabilities Loans and borrowings Deferred tax liabilities Derivative financial instruments Total non-current liabilities Total liabilities Equity Share Capital Reserves Retained (deficit) / earnings Total equity attributable to equity holders of the Company Total equity and liabilities page 86 i Group Group Year ended Year ended 2013 2013 Notes Actual Prospectus Variance $’000 $’000 $’000 j g h m i k m j l m n m m 2,365 59,134 2,917 570 65,025 1,138 - 68,876 2,771 784 58,847 - 131,149 131,278 210,780 217,954 4,052 86 214,918 346,067 33,079 57,535 46,924 4,379 230 - 218,184 349,462 39,755 60,959 48,478 1,104 141,917 150,296 27,917 11,755 440 40,112 182,029 172,548 6,175 (14,685) 164,038 346,067 20,950 11,772 1,453 34,175 184,471 172,473 7,892 (15,374) 164,991 349,462 2,365 (9,742) 146 (214) 6,178 1,138 (129) (7,174) 3,822 86 (3,266) (3,395) (6,676) (3,424) (1,554) 3,275 (8,379) 6,967 (17) (1,013) 5,937 (2,442) 75 (1,717) 689 (953) (3,395) Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Explanation of variances (g) Accounts receivable were $9.7m lower than PFI due to a strong focus on cash collections. (h) Inventories were $6.2m higher than PFI due to higher Infant protein raw material on hand and higher Infant and special milk stock on hand. (i) Property, plant and equipment was $7.2m lower than the PFI predominantly due to there being lower payments than expected associated with capital projects. (j) Net working capital facility is below the PFI, primarily due to management deciding to defer making a voluntary repayment of $10m to the Revolving Credit Facility (Loans and Borrowings). (k) Intangibles are $3.8 m higher due to computer software assets having been disclosed in Property, Plant and Equipment in the PFI. (l) Trade and other payables are $3.4m lower than the PFI due to timing of ingredients purchases and payments assumed in the PFI. (m) Derivative financial instruments are a net $1.0m higher than PFI, spread over assets and liabilities. This is primarily due to the foreign exchange ‘out of the money position’ with cover on hand at year end at rates higher than the spot rates. The mark to market movement being reflected in reserves. (n) Loans and borrowings are $7.0m higher than PFI due to the deferment in making a $10.0 m voluntary repayment before the balance date, offset by the slower than expected capital project payments assumed in the PFI. page 87 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I nOTEs TO THE FInAnCIAL sTATEMEnTs FOR THE yEAR EnDIng 31 JULy 2013 Prospective Cash Flow Statement For the year ending 31 July 2013 Notes Cash flows from operating activities Cash receipts from customers Cash paid for milk purchased Cash paid to other creditors and employees Goods and services tax refunds Income tax refunds Net cash inflow/(outflow) from operating activities Cash flows from investing activities Interest received Acquisition of property, plant and equipment Acquisition of intangibles Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds and costs from issue of shares Repayment of borrowings Receipt of borrowings Interest paid Net cash inflow/(outflow) from financing activities Net decrease in cash and cash equivalents Net overdraft at beginning of period Net overdraft at end of period1 o p q r Group Group Year ended Year ended 2013 2013 Actual Prospectus Variance $’000 $’000 $’000 415,907 (289,268) (141,231) 575 229 413,382 (288,586) (134,010) 723 228 2,525 (682) (7,221) (148) 1 (13,788) (8,263) (5,525) 1,272 (7,989) (55) (6,772) 68,900 (64,521) 670 (13,525) (8,476) (29,036) (1,678) (30,714) 62 (15,237) - (15,175) 69,568 (81,120) 9,840 (12,927) (14,639) (38,077) (1,678) (39,755) 1,210 7,248 (55) 8,403 (668) 16,599 (9,170) 598 7,359 10,237 - 10,237 1Net working capital facility is used in the comparison to PFI Statement of Cash Flows for comparability purposes as this is how it was treated in the Prospectus. In the financial statements cash and cash equivalent is used and this will be the treatment going forward. Explanation of variances (o) Sales receipts are $2.5m higher than PFI due to higher cash collections from customers at the end of July offset by the lower sales volumes. (p) Cash paid to creditors are $7.2m higher than the PFI, due to payments for raw materials and other creditors occurring before year end. (q) Cash purchases of Property, Plant and Equipment are $7.2m lower than PFI as payments for capital projects have been slower than expected. (r) Net borrowings is $7.4m less than the PFI, due to the deferment of a $10m voluntary repayment assumed in the PFI, offset by lower drawdowns relating to lower spend on capital projects to July 2013. 30 eVents occurring after the reporting period There were no events occurring subsequent to balance date which require adjustment to or disclosure in the financial statements. page 88 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 ISynlait Milk Limited Financial Statements for the year ended 31 July 2013 AUDITOR’s REpORT INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF SYNLAIT MILK LIMITED report on the financial statements We have audited the financial statements of Synlait Milk Limited and group on pages 49 to 88, which comprise the consolidated and separate statements of financial position of Synlait Milk Limited, as at 31 July 2013, the consolidated and separate statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. This report is made solely to the Company’s shareholders, as a body, in accordance with Section 205(1) of the Companies Act 1993. Our audit has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed. board of directors’ responsibility for the financial statements The Board of Directors are responsible for the preparation of financial statements in accordance with generally accepted accounting practice in New Zealand and that give a true and fair view of the matters to which they relate, and for such internal control as the Board of Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. auditor’s responsibilities Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and International Standards on Auditing (New Zealand). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements that give a true and fair view of the matters to which they relate in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates, as well as the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Other than in our capacity as auditor, investigating accountant and auditor in respect of the 24 June 2013 IPO, the provision of financial model assurance services, taxation consulting services and other advisory services we have no relationship with or interests in Synlait Milk Limited or its subsidiary. page 89 Synlait Milk Limited Financial Statements for the year ended 31 July 2013 I AUDITOR’s REpORT COnT... opinion In our opinion, the financial statements on pages 49 to 88: - comply with generally accepted accounting practice in New Zealand; - comply with International Financial Reporting Standards; and - give a true and fair view of the financial position of Synlait Milk Limited and group as at 31 July 2013, and their financial performance and cash flows for the year then ended. report on other legal and regulatory reQuirements We also report in accordance with section 16 of the Financial Reporting Act 1993. In relation to our audit of the financial statements for the year ended 31 July 2013: - we have obtained all the information and explanations we have required; and - in our opinion proper accounting records have been kept by Synlait Milk Limited as far as appears from our examination of those records. Chartered Accountants 23 September 2013 Christchurch, New Zealand WE’RE COMMITTED TO A HIgH pERFORMAnCE WORKIng EnVIROnMEnT page 90 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 i Synlait Milk Limited Financial Statements for the year ended 31 July 2013 cOMPanY discLOsuRes WE’RE COMMITTED TO A HIgH pERFORMAnCE WORKIng EnVIROnMEnT Synlait Milk Limited Financial Statements for the year ended 31 July 2013 i page 91 sTATUTORy InFORMATIOn stock eXchange listing Our shares are listed on the Main Board of the New Zealand Stock Exchange (NZX). shares on issue As at 31 July 2013 we had 146,341,197 ordinary shares issued to 2,412 holders. top 20 shareholders Our top 20 shareholders as at 31 July 2013 are as follows: Rank Name 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Bright Dairy Holding Limited FNZ Custodians Limited Mitsui & Co.Limited Citibank Nominees (New Zealand) Limited - NZCSDJohn Penno Mitsui & Co.(Australia) Limited Ben Dingle Tea Custodians Limited - NZCSD HSBC Nominees (New Zealand) Limited - NZCSD Jpmorgan Chase Bank NA - NZCSD New Zealand Superannuation Fund Nominees Limited -NZCSD Accident Compensation Corporation - NZCSD Juliet Maclean Falcon Rural Investments Limited Custodial Services Limited BNP Paribas Nominees (NZ) Limited - NZCSD Paul Lancaster + Bronwyn Lancaster National Nominees New Zealand Limited - NZCSD Horo Holdings Limited Therese Roche Units at 31 Jul 2013 % of Units 57,247,647 13,977,713 7,373,331 5,428,175 5,423,817 4,915,556 4,543,666 3,835,769 2,420,357 2,270,099 1,959,012 1,837,094 1,298,212 1,237,797 1,193,350 1,124,117 1,121,723 912,673 902,292 900,000 39.12 9.55 5.04 3.71 3.71 3.36 3.10 2.62 1.65 1.55 1.34 1.26 0.89 0.85 0.82 0.77 0.77 0.62 0.62 0.62 Totals: Top 20 holders of Ordinary Shares Total Remaining Holders Balance 119,922,400 26,418,797 81.95 18.05 substantial shareholders A ‘substantial shareholder’ is defined in the Securities Markets Act 1988. Shareholders are required to disclose their holdings to us and to our share registrar by giving a ‘Substantial Shareholder Notice’ when: They begin to have a substantial shareholding (5% or more of our shares) There is a subsequent movement of 1% or more in a substantial holding, or if they cease to be have a substantial holding There is any change in the nature or interest in a substantial holding The following Substantial Shareholder Notices were received as at the date of this Annual Report: page 92 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 sTATUTORy InFORMATIOn COnT... Bright Dairy Holding Limited FrieslandCampina Mitsui & Co. Limited distribution of shareholders As at 31 July 2013. Range 1 - 99 100 - 199 200 - 499 500 - 999 1,000 - 1,999 2,000 - 4,999 5,000 - 9,999 10,000 - 49,999 50,000 - 99,999 100,000 - 499,999 500,000 - 999,999 1,000,000 and over Total Total holders 3 7 35 73 165 1,273 434 352 21 28 10 11 2,412 Fully Paid Shares Percentage of Paid Capital 57,247,647 10,975,590 12,288,887 Units 216 884 11,139 48,993 219,275 3,425,216 2,708,323 6,059,850 1,541,020 5,984,254 6,772,954 119,569,073 146,341,197 39.12 7.50 8.40 % of Issued Capital 0.00 0.00 0.01 0.03 0.15 2.34 1.85 4.14 1.05 4.09 4.63 81.71 100.00 Voting rights Section 16 of our Constitution states that a shareholder may vote at any meeting of shareholders in person or through a representative. Where voting is by a show of hands or voice, every shareholder present (or through their representative) has one vote. In a poll, every shareholder present (or through their representative) has one vote per fully-paid up share they hold. Unless the Board determines otherwise, shareholders may not exercise the right to vote at a meeting by casting postal votes. More detail on voting can be found in our Constitution at the following link - www.synlait.com/site/uploads/2013/07/Synlait- Milk-Limited-Constitution.pdf trading statistics Synlait Milk Limited listed on NZX on the 23 July 2013 at an initial share price of $2.20. The trading range for the 9 days of trading from initial listing is shown below: Minimum: Maximum: Range: Total Shares Traded: diVidend policy $2.61 $2.80 $2.61 - $2.80 11,550,218 The Board has a Dividend Policy to determine whether it is appropriate to declare a dividend for shareholders in any financial year. The policy provides that any decision to pay a dividend will depend on, amongst other things: − Current and forecasted earnings − Internal capital requirements − Availability of tax imputation credits and page 93 Synlait Milk Limted Annual Report 2013 I sTATUTORy InFORMATIOn COnT... − Synlait Milks debt/equity position Any dividend can only be declared by the Board if the requirements of the Companies Act 1993 are also satisfied. The Board has determined no dividend will be payable in the periods ending 31 July 2013 or 31 July 2014. nZX waiVers We have received various waivers from NZX to allow our Constitution and the composition of our Board to reflect our non- standard governance arrangements. Full details of the waivers granted by the NZX can be found at the following link: www.nzx.com/files/attachments/178616.pdf directors’ remuneration The total remuneration and other benefits to Directors (and past Directors) for services for the year ended 31 July 2013 were: Director Graeme Milne Bill Roest Sam Knowles Li Ke Dong Zongbo Yang Sihang Class Independent Independent Independent Bright Appointed Bright Appointed Bright Appointed Position Chairman Retired / Appointed Total Remuneration Chairman Audit & Risk Appointed 8 May 2013 Appointed 4 July 2013 Ruth Richardson Bright Appointed Chairman Remunera- tion & Governance John Penno 1 Ben Dingle Board Appointed Managing Director Board Appointed Zhang Dazheng Board Appointed Retired 8 May 2013 Retired 8 May 2013 $83,000 $13,696 $4,035 $45,333 $49,190 $45,333 $50,333 $645,765 $34,365 $40,043 1. As Managing Director, John Penno does not receive directors fees. His remuneration received in the year to 31 July 2013 listed above constitutes payment for his position as Managing Director and Chief Executive Officer. directors’ interests Directors’ interests recorded in the Interests Register of the Company as at 31 July 2013 are set out as follows: Graeme Roderick Milne Director, Genesis Power Limited Chairman, New Zealand Pharmaceuticals Ltd Chairman, Terracare Ltd Chairman, Waikato District Health Board Director, New Zealand Institute for Rare Disease Research Ltd Trustee, Rockhaven Trust Partner, G R & J A Milne Chairman, Jones Disease Research Consortium Chairman, Rural Broadband Initiative National Advisory Committee Director, Farmers Mutual Group Director, Alliance Group Ltd Member, NZ Meat Industry Strategy Co-ordination Group Member, Massey University School of Advanced Engineering and Technology (SEAT) Advisory Board Sole Shareholder and Chairman, Synlait Milk Limited page 94 i Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 sTATUTORy InFORMATIOn COnT... Ruth Margaret Richardson Chairman, Jade Corporation Chairman, Kula Fund Director, Ruth Richardson [NZ] Ltd Chair, SYFT Technologies Limited Chairman, Kiwinet Director, The New Zealand Merino Company Chairman, Synlait Limited Director, Synlait Milk Limited Director, Synlait Milk Finance Limited Willem Jan Roest Director, Fisher & Paykel Appliances Ltd Director, Housing Foundation Ltd Trustee, New Zealand Housing Foundation Trustee, WJ & IJ Family Trust Director, Synlait Milk Limited Director, Synlait Milk Finance Limited Ms Li Ke Employee, Bright Dairy Ltd – substantial Shareholder in SML Director, Synlait Milk Limited Director, Synlait Milk Finance Limited Mr Dong Zongbo Employee, Bright Dairy Ltd – substantial Shareholder in Synlait Milk Limited Director, Synlait Milk Limited Director, Synlait Milk Finance Limited Mr Yang Sihang Employee, Bright Dairy Ltd – substantial Shareholder in SML Director, Synlait Milk Limited Director, Synlait Milk Finance Limited John William Penno Trustee, John Penno Trust Director, Synlait Farms Limited Director, Synlait Milk Limited Director, Synlait Milk Finance Limited Ian Samuel Knowles Chairman, Xero Ltd Director, Trustpower Ltd Director, Rangatira Ltd Chairman, Unlimited Realities Ltd Chairman, Partners Life Ltd Chairman, OnBrand Ltd Director, Magritek Ltd Director, SLI Systems Ltd Trustee, Te Omanga Hospice page 95 Synlait Milk Limted Annual Report 2013 I sTATUTORy InFORMATIOn COnT... Trustee, United World College NZ Director, Angel HQ Inc Director, Com Investments Ltd Director, Growthcom Ltd Director, Habourside Rentals Ltd Trustee, Ruby Trust, Com Trust and Ian Samuel Knowles Children’s Trust Director, Synlait Milk Finance Limited directors’ shareholding in synlait The Directors’ respective shareholding in Synlait as at 31 July 2013 is as follows: John Penno Graeme Milne Ruth Richardson Sam Knowles Willem (Bill) Roest Directly Held 5,423,817 59,526 46,000 45,000 22,750 subsidiary company directors The following Companies were subsidiaries of Synlait Milk Limited as at 31 July 2013. Synlait Milk Finance Limited Directors: John Penno, Graeme Milne, Bill Roest, Sam Knowles, Ruth Richardson, Li Ke, Dong Zongbo, Yang Sihang diVersity We are committed to hiring and retaining the best people for the job – regardless of gender, age, disability, religion, race, sexual orientation, family circumstances, politics and ethnicity. We pride ourselves on having an inclusive working environment that promotes employment equity and workforce diversity at all levels – from factory floor to Board table. In accordance with NZX requirements, our reported gender breakdown at Senior Management and Board level as at 31 July 2013 is: Board Senior Management Team Female 2 1 Male 6 8 Total % Female 8 9 25 11 employee remuneration During the year ended 31 July 2013 the following employees and former employees received individual remuneration over $100,000: Remuneration range $100,000 - $110,000 $110,000 - $120,000 $120,000 - $130,000 $130,000 - $140,000 page 96 i Number of employees 8 5 4 2 Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 sTATUTORy InFORMATIOn COnT... $140,000 - $150,000 $150,000 - $160,000 $160,000 - $170,000 $170,000 - $180,000 $240,000 - $250,000 $260,000 - $270,000 $270,000 - $280,000 $300,000 - $310,000 $310,000 - $320,000 $360,000 - $370,000 $390,000 - $400,000 $640,000 - $650,000 donations 1 3 2 3 1 1 1 1 1 1 1 1 For the year ended 31 July 2013 we donated $43,035.70 to charitable organisations. directors’ and officers’ liability insurance In accordance with section 162 of the Companies Act 1993 and our constitution, we indemnify and insure Directors and Officers against liability to other parties that may arise from their position. This is through the Company and the Directors entering into Deeds of Access, Insurance and Indemnity. Details are maintained in the Company’s Interests Register. This cover does not apply to any liabilities arising from criminal or reckless acts by our Directors or Officers. currency Within this Annual Report, all amounts are in New Zealand dollars unless otherwise specified. credit rating We do not have a credit rating. annual shareholder meeting Our inaugural annual shareholder meeting is expected to be held on Tuesday 3 December 2013 in Christchurch. We will confirm the details of the time and place by notice to all our shareholders nearer to that date. annual report Our Annual Report is available on our website at www.synlait.com/investors/corporate-governance/ and will be emailed out to those shareholders opting for e-communication with us and our share registry. We prefer to communicate with our shareholders promptly by email without using up valuable printing resources, but any shareholder who does request a hard copy of our Annual Report will be sent one in the regular post. further information online This Annual Report, all our core governance documents (our Constitution, some of our key Policies and Charters) and all our announcements can be viewed on our website: www.synlait.com/investors/corporate-governance/ page 97 Synlait Milk Limted Annual Report 2013 I DIRECTORy registered office 1028 Heslerton Road, Rakaia, Rd 13, New Zealand Telephone: +64 3 373 3000 Email: info@synlait.com board of directors Graeme Roderick Milne (Chair of the Board) – Independent Director Willem (Bill) Jan Roest (Chair of the Audit and Risk Committee) – Independent Director Ian Samuel Knowles – Independent Director John William Penno (Managing Director) – Board Appointed Director Ke Li – Bright Dairy Director Zongbo Dong – Bright Dairy Director Sihang Yang – Bright Dairy Director lawyers Minter Ellison Rudd Watts Lumley Centre 88 Shortland St Auckland 1010 Duncan Cotterill 1 Sir William Pickering Drive Burnside Christchurch 8053 James & Wells Level 5, State Insurance Building 88 Division St Riccarton 8041 Christchurch bankers ANZ Bank New Zealand Limited The Bank of New Zealand Ruth Margaret Richardson (Chair of the Remuneration and Governance Committee) – Bright Dairy Director inVestment bankers First NZ Capital Securities Limited Goldman Sachs New Zealand Limited senior management John Penno – Chief Executive Officer & Managing Director share registrar Nigel Greenwood – Chief Financial Officer Matthew Foster – General Manager Supply Chain Tony McKenna – General Manager Nutritionals Natalie Lombe – General Manager Human Resources Mike Lee – General Manager Ingredients Neil Betteridge – General Manager Manufacturing Michael Stein – General Manager Quality Michael Wan – Marketing & Communications Manager Quentin Lowcay – General Counsel & Company Secretary auditor Deloitte 50 Hazeldean Rd Christchurch 8024 New Zealand page 98 i Computershare Investor Services Limited Private Bag 92119 Auckland 1142 Level 2 159 Hurstmere Rd Takapuna Auckland 06022 Freephone (within NZ): 0800 467 335 Telephone: +64 9 488 8777 Facsimile: +64 9 488 8787 managing your shareholding online To change your address, update your payment instructions and to view your registered details including transactions, please visit www.investorcentre.com/nz General enquiries can be directed to enquiry@computershare. co.nz Please assist our registry by quoting your CSN or shareholder number when making enquiries. other information Please visit us at our website www.synlait.com Synlait Milk Limted Annual Report 2013 ISynlait Milk Limted Annual Report 2013 page 99 Synlait Milk Limted Annual Report 2013 I Synlait Milk Ltd 1028 Heslerton Road RD13, Rakaia 7783 New Zealand P+ 64 3 373 3000 www.synlait.com