THE FO RMUL A Synlait Milk Limited Annual Report 2015 WE’VE TRANSFORMED OUR BUSINESS TO CREATE AN INTEGRATED SUPPLY CHAIN SOLUTION WITH UNCOMPROMISED QUALITY AT EVERY STEP. FROM ELITE FARMING TO STATE OF THE ART PROCESSING AND PACKAGING AT SOURCE – IT’S AN UNBROKEN CHAIN THAT WE CONTROL FROM START TO FINISH. WE CALL IT THE FORMULA. SOURCE MILK SUPPLIERS MANUFACTURING CAPABILITY CONSUMER PACKAGING PEOPLE CUSTOMERS SOURCE OUR UNIQUE CANTERBURY PLAINS LANDSCAPE AND CLIMATE IS ONE OF THE BEST DAIRY FARMING ENVIRONMENTS IN THE WORLD AND PROVIDES US WITH SURETY OF MILK SUPPLY. MILK SUPPLIERS BEST PRACTICE FARMING AND THE OPPORTUNITY TO PRODUCE DIFFERENTIATED MILKS ALLOW OUR MILK SUPPLIERS TO MAKE MORE FROM THEIR MILK AND HELP MEET CUSTOMER DEMAND FOR INNOVATIVE AND TRUSTED PRODUCTS. MANUFACTURING CAPABILITY WE HAVE ONE OF THE LARGEST INTEGRATED INFANT FORMULA MANUFACTURING SITES IN THE WORLD. THIS SETS US APART AND SUPPORTS US BECOMING THE WORLD LEADER IN INFANT NUTRITIONAL POWDERS. CONSUMER PACKAGING OUR ABILITY TO PACKAGE RETAIL-READY PRODUCTS AT SOURCE IN ONE OF THE MOST TECHNICALLY ADVANCED AND QUALITY CONTROLLED PLANTS IN THE WORLD MEANS WE CAN PROVIDE OUR CUSTOMERS THE COMPLETE INFANT NUTRITION SOLUTION. PEOPLE OUR STAFF ARE EXPERTS IN THEIR FIELDS AND BRING A WEALTH OF KNOWLEDGE AND EXPERIENCE TO OUR BUSINESS. IT’S OUR EXCEPTIONAL PEOPLE THAT ENABLES US TO BE SUCCESSFUL EVERY DAY. CUSTOMERS WE PARTNER WITH LEADING INTERNATIONAL CUSTOMERS AND TOGETHER WE DEVELOP PREMIUM PRODUCTS THAT MEET CONSUMER DEMAND FOR UNCOMPROMISED QUALITY AND SAFETY. CONTENTS Key Performance Indicators Pg 2 Company Profile Pg 20 Our Partnerships Pg 26 Chairman’s Report Pg 4 Board of Directors Profile Pg 22 Progressing up the value chain Chief Executive Officer’s Review Financial Review Pg 8 Pg 12 Senior Leadership Team Profile Pg 24 End to end confidence for consumers Developing strong partnerships Creating value inside the farm gate Quality raw materials Logistics partnership delivers value Our Place Pg 33 Our People Pg 36 Our Governance Pg 42 Our production capability Best place to work Packaging success Developing great people Our Corporate Governance Report Pg 45 Technical centre of excellence Leading from the front Our Financial Statements Pg 56 Responsible manufacturing Everyone home safe, every day Auditor’s Report Pg 99 Meet some of our people Statutory Information Pg 102 Directory Pg 112 I PAGE 1 Synlait Milk Limited Annual Report 2015 KEY PERFORMANCE INDICATORS PAGE 2 I Synlait Milk Limited Annual Report 2015 KEY PERFORMANCE INDICATORS Financial metrics Currency as stated (in millions) FY11 FY12 FY13 FY14 FY15 Income statement Revenue Gross profit EBITDA EBIT NPAT Underlying NPAT Revenue (USD per MT) Gross profit per MT (NZD) EBIT per MT sold (NZD) Net cash from / (used in) operating activities Balance Sheet Net operating assets Return on net operating assets1 Net return on capital employed (pre-tax) Debt / debt + equity (excl derivatives) Net debt / EBITDA Earnings per share Underlying earnings per share Foreign exchange rate (NZD:USD) Total milk price (kgMS)2 298.9 21.1 4.8 0.0 (3.1) (3.1) 376.8 420.0 600.5 448.1 46.0 22.1 13.4 4.4 4.4 65.1 38.5 28.3 11.5 11.5 77.1 43.8 32.4 19.6 19.6 71.0 40.9 26.3 10.6 12.2 3,848 3,644 3,894 5,214 3,610 385 0 9.2 159.4 0.0% 0.0% 53.0% 17.1 (3.21) (3.21) 0.729 7.76 594 173 29.8 751 326 (47.1) 824 346 58.7 726 269 16.4 180.9 10.4% 8.8% 50.2% 3.9 5.62 5.62 0.778 6.22 281.0 12.6% 13.1% 38.9% 2.7 10.21 10.21 0.804 5.89 353.4 11.0% 11.5% 45.1% 3.5 13.40 13.40 0.813 8.31 495.6 7.9% 6.9% 55.7% 6.4 7.21 8.35 0.788 4.54 Operational metrics FY11 FY12 FY13 FY14 FY15 Sales (MT) 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 (kgMS in thousands) 54,652 234 77,377 4,383 54,886 77,415 53,811 604 77,015 4,383 54,415 81,398 24,934 4,524 29,458 37,572 6,453 44,025 82,048 8,864 86,746 82,366 8,864 91,229 42,076 4,692 46,768 88,052 89,003 5,592 8,800 93,644 97,803 90,089 91,881 6,404 9,801 96,492 101,681 47,903 51,049 2,033 2,549 49,936 53,598 Certain comparatives within the five year performance indicators have been reclassified for comparative purposes, to ensure consistency with the current year. 1Return on net operating assets excludes capital work in progress. 2Total milk price for Synlait Milk suppliers on standard milk supply contracts, including average premiums paid. I PAGE 3 Synlait Milk Limited Annual Report 2015 CHAIRMAN’S REPORT Graeme Milne CHAIRMAN PAGE 4 I Synlait Milk Limited Annual Report 2015 CHAIRMAN’S REPORT I am pleased to report to shareholders on the seventh year Our reported NPAT for FY15 is $10.6 million. This was to be of operation for Synlait. Our vision is to become the world’s most innovative and trusted dairy company. We certainly took major steps in that direction again this year. expected following a significant one-off product mix benefit in FY14, combined with a year where debt and staffing levels increased significantly as the new initiatives mentioned above were constructed. Additionally, we took the opportunity to increase the relative milk price to our suppliers in what has In our June 2013 investment statement and prospectus we turned out to be the first of probably two very challenging detailed a number of growth initiatives that we planned years on farm. to execute over the next few years. In FY14 we built our 22,500m2 drystore, lactoferrin facility and state of the art blending and consumer packaging facility. During FY15 we brought those assets into production and the consequent products to market while starting construction on the next group of projects. These were our quality testing laboratory and administration building and dryer three (D3), which is a 10.5 metric tonne (MT) per hour infant formula and nutritional capable spray dryer. At year’s end these three growth initiatives were nearing completion with full commissioning to occur in FY16. In summary, FY15 was an extremely busy year where our focus was on operating the existing ingredients and bulk nutritionals business, bringing to market lactoferrin and also finished infant formula products in cans. We also executed the remaining growth initiatives efficiently along with recruiting and training a large contingent of new staff. Our total sales for the year were $448.1 million, which is a long way back from the $600.5 million achieved in FY14. This decrease is due to the fall in global commodity prices during the year and disguises the increase in value added products that we marketed during the year. Earnings before interest and tax (EBIT) at $26.3 million is below last year’s $32.4 million, as is our underlying net profit after tax (NPAT) of $12.2 million, compared to last year’s NPAT of $19.6 million. The distinguishing feature of this year for the international dairy market was the relentless decrease in market pricing throughout the year. International whole milk powder (WMP) prices in February 2014 were approximately US $5,000 per tonne, but thereafter a steady decrease began that saw prices down to US $3,000 per tonne by July 2014 and US $2,000 per tonne by July 2015. Subsequent prices fell even further below the US $2,000 mark, which is unsustainable from a farming perspective. The causes have been well articulated in the media and involve lower oil and gas prices leading to lower ethanol production for transport fuels, which leads to lower grain prices and then higher milk production in the Americas and Europe. Add to the mix the removal of quotas in the European Union from April 2015, the Russian ban on importation of many food substances including dairy products and an increase in Chinese milk production after large investments in the sector (leading to lower imports into that country), we see a near perfect storm of negative factors has eventuated. Ironically, the introduction of agriculture into the 1995 World Trade Organisation (WTO) agreement, and the consequent reduction of state intervention into international dairy markets, has led to a net improvement in overall terms of trade and also an increase in price volatility. The introduction in the last few years of large volumes of dairy products sold by auction has improved price discovery, but arguably it has increased volatility as well. The solution will, like in all markets, be provided by the problem - low prices will lead to lower production and increased consumer demand. I PAGE 5 Synlait Milk Limited Annual Report 2015 CHAIRMAN’S REPORT CONTINUED Looking forward our current investment phase is largely complete. The focus for FY16 is on commissioning D3 and continuing to develop our nutritional and infant formula products with key customers. Many new and developing products rely on changed farm practices to ensure that special milks are produced on farm and directed to specific production. You can read about examples of these in Our Partnerships from page 26. With these new products and the facilities to produce them, FY16 will be the first year where we can start to capitalise on the aforementioned growth initiatives programme. We therefore expect, at this stage, that based on the expected increase in volumes from both D3 and our blending and consumer packaging plant, profitability will be in advance of anything achieved to date. The question for our shareholders is how this situation and price volatility impacts our performance. Fundamentally it doesn’t as our business model adds value over the commodity price when prices are low or high. In fact, adding margin over low prices could be argued to be more achievable than the alternative. However, in practice, volatility does bring risk to the business and its results. Negative results would result from selling short in a falling market or going long in a rising market, and of course positive results are generated from the reverse. We have policies designed to keep our team within tightly prescribed boundaries to reduce, but of course not eliminate, the impact of price volatility. While our top line was definitely impacted by international price volatility, our bottom line was not particularly affected, but this disguises a great amount of work by all staff to achieve our result in a very difficult trading environment. For shareholders the sector’s negative sentiment during this period has weighed on our share price. The share price of Graeme Milne $3.45 on the 1 August 2014 is a long way from the $2.39 on CHAIRMAN the closing day of this financial year. There were no changes to the Board of Directors or to the Senior Leadership Team (SLT) during FY15. The Board has a great mix of skills with local directors Bill Roest, Sam Knowles and Hon. Ruth Richardson complemented by Li Ke, Sihang Yang and Zongbo Dong providing international and specifically Chinese market expertise. The SLT, ably led by Managing Director and Chief Executive Officer John Penno, continue to drive the company forward on our prescribed strategy. PAGE 6 I Synlait Milk Limited Annual Report 2015 Synlait Milk Limited Annual Report 2015 I PAGE 7 CHIEF EXECUTIVE OFFICER’S REVIEW John Penno MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER PAGE 8 I Synlait Milk Limited Annual Report 2015 CHIEF EXECUTIVE OFFICER’S REVIEW INCREASING OUR FOCUS INVESTMENT IN CAPABILITY We remain completely focused on making more from milk. Having quickly proven the strength of our strategy, In doing so, we believe we will build the world’s most trusted we are now coming to the end of a two year period of and innovative dairy company. building capacity. New Zealand only produces 3% of the milk produced and In July 2014 we commissioned our new blending and consumed in the world. At 650 million litres / year, our consumer packaging facility. A second shift was added in suppliers only produce 3% of New Zealand’s milk. With such June 2015 and we are now recruiting a third shift to meet a small share of the international market we can be very rapidly growing demand. This has improved margins through targeted with the customers we choose to partner with and reduced manufacturing costs and we can now blend and the products we manufacture for them. package 25,000 MT to 30,000 MT annually of infant formula Our strategy is to partner with leaders in the infant formula into 400g and 900g consumer cans. industry and manufacture finished infant formula, infant In April 2014 we commissioned our lactoferrin facility grade and nutritional powders, ingredient milk powders and with world-first production processes. While we faced special nutraceutical products. We want to differentiate our some challenges through commissioning, these have been offerings to create meaningful value for our customers and substantially resolved and we are now executing our strategy their consumers. to make more from milk as we increase sales volumes. Our milk supply is increasingly differentiated before it leaves the farm gate to offer the attributes affluent parents - focused on health and wellness - are seeking for their families. Our products are often distinguished by the milk they are manufactured from and nutraceutical products like our lactoferrin is differentiated by its functional properties. The past year has seen us grow our sales volumes to our multinational infant formula customers by 59% to 41,979 MT, so they now account for 43% of our total sales. Our sales of infant grade milk powders, nutritional base powders and consumer packaged infant formula has grown by 54% to 43,000 MT and sales volumes for finished infant formula has continued to build strongly through FY15. Our new 22,500m2 drystore has significantly increased our onsite storage capacity and supported the development of our logistics capabilities. This enabled us to reduce our reliance on external warehousing, which has significantly reduced our domestic freight costs. With D3 in the final stages of commissioning, we now have spray drying capacity to produce approximately 120,000 MT of infant base powder and infant grade skim and whole milk powder, 20,000 MT of anhydrous milk fat (AMF) and 20 MT of lactoferrin. From September 2015 our on-site quality testing laboratory, which includes a new product development centre, will be completed. As a result, we will have one of the largest and highest specification infant formula production sites globally with an integrated supply chain from source to our customers. I PAGE 9 Synlait Milk Limited Annual Report 2015 CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED MILK SUPPLY GROWING IN SCALE AND SOPHISTICATION While we are continuing to grow our milk supply base with 173 suppliers contracted for supply in FY16, the largest shift is toward the proportion of our milk supply that is truly differentiated. Our partnership with The a2 Milk Company™ continues to develop with our manufacturing of a2 Platinum® infant formula supporting their strong growth in the Australian market. Base powder for a2 Platinum® is manufactured using milk sourced exclusively from herds of cows that only produce the A2 beta-casein protein. We work in partnership with our suppliers to establish these herds on their farms and they receive a premium for the A2 milk they supply. The base powder is then mixed with final minor ingredients and blended before being packaged onsite into retail-ready cans, ready for sale in New Zealand and export to Australia and China. This model is also behind our recently announced partnership with Munchkin Inc. Munchkin is the leading brand of infant feeding equipment in the USA and is extending their product range into infant formula. This product, called Grass Fed, will be differentiated on the basis of being manufactured from milk exclusively produced from pasture-fed cows. This product is targeting the growing consumer awareness of the nutritional benefits of milk from animals grazing pasture rather than being farmed indoors on grain based diets. total of 173 contracted suppliers at an average distance of 47 kilometres from our processing site in Dunsandel. Combined with the expectation that we will take our full allocation of Dairy Industry Restructuring Act (DIRA) milk in FY16 of 4.3 million kgMS, our total estimated milk supply is 61.4 million kgMS. However, the anticipated low milk price in FY16 may result in some reduction in production from this estimate. These initiatives allow us to start our differentiated offering inside the farm gate, thereby increasing the value we offer to our suppliers. In the coming season more than 50% of our milk supply will attract a premium over our base milk price because they are doing something special on farm to create value for specific customers. We are continuing to build a strong relationship with our suppliers, and appreciate the difficult financial situation created by the current low international commodity dairy price. While there is little we can do in terms of our milk price, we have paid higher than normal advance payments in a bid to assist the cash flow of suppliers to ultimately protect our suppliers as well as we can. This has placed increased pressure on our working capital during the year, however, we believe this has been important and we will continue to do We have already worked with our suppliers to develop a this while milk prices remain at very low levels. unique Grass Fed standard that will see them transition away from feeding their herd any grain or concentrate feeds. We currently have 25 suppliers registered for Grass Fed, which will be streamed into the manufacture of this unique product. We are also continuing to build momentum with Lead With Pride™, our dairy farming best practice certification programme. We now have one third of our suppliers working their way through the programme and have 16 suppliers who have certified their farm at the end of FY15, with at least a further 12 expected to certify before the end of the 2015 calendar year. With the commissioning of our new infant formula dryer, D3, we have also grown our milk supply by an additional 6 million kgMS of contracted milk from suppliers, taking our total contracted milk supply to 57.1 million kgMS. We now have a MAKING SYNLAIT THE BEST PLACE TO WORK The most important element of building our capacity has been building the team we need to support operations and business development. Our staff who have been on the journey for some time remain committed to what we are working to achieve and continue to learn and develop, often stepping up into key leadership roles along the way. Over the past two years we have more than doubled the number of people working in the business and continue to attract people of ever increasing knowledge and experience. Again, this period of capability build is coming to a close and the teams are focusing on increasing performance. PAGE 10 I Synlait Milk Limited Annual Report 2015 CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED Not only has our team grown in number, but their commitment With the combination of these initiatives we expect to to what we are building and to excellence every day is growing. increase plant utilisation, reduce the amount of downgraded Synlait is a great place to work and I thank the whole team for or reworked product and reduce the time from manufacture what they do and the way they do it. to shipping thereby reducing inventory and working capital At the end of the FY15 we enjoyed a steep change in productivity as our office-based team moved into the new administration office at our Dunsandel site. This open plan environment was designed to facilitate different teams working as one. It has provided the right mix of individual work stations, informal collaboration areas and more formal meeting spaces. While it has come at a time when most teams were becoming established, we couldn’t have hoped for a better outcome from requirements. ACCELERATING We are heading into the new financial year with a business that has been geared up to achieve its strategy and is beginning to accelerate. We now have the customers, people, manufacturing capability and milk suppliers to deliver a significant increase in our overall volumes, particularly the volume of finished infant formula. the new office. The increase in teamwork and productivity is Our total sales volume is expected to increase from 97,803 MT clear and everyone is enjoying their new home. in FY15 to 122,500 MT in FY16, with further growth in total volumes in FY17. SIMPLIFYING AND IMPROVING OUR BUSINESS While we are experiencing some growth in our infant formula Just as the last two years have been about building our base powder business, it is increasingly clear that finished customer base, our manufacturing capacity and the capability infant formula in consumer packaging is going to dominate of our team, the next two are about achieving operational our infant formula production process. excellence and continuing to build volumes of infant formula with our brand partners. We are expecting a threefold year on year increase in manufacture of consumer packaged infant formula, with some The starting point is a significant rationalisation of the 250 MT already being shipped each week and increased number of products we manufacture on our three large spray volumes forecast in the second half of FY16. dryers, the number of customers we sell to and the number of countries we export to. Integrating the blending and consumer packaging facility into our infant formula manufacturing process has enabled us to rationalise the number of different infant formula base powders we manufacture by customising the different products on the canning line, rather than at the spray drying step. This will allow us to gain increased throughput on our spray dryers and enable the team to learn faster as they focus on increasing quality and yield of our highest value products. The effort that has been focused on building the scale of our business is now firmly focused on several key operational excellence projects. Flagship projects are aimed at improving our sales and operational planning processes and improving the way we collect and use data within the business. These are supported by initiatives to build staff engagement, increase manufacturing quality and yield, and increase inventory accuracy. Finally, I would like to acknowledge the strong support I have had in leading the business from the Board and from my SLT. Both the Board and SLT have been in place for some time now. They know the business and we agree on where we are going and what we need to do to get there. The company is well served by them and I enjoy working with them every day. I am personally looking forward to harvesting the benefits of the hard work we have put into building the business as we take performance to a new level in the coming year. John Penno MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER I PAGE 11 Synlait Milk Limited Annual Report 2015 FINANCIAL REVIEW Nigel Greenwood CHIEF FINANCIAL OFFICER PAGE 12 I Synlait Milk Limited Annual Report 2015 FINANCIAL REVIEW OVERVIEW FINANCIAL PERFORMANCE SALES For the year ended 31 July 2015 our revenue at $448.1 million was down 25.4% on last year’s $600.5 million, primarily due to lower international commodity prices. This is demonstrated in Figure 1 below. The average US dollar commodity price in FY15 was USD$2,593 compared with USD$4,532 in FY14. Ingredient sales volumes in FY15 at 89,003 MT was 1.1% ahead of our FY14 result of 88,052 MT. Infant and nutritional sales volumes, including lactoferrin, in FY15 at 8,800 MT were 57.4% ahead of 5,592 MT in FY14. The growth in infant sales volumes was primarily driven by consumer packaged infant formula sales, which increased by 63% to 4,300 MT. Bulk infant formula sales increased to a smaller extent at 4,300 MT. We sold 7 MT of lactoferrin in FY15 compared to only 2 MT in FY14, however this was well below the 15 MT that we had forecast to sell in FY15. Underlying NPAT for the year was $12.2 million compared to $19.6 million last year. While within market guidance, this was down on initial expectations. This was primarily due to lower lactoferrin sales than anticipated and a Synlait base milk price of $4.48 per kgMS, which is expected to be eight cents higher than the 2014/15 industry’s farm gate milk price (FGMP) of $4.40 per kgMS. Combined, this has impacted results by an estimated $6.2 million after tax. Underlying earnings are the most appropriate reflection of underlying business performance as the measure removes the impact of unrealised foreign exchange losses, in respect of USD debt financing, as discussed in the foreign exchange section later in this review. $ million Reported NPAT Unrealised FX losses Tax effect of FX losses Underlying NPAT Underlying EPS (cents) 12 months to July 2014 12 months to July 2015 19.6 - - 19.6 13.40 10.6 2.3 (0.7) 12.2 8.35 Reported after tax earnings are a profit of $10.6 million. This includes after tax unrealised foreign exchange losses of $1.6 million, which are further explained above. Figure1. Weighted average auction commodity price Figure 2. Sales volume by product category $USD / MT 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1500 93,644 5,592 97,803 8,800 88,052 89,003 MT 120,000 100,000 80,000 60,000 40,000 20,000 0 3 1 - g u A 3 1 - t c O 3 1 - c e D 4 1 - b e F 4 1 - r p A 4 1 - n u J 4 1 - g u A 4 1 - t c O 4 1 - c e D 5 1 - b e F 5 1 - r p A 5 1 - n u J FY14 FY15 Ingredients Nutritionals Total volume sold for this period at 97,803 MT was 4.4% above last year’s 93,644 MT. I PAGE 13 Synlait Milk Limited Annual Report 2015 FINANCIAL REVIEW CONTINUED Figure 3. Sales revenue by geographic region China Rest of Asia Middle East and Africa New Zealand Rest of World 3% 6% 30% 31% FY14 30% 17% 8% 10% 39% 26% FY15 China Rest of Asia Middle East and Africa New Zealand Rest of World Geographical diversification has been improved in FY15 with increased our earnings from ingredient and nutritional product a lower proportion of sales to China and increased domestic categories, as described further below. sales to The a2 Milk Company™. GROSS PROFIT The increase in ingredients gross profit is due to a number of factors including higher sales premiums over auction pricing, slightly higher sales volumes (up 951 MT) and an estimated Our gross profit for FY15 at $71.0 million decreased 8% on gain from a favourable performance against the notional our FY14 result of $77.1 million. This reduction in gross profit producer model used to determine the industry FGMP. This from last year does not reflect the underlying improved being offset by marginally higher manufacturing costs. performance across all of our key product streams, as reflected in Figure 4 below. The increase in nutritionals gross profit is due to higher infant formula base powder and consumer packaged sales The primary cause of the reduction in gross profit between volumes (up 3,208 MT), improved margin per MT (due to years was the one-off product mix benefit we enjoyed last manufacturing cost efficiencies as a consequence of bringing year of $24.1 million (or $257 per MT). Against this, we blending and consumer packaging in house), significantly Figure 4. Gross profit 9.8 17.8 (24.1) (9.5) 77.1 FY14 gross profit Ingredients Nutritionals Product mix Synlait milk price impact FY15 gross profit 71.0 Figure 5. Milk price impacts on gross profit FY14 MILK PRICE DISCOUNT $0.13/KgMs $(6.0m) FY15 MILK PRICE PREMIUMS1 $0.08/KgMS $(3.5m) FY15 MILK PRICE IMPACT $(9.5m) $ MILLIONS 120 100 80 60 40 20 0 PAGE 14 I Synlait Milk Limited Annual Report 2015 FINANCIAL REVIEW CONTINUED lower stock provisioning required in FY15 and higher At the time we announced our final Synlait base milk price lactoferrin sales volumes (up 5 MT). for the FY15 season of $4.48 kgMS, the previously announced Our gross profit per MT at $726 was down $98 on $824 in FY14. As noted earlier, FY14 enjoyed the one-off product mix benefit of $257 per MT. This was partially mitigated by upsides from improved ingredients and nutritionals performances. As noted above, embedded within our ingredients gross profit for FY15 will be the financial impacts associated with our performance compared to the notional producer model that is used to determine the industry FGMP. It is not practically possible to accurately determine these financial impacts, such as product mix, sales phasing, foreign exchange and lactose pricing until we have received the details applied in the FGMP calculation for FY15, which is set out in the Fonterra Milk Price Statement released in late September 2015. We anticipate FGMP was $4.40 kgMS. Should this remain the final FGMP for the season, then the additional cost of Synlait’s base milk price is approximately $3.5 million. OVERHEAD EXPENDITURE Our overhead expenditure for FY15 at $44.4 million was slightly down on FY14 at $44.7 million. Cost savings were made in domestic freight ($1.7 million), primarily due to the benefits of our new fully integrated 22,500m² drystore facility commissioned in April 2014, as well as negotiated reductions in our export documentation fees ($1.0 million). This has been largely offset by an increase of $2.0 million in our employee benefits expenses over last year. being able to provide an update on these financial impacts at Included within our overhead expenditure is $8.7 million the time of our Annual General Meeting in December 2015. ($8.6 million in FY14) of export freight costs. These are MILK PRICE recovered from our customers through export freight charges that are included in revenue. Milk purchases remain our most significant cost when determining gross profit. Our final base milk price for FY15 SHARE OF LOSS FROM ASSOCIATES (the 2014/15 dairy season) is $4.48 per kgMS, significantly In late January 2015 we acquired a 25% shareholding in lower than our FY14 base milk price of $8.27 per kgMS New Hope Nutritionals for $2.2 million, which owns and (for the 2013/14 dairy season). In addition, we paid distributes the Akara and Akarola infant formula brands in the $0.06 per kgMS in seasonal and value added premiums to China market. Synlait has an exclusive manufacturing and increase the average total milk price for Synlait suppliers to supply agreement for these brands to New Hope Nutritionals. $4.54 per kgMS, compared with $8.31 per kgMS in FY14. In the period to 31 July 2015 our share of the losses of this This resulted in our contracted suppliers receiving a total company were $378,000. It is expected that this company will of $3.1 million in additional value added premiums in FY15, make initial losses while it establishes its brand presence in compared to $2.0 million in FY14. the China market. Figure 6. Five year Synlait milk price trend 7.76 0.10 6.22 0.08 5.89 0.08 8.31 0.04 7.66 6.14 5.81 8.27 $ / kgMS 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0 4.54 0.06 4.48 Average premium Base Synlait milk price FY11 FY12 FY13 FY14 FY15 I PAGE 15 Synlait Milk Limited Annual Report 2015 FINANCIAL REVIEW CONTINUED EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTISATION (EBITDA) FOREIGN EXCHANGE The management of foreign exchange exposure is one of the EBITDA at $40.9 million decreased 6.6% on the FY14 result key risks of our business as the majority of product sales to of $43.8 million, driven by the reduction in gross margin overseas markets primarily creates a USD exposure risk. Our (excluding depreciation) of $3.4 million and partially offset foreign exchange policy seeks to achieve the lowest annual by overhead savings of $0.3 million. average exchange rate for the year. NET FINANCING COSTS The key measure of our performance in our management of this risk is the comparison of our annual average exchange Net financing costs at $8.9 million increased by 68% from rate to that applied in the industry FGMP model, which FY14’s $5.4 million. determines the benchmark market price for milk. This variance $millions FY14 FY15 Variance Gross term debt interest Less capitalised interest Net term debt interest Working capital funding interest Interest received Loss on derecognition of financial instruments Net finance costs 3.9 (2.1) 1.8 3.7 (0.1) - 5.4 9.5 (4.8) 4.7 4.5 (0.3) 0.0 8.9 5.6 (2.7) 2.9 0.8 (0.2) 0.0 3.5 effectively impacts our gross margin as either an upside or downside in the year. In FY14 we achieved an annual average exchange rate of 81.3 cents, while the rate applied in the calculation of the FGMP was 80.9 cents. Therefore the downside associated with our annual average foreign exchange rate being higher by 0.4 cents was approximately $2.0 million. In FY15 we achieved an annual average exchange rate of 78.8 cents, however we will not be able to determine whether we have achieved a gross profit impact related to our exchange rate performance (relative to the notional producer model) until the Fonterra Milk Price Statement is released in late September 2015. The $3.5 million increase in net financing costs is split between an increase in net interest costs associated with term As at 31 July 2015 unrealised foreign exchange losses debt financing of $2.9 million, an increase in net interest costs associated with our USD inventory financing facility totalled associated with our working capital financing of $0.8 million $2.3 million. These unrealised foreign exchange losses are and offset by an increase in interest received of $0.2 million. determined by the difference between the year end spot rate Gross interest on term debt has increased by $5.6 million to $9.5 million in FY15 as a consequence of increased debt applied to fund the capital spend on D3 and our administration and quality testing laboratory building. While the interest on this increased funding has been capitalised, the previously capitalised interest on debt applied to fund commissioned projects (such as the blending and consumer packaging facility, lactoferrin facility and 22,500m² drystore) is now and the average delivery rate at the time the USD inventory finance is drawn down, related to the total USD inventory finance liability balance at year end. These unrealised foreign exchange losses do not qualify for hedge accounting, and therefore must be recognised through the income statement. However, as the associated USD liability is settled with USD revenue in the following accounting period, this unrealised exchange loss is never expensed. Term debt interest, excluding capitalised interest, actually realised. has increased by $2.9 million to $4.7 million, accordingly. Interest on working capital funding has increased by $0.8 million to $4.5 million, due to higher debt levels as a consequence of accelerated advance payments to milk suppliers. Savings in working capital interest of $1.1 million were achieved through the introduction of the inventory finance facility with Mitsui & Co. (NZ) Ltd., which is denominated in United States Dollar (USD). While the volatility in reported earnings caused by these unrealised foreign exchange gains or losses create additional complexity to our business, significant savings in our working capital financing costs are achieved as a result, as noted earlier. EARNINGS PER SHARE (EPS) AND RETURN ON CAPITAL EMPLOYED Our reported basic and diluted earnings per share (EPS) for FY15 was 7.21 cents against 13.40 cents in FY14. PAGE 16 I Synlait Milk Limited Annual Report 2015 FINANCIAL REVIEW CONTINUED Our underlying basic and diluted earnings per share for FY15 However, we also achieved improved collections on our was 8.35 cents against 13.40 cents in FY14. overdue debtors in this financial year with only $2.5 million We also generated a pre-tax return on average capital employed of 6.9% in FY15, compared with 11.5% in FY14. The lower return on capital employed is partially due to the overdue at year end, compared to $9.7 million overdue at last year end. Noting that, all but $0.6 million of FY15 overdue balances had been collected within one month of year end. increasing value of unproductive assets under construction INVENTORIES that will generate returns in future years. FINANCIAL POSITION OVERVIEW FY15 has been a year where we have focused on the completion of our growth initiative projects with significant capital expenditure and associated growth in our total net debt position. We commissioned our blending and consumer packaging facility in July 2014 and are nearing full commissioning of our administration and quality testing laboratory building, as well as D3 as we closed out the financial year. In addition we completed our three yearly revaluation of our Total inventory at year end at $63.8 million is also down on last year’s $71.3 million, however the mix of inventory on hand is quite different. We have reduced our raw material inventory holdings by $3.8 million to $11.5 million, which are primarily made up of lactose and ingredients for infant formula production. New procurement policies in place are resulting in more efficient levels of raw material holdings. Finished goods inventory in total has decreased by $3.7 million in FY15 to $52.3 million in FY15. The decrease is due to lower dairy commodity prices that have translated into lower inventory valuation per MT. This is largely offset by a larger volume of product on hand at year end that is subject to committed orders for delivery in the first three months post year end. We are seeing an increasing volume of product needing to be carried over year end in order to meet regular customer delivery requirements and this is likely to be a continuing requirement in future years. It should be noted that we have very little finished goods inventory on hand that is not subject to a committed customer sales order. land, buildings and plant in line with our accounting policy, We have reviewed all our sales contracts for the risk that a which has resulted in an uplift in these asset values. sales order value lower than the weighted average cost of this We have also experienced a significant mark to market derivatives adjustment as a consequence of declining foreign exchange and interest rates, which has impacted other reserves. As a result total equity has dropped to $171.8 million from $183.1 million as at 31 July 2014. product has been created and identified an onerous contracts provision of $0.4 million. We have also performed impairment testing on this inventory, given that declining international commodity prices create an increased impairment risk, and determined that no further impairment provisions are required in addition to existing provisions for distressed inventory and However, with the commissioning of D3 scheduled for onerous contracts. September 2015 we will see a significant uplift in earnings and cash flow in FY16 that will result in an improved balance sheet position as at 31 July 2016. TRADE AND OTHER RECEIVABLES Within total finished goods inventory, finished goods at net realisable value have substantially reduced in value to $4.5 million from $26.5 million last year. This shows we have substantially addressed the surplus infant formula product challenges we had in FY14 and is also reflected in the At $68.1 million, these are significantly down on FY14 at significantly reduced inventory provision of only $3.9 million at $89.0 million. This reduction is primarily due to the sale of year end, compared to $9.9 million as at FY14. our FrieslandCampina receivables to ANZ using our new receivables assignment agreement. This arrangement is more fully explained in Note 24 (b) in the Financial Statements. I PAGE 17 Synlait Milk Limited Annual Report 2015 FINANCIAL REVIEW CONTINUED PROPERTY, PLANT AND EQUIPMENT TRADE AND OTHER PAYABLES Property, plant and equipment at $436.0 million has increased Trade and other payables at $80.4 million is down $36.3 $137.8 million over FY14’s $298.2 million. This significant million on last year’s balance of $116.7 million. This variance increase primarily reflects the costs associated with the build reflects two significant items. of D3 and the administration and quality testing laboratory building. The increase also includes the asset revaluation carried out this year. The first is the reduction in milk creditors and accruals which have decreased from $94.9 million in FY14 to only $18.5 million in FY15, a $76.4 million reduction. This reflects the fact Note that more information regarding the revaluation of our that our advance rates paid to suppliers by year end were 96% assets is included in Note 14 (a) of the Financial Statements. of our base milk price of $4.48 kgMS, while in FY14 they were D3 is on schedule to be commissioned in late September 2015. This will add 40,000 MT of additional infant formula capacity. The new administration building was completed and commissioned in July 2015 at a cost of $10.5 million, while the only 78% of our base final milk price. The significant increase in advance rate payments in FY15 is due to the rapid decline in milk price during the season and relatively higher advance rates paid earlier in the season. new quality testing laboratory is due to be commissioned in Offsetting this was a significant increase in accrued capital September 2015 at an estimated cost of $10.1 million. expenditure at year end of $29.4 million, $20.0 million more OTHER INVESTMENTS Other investments includes our 16.67% shareholding in Primary Collaboration of New Zealand (PCNZ) at a cost of $110,000. This is a Wholly Foreign Owned Enterprise (WFOE) with a shared office based in Shanghai. It was established with the support of than FY14, of which $13.3 million is accrued retention payments primarily related to the build of D3. These accrued capital expenditure amounts will be funded by our approved bank term debt funding lines. TOTAL NET DEBT New Zealand Trade and Enterprise (NZTE). Other shareholders Total net debt at year end, including both current and term include a number of other New Zealand primary industry debt facilities less cash on hand was $262.0 million, an increase companies. We expect to have staff representatives based from of $109.9 million over the FY14 balance of $152.1 million. this office during the course of FY16. As noted earlier we also acquired a 25% shareholding in New Hope Nutritionals in late January 2015 at an initial cost of $2.2 million. After deducting our share of losses since acquisition of $378,000, our current investment value is $1.9 million. This company owns and markets the Akara and Akarola infant formula brands in the China market, which are exclusively manufactured by Synlait. The $109.9 million increase in net debt has been primarily due to the build of D3, however it also includes costs related to the build of the new administration and quality testing laboratory building. High advances paid to our milk suppliers have also impacted our current debt in FY15. We estimate that we have paid approximately $40.0 million in cash advances in FY15, higher than our normal advance rate programme. Figure 7. Net debt (8.4) (14.0) (2.1) (101.7) (262.0) $ millions 300 250 200 150 100 50 0 16.4 (152.1) FY14 net debt Cashflow from operating activities Investment in growth capex Other investments Net interest paid Other FY15 net debt DEBT / EBITDA 3.47x 6.40x PAGE 18 I Synlait Milk Limited Annual Report 2015 FINANCIAL REVIEW CONTINUED At year end our reported debt/debt plus equity ratio is 60.4%. 2. Revolver facility – matures 1 August 2016 with a facility However, excluding the mark to market derivative impacts limit of $75.0 million within equity of $36.2 million (only $2.1 million in FY14), this ratio improves to 55.7%. This is reasonably in line with expectations given the significant expenditure on growth 3. Dryer three (D3) loan – matures 31 July 2017 with a facility limit of $135.0 million initiatives over the last two years. Improved earnings and cash Our bank facility agreement includes a number of banking flows will primarily flow from this investment in future periods. covenants. These are an interest cover ratio, minimum DERIVATIVES shareholders’ funds level and working capital ratio. The company was compliant with our bank covenants at As at 31 July 2015 we held US $406 million in foreign all times during the financial period. exchange contracts, as detailed in Note 23 (d) of the Financial Statements. These have been taken out steadily over a period of depreciating currency and placed across a 24 month future period, in accordance with our treasury policy. It should also be noted that all unrealised gains or losses associated with both our foreign exchange and interest rate swap derivatives within equity are excluded when determining our compliance with our minimum shareholder’s Given the rapidly declining exchange rate over the last six funds bank covenant calculation. months, in particular, we had a significant mark to market unrealised loss associated with these contracts at year end of $30.8 million after tax. As all of our foreign exchange contracts are fully hedged against future USD receipts, this unrealised loss is recognised in other reserves in equity rather than through the income statement. The impact of these foreign exchange contracts will play out in the periods in which they mature and they will form part of our annual average exchange rate in those periods. We also have in place $139 million of interest rate swap agreements at year end ($178 million in FY14) at various weighted average interest rates, which generated an unrealised mark to market loss of $5.4 million after tax. OPERATING CASH FLOWS We are currently renegotiating our bank facility arrangements with our bank syndicate and expect to be in a position to advise the market of the outcome of these negotiations when we release our annual result on 22 September 2015. It should be noted that we also have trade and inventory financing facilities with Mitsui & Co. (NZ) Ltd., which have no prescribed facility limit and no prescribed covenants in place. Operating cash flows at $16.4 million were $42.3 million The security associated with the inventory finance facility down on FY14 at $58.7 million. This significant reduction in is limited to the specific inventory financed by that facility. operating cash flows for the year was predominantly driven These facilities expire on 31 July 2017. by the accelerated advance rate milk payments of approximately $40.0 million. While the high advance rate payments made in FY15 have impacted our operating cash flows this year, this is a timing difference and will result in an operating cash flow benefit in FY16. BANK FACILITIES AND COVENANTS The company has in place three syndicated bank facilities with ANZ and BNZ: 1. Working capital facility – reviewed annually with a year end facility limit of $70.0 million Nigel Greenwood CHIEF FINANCIAL OFFICER I PAGE 19 Synlait Milk Limited Annual Report 2015 ` COMPANY PROFILE WE ARE A NEW ZEALAND MANUFACTURER OF NUTRACEUTICAL, NUTRITIONAL AND VALUE ADDED PRODUCTS. Operating as a business to business (B2B) company, we build strong relationships with leading customers around the globe to create valuable partnerships for the long term. We have the largest integrated infant formula site in the world, offering our customers complete supply chain integrity from behind the farm gate to consumer. Located in the South Island, we employ more than 326 staff. Our Dunsandel site in Canterbury received an average of 610 million litres of milk in FY15 from our contracted milk suppliers located in the same region. Quality begins on farm with our suppliers who produce excellent milk and are supported to achieve dairy farming best practice through our Lead With PrideTM certification programme. We process our suppliers’ milk with some of the most sophisticated production capability in the world, including three large spray dryers (the third being commissioned in September 2015), a special milks dryer, a state of the art blending and consumer packaging facility and a quality testing laboratory. From FY16 we will have 140,000 metric tonnes of annual production capacity. Most of our products are exported to customers in Asia (49%), Middle East and Africa (26%) and other regions (8%). New Zealand received 17% of our product in FY15. Our aim is to annually increase the proportion of nutritional and value added product we manufacture with the aim of these products accounting for 30% of our product mix in FY17. Our value added capability allows us to produce customised milk powders, infant formula, adult nutritional powders and nutraceutical products such as Synlait Lactoferrin and iNdream3 in an integrated supply chain with uncompromised quality. This unbroken chain is controlled from start to finish, giving our customers and their consumers complete confidence in the integrity of the products they consume. We’ve been awarded some of New Zealand’s top business accolades, including the ANZ Best Business Operating Internationally (Over $50 million) award at the 2015 New Zealand International Business Awards and the Supreme Award at the 2013 HSBC New Zealand China Trade Association China Business Awards. We listed on the New Zealand Exchange (NZX) in 2013 and our three largest shareholders are Bright Dairy Holding Limited (39.1%), FrieslandCampina (9.9%) and Mitsui & Co. (NZ) Ltd. (8.3%). PAGE 20 I Synlait Milk Limited Annual Report 2015 Synlait Milk Limited Annual Report 2015 I PAGE 21 BOARD OF DIRECTORS LEFT TO RIGHT: BILL ROEST YANG SIHANG HON. RUTH RICHARDSON GRAEME MILNE LI KE JOHN PENNO DONG ZONGBO SAM KNOWLES PAGE 22 I Synlait Milk Limited Annual Report 2015 BOARD OF DIRECTORS Ruth was the Member of Parliament for Selwyn (Synlait’s local electorate) from 1981 – 1984 and later New Zealand’s Minister of Finance from 1990 to 1993. Following her political career, Ruth established herself as a public policy consultant and accepted a range of corporate governance roles. Ruth is currently Chairman of Jade Software Corporation Limited, SYFT Technologies Limited, Kiwi Innovation Network Limited (Kiwinet), The New Zealand Merino Company and the Kula Fund Advisory. She is a director of Synlait Milk Limited, Synlait Milk Finance Limited and the Bank of China (NZ). Previous governance roles include Dairy Brands, the Reserve Bank of New Zealand and Wrightson Limited. Ruth holds a Bachelor of Laws (with honours) from the University of Canterbury. Graeme Milne CHAIRMAN (INDEPENDENT) Graeme joined the Synlait Group as a director in 2006. With extensive experience, his career in the dairy industry has seen him working in New Zealand, Australia and Europe. He is the Chairman of Synlait Milk Limited and Synlait Milk Finance Limited. Graeme was appointed CEO of Bay Milk Products in 1992, and has held several leadership roles since then. This included CEO of the New Zealand Dairy Group prior to the formation of Fonterra and interim CEO of Richmond Limited and Bonlac Limited in Australia. Now a farmer, Graeme maintains several governance roles with a range of organisations. He is the chairman of Terracare Fertilisers Limited, New Zealand Pharmaceuticals Limited and Johnes Disease Research Limited. Graeme is also a director of Genesis Energy Limited, FMG and Alliance Group Limited. Bill Roest NON-EXECUTIVE DIRECTOR (INDEPENDENT), CHAIR OF THE AUDIT AND RISK COMMITTEE. Bill was appointed to the Synlait Milk Board in May 2013. Bill’s long and varied career included 12 years as Chief Financial Officer of Fletcher Building Limited until April 2013. He has held several leadership roles in New Zealand’s corporate sector, including Managing Director of Fletcher Residential and Fletcher Aluminium. Bill is also a director of Housing Foundation Limited, Metro Performance Glass and Fisher and Paykel Appliances Holdings Limited, where he chairs the Audit Committee. Bill is a member of Chartered Accountants Australia and New Zealand and is an Association of Chartered Certified Accountants (UK) fellow. Yang Sihang BRIGHT DAIRY APPOINTED DIRECTOR Yang was appointed a director of Synlait Milk in August 2010. With 15 years of industry experience, he is Bright Dairy & Food Co.’s director of strategy and research and director of several Bright Dairy subsidiaries. Yang previously worked for Heilongjiang Dairy Group as the director of technology and subsequently as the director of quality assurance. He was later appointed the secretary-general of Heilongjiang Dairy Industry Association and a director of China Dairy Industry Association. Yang is currently a director of Synlait Milk Limited and Synlait Milk Finance Limited. He holds a master’s degree in food science and engineering. Hon. Ruth Richardson NON-EXECUTIVE, BRIGHT DAIRY APPOINTED DIRECTOR, CHAIR OF REMUNERATION AND GOVERNANCE COMMITTEE A professional company director, Ruth specialises in agribusiness, commercialising innovation, information technology and finance. Ruth joined the Synlait Group as the first independent director in 2004. Li Ke BRIGHT DAIRY APPOINTED DIRECTOR Li was appointed a director of Synlait Milk in August 2010. Li is currently a director of Synlait Milk Limited and Synlait Milk Finance Limited. Li has worked for Bright Dairy for over 12 years. During her years at Bright Dairy, Li’s sales and marketing expertise has helped the significant growth of many different Bright Dairy brands, including the Bright brand. A vice president of Bright Dairy & Food Co., Ltd and head of marketing, Li also heads Bright Dairy’s public relations department. She is a director of a number of Bright Dairy subsidiaries. Li holds a Master of Business Administration from La Trobe University, Melbourne. John Penno MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER (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 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 leader’s award from the Sir Peter Blake Trust and the Excellence in Leadership award at the 2015 New Zealand International Business Awards. Dong Zongbo BRIGHT DAIRY APPOINTED DIRECTOR Dong was appointed a director of Synlait Milk in August 2010. Currently he is a director of Synlait Milk Limited and Synlait Milk Finance Limited. Since 1985, Dong has worked in accounting and finance roles for the dairy industry. Dong was appointed vice general manager and CFO of Shanghai Danone Yogurt and Cheese Co., Ltd. in the 1990s. He oversaw 16 Bright Group subsidiaries merge into the Bright Dairy & Food Co., Ltd. structure. He became CFO for Bright Dairy & Food Co., Ltd in 2007. Dong is currently a director and supervisor for a number of Bright Dairy subsidiaries, is a member of the Institute of Public Accountants (Australia) and has certification granted by China Association of Chief Financial Officers. Sam Knowles NON-EXECUTIVE DIRECTOR (INDEPENDENT) Sam has held senior executive positions in major banks in both Australia and New Zealand, and is currently a director of Synlait Milk Limited and Synlait Milk Finance Limited. He has extensive experience in private and public sector governance, with more than 12 years on several boards of NZX listed companies, including as Chairman of Xero. He had a key role in establishing Kiwibank, leading the company from being a start-up to a large successful business. Sam’s governance roles focus on growth businesses. He is Chairman of Partners Life, OnBrand Partners and Umajin Limited. Sam is also a director of TrustPower, SLI Systems, Magritek and Rangatira. I PAGE 23 Synlait Milk Limited Annual Report 2015 SENIOR LEADERSHIP TEAM LEFT TO RIGHT: MICHAEL STEIN NEIL BETTERIDGE NATALIE LOMBE JOHN PENNO MIKE LEE NIGEL GREENWOOD MATTHEW FOSTER PAGE 24 I Synlait Milk Limited Annual Report 2015 SENIOR LEADERSHIP TEAM career has included working with manufacturing processes for a variety of dairy products. program leader he worked to enable New Zealand dairy farmers to increase productivity and profit. Michael Stein GENERAL MANAGER QUALITY AND TECHNICAL SERVICES 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, technical 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. 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. Neil is a member of the New Zealand Institute of Food Science and Technology and a Chartered Professional Engineer. Natalie Lombe GENERAL MANAGER CULTURE, CAPABILITY AND STRATEGY 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 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. Neil Betteridge John Penno GENERAL MANAGER MANUFACTURING MANAGING DIRECTOR AND CHIEF Neil joined Synlait Milk in 2007 after 10 years with Fonterra. Neil currently leads our manufacturing team 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 EXECUTIVE OFFICER 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 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 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 leader’s award from the Sir Peter Blake Trust and the Excellence in Leadership award at the 2015 New Zealand International Business Awards. Nigel Greenwood CHIEF FINANCIAL OFFICER 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 Chartered Accountants Australia and New Zealand and the Institute of Directors. Nigel has a Bachelor of Commerce (majoring in accounting) and has completed the General Manager Program at the University of Michigan. Mike Lee Matthew Foster GENERAL MANAGER SALES GENERAL MANAGER SUPPLY CHAIN Mike joined Synlait Milk in September 2011 and leads sales, business development, overall category profitability as well as overseeing marketing and communications. 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 value added 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 from Massey University. Matthew joined Synlait Milk in February 2012 and is responsible for managing and developing Synlait Milk’s supply chain activities from farmer to customer, as well as business planning and optimisation. 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 Chartered Accountants Australia and New Zealand and holds a Bachelor of Management Studies from the University of Waikato. I PAGE 25 Synlait Milk Limited Annual Report 2015 OUR PARTNERSHIPS PAGE 26 I Synlait Milk Limited Annual Report 2015 OUR PARTNERSHIPS PROGRESSING UP THE VALUE CHAIN Our commitment to a customer portfolio with 70% of business from the world’s leading multinational infant formula and nutritional brands, 25% from regional market leaders and 5% from uniquely positioned companies remains our focus for FY16. This strategy directly supports our aim of progressing customers up the value chain, and we anticipate that FY16 will see more customers make this shift. Increasing the value of our relationships with customers by leveraging our infant formula and consumer powder credentials in FY15 saw us achieve a 59% year on year growth in sales to multinational customers. We also saw the beginnings of uniquely positioned customers providing positive returns to our business through their value added brands successfully disrupting their market. To support customer progress up the value chain, our aim is to disproportionally grow our business into adding more value for customers, while concurrently growing our overall business. This will increase our average gross margin per tonne and customer development in FY15 focused on increasing infant formula production, consumer-ready applications and new nutraceutical products. These market sectors accounted for 55% of the total volume of powder sales in FY15, a 15,004 MT increase on FY14. We were also able to take advantage of product mix differentials in a highly dynamic global market. Sales of skim milk powder (SMP) and anhydrous milk fat (AMF) outperformed whole milk powder (WMP) for most of FY15, allowing us to switch 20% of our WMP business into SMP/ AMF and benefit from favourable market conditions. VALUE ADDED THE SYNLAIT VALUE CHAIN Nutraceutical products Highly specialised and similar to pharmaceutical-grade solutions, these products are created through technical innovation and excellence. Synlait Lactoferrin and night milk ingredient (iNdream3) are both Synlait creations. Nutritional products Designed to enhance the health and nutrition of consumers, these products include infant formula base powders, adult nutritional powders and infant formula manufactured into retail-ready consumer packaging. Ingredient products Customised milk powders made to high specifications including whole milk powder (WMP), skim milk powder (SMP) and anhydrous milk fat (AMF). INGREDIENTS NEW PACKAGING OLD PACKAGING WHOLE MILK POWDER 3 I PAGE 27 Synlait Milk Limited Annual Report 2015 OUR PARTNERSHIPS CONTINUED END TO END CONFIDENCE FOR CONSUMERS DEVELOPING STRONG PARTNERSHIPS Our nutritional customers need us to make premium quality We have enjoyed developing partnerships with our customers infant formula and special milk powders that are safe. in FY15, and we are seeing the benefits with our international That’s why we’ve transformed our business to create an integrated supply chain solution with uncompromised quality at every step. From elite farming to state of the art processing and packaging at source – it’s an unbroken chain. Synlait Sure™ reflects this standard of excellence and helps make the buying decision easier for consumers. reputation as an innovative and trusted partner of choice growing. It directly led to several new partnerships being established in FY15 with customers both in New Zealand and overseas. In addition to New Hope Nutritionals, Bright Dairy and The a2 Milk CompanyTM, we were pleased to add Nouriz to our portfolio of blending and consumer packaging customers. Nouriz is a large New Zealand export brand of infant formula exported to China and we recognise their position as an established regional market leader. We also supported New Hope’s marketing-driven launch of Akarola, a new infant formula product range in China targeting Synlait Sure™ works in two ways. First, it allows consumers the growing e-channel market. Initially bypassing traditional to check their product is genuine and trace it right back to retail environments, Akarola disrupted the established supply the source. They simply enter the unique code found on the chain and used Synlait Sure™ to support consumer confidence bottom of their infant formula can to access authentication in the quality of infant formula sold online. details on their phone, tablet or desktop computer. One new partnership that was well received by our suppliers They can also access a range of traceability information that was with Munchkin Inc, a well established and innovative lets them explore how our products are made, so they can baby products manufacturer based in the United States (U.S.). buy with confidence and peace of mind. We will exclusively manufacture their uniquely positioned It is another example of how we’re creating value for our Grass Fed infant formula product, Grass Fed responds to customers by addressing the needs of their consumers. You increasing demand from U.S. consumers for products that can experience Synlait Sure™ by visiting www.synlaitsure.com. originate in traditional, outdoor farming environments with healthy and well-cared for cows. Indoor barns are commonplace in the U.S., as are all-grain diets and overcrowded feeding. Munchkin expects to launch Grass Fed into the U.S. and China in FY16, leveraging their extensive retail distribution network in those regions. You can read more about how milk for Grass Fed will be produced on page 31. PAGE 28 I Synlait Milk Limited Annual Report 2015 OUR PARTNERSHIPS CONTINUED CUSTOMER PROFILES Danone Nutricia - A multinational partner Danone Nutricia’s early life nutrition is a global leader in standing by mums to nurture new lives in their first 1,000 days. Nutricia’s brands include Karicare, Nutrilon, Aptamil and Dumex. Despite being headquartered in Europe, Nutricia generates 60% of its sales outside of Europe by adapting to local market needs with an entrepreneurial spirit, employing more than 12,000 people. Nutricia produces more than 800,000 MT of product annually. We have been pleased to significantly develop and deepen our supply relationship of ingredients for use in infant formula and children’s products in Asia with Nutricia. Despite the scale of Nutricia, we have particularly enjoyed working with the distinctive company culture based on commitment, agility, openness, sharing and pragmatism. Nouriz - A regional market leader Nouriz is an Auckland-based company with major operations in Shanghai, which includes the marketing and distribution of dairy products. With a long history of exporting infant formula from New Zealand to China as a premium product, Nouriz is an established market leader. We’ve partnered with Nouriz to exclusively manufacture their infant formula range using cows’ milk from our Canterbury suppliers and our state of the art manufacturing process. This partnership helps to build our credentials as a nutritional business and the volume increases our reputation as a leading infant formula manufacturer. Nouriz will be joining the Synlait Sure™ traceability programme to share the benefits of our ‘cow to can’ supply chain with their consumers. Their product will be finished in our blending and consumer packaging facility and exported in retail-ready infant formula cans. The a2 Milk CompanyTM - A uniquely positioned company We partnered with The a2 Milk Company™ in 2013 to launch a world-first infant formula based on the A2 protein in cow’s milk, which is similar to the protein found in human breast milk. The a2 Platinum® range of infant formula disrupted the market in New Zealand, Australia and China as a product naturally containing only the A2 beta- casein protein and completely free from the A1 protein. In the last year we have seen this customer gain significant momentum with their infant formula business and we also began producing a new whole milk powder product for the Australasian market. Their growth indicates they will soon be a leading infant nutrition and powdered milk brand in the marketplace and we’re pleased to have increased our milk supply in FY15 in response to their success. I PAGE 29 Synlait Milk Limited Annual Report 2015 OUR PARTNERSHIPS CONTINUED CREATING VALUE INSIDE THE FARM GATE Special milk programmes We partner with 173 suppliers in the Canterbury region with Our suppliers have the ability to create more from their the aim of differentiating milk inside the farm gate, creating milk before it leaves their farm through our special milk value both on farm and also at our Dunsandel site, through programmes. The programmes are created in partnership with our Lead With Pride™ and special milk programmes. customers who want to produce unique dairy-based products. Lead With Pride™ Lead With Pride™ is our flagship best practice dairy farming programme, with a total of 16 supply farms being certified at the end of FY15. Our strategy is to have sufficient volumes of certified Lead With Pride™ milk by the end of FY16 to offer customers another option to create value in the marketplace. Each programme requires suppliers to create value in a certain way, such as genetics for The a2 Milk Company™ or specific diets for Grass Fed. We recognise the commitment this differentiation requires and premium payments – in addition to our milk price – reward suppliers for creating the value on their farm. In FY16 we expect more than half of our suppliers will participate in at least one special milk programme, resulting in some form of premium payment to more than half of our supply base. Additionally, the increased participation in these programmes has lifted the average value of premiums paid in FY15 to $0.06 per kgMS ($0.04 per kgMS paid in FY14). Our dedicated milk supply team have been working alongside suppliers to support them through the Lead With Pride™ certification process. We held two focus days and themed our annual supplier conference around Lead With Pride™ in FY15. These events gave suppliers working through their certification access to specialist knowledge and expertise around best practice dairy farming. We will continue to work closely with our suppliers in FY16 to increase the number of certified Lead With Pride™ suppliers and also to maintain the high standards set by certified suppliers. The a2 Milk Company™ is the customer behind one of our strongest special milk programmes. We are the exclusive producer of their a2 Platinum® range of infant formula. PAGE 30 I Synlait Milk Limited Annual Report 2015 OUR PARTNERSHIPS CONTINUED In response to their growth we will have more than 30 SYNLAIT SUPPLIER CONFERENCE suppliers providing milk for The a2 Milk Company™ in FY16, up from 17 in FY15, with further growth expected in FY17. Our A2 suppliers have identified and separated cows that express the A2 protein into A2 herds. This ensures milk used to manufacture products for The a2 Milk Company™ only contains the A2 protein, which is similar to the protein found in human breast milk. Our newest special milk programme with Munchkin, is a new unique infant formula product called Grass Fed. Made from cows exclusively grazed on pasture and crop- based diets, suppliers must adhere to a Grass Fed standard that requires, among other requirements, that cows must never be kept indoors and are not fed any grain, or feed grown outside New Zealand. We believe Canterbury is the best area in New Zealand to consistently maintain an all grass system, so our suppliers are well placed to benefit from this opportunity. We have already received commitments from 25 suppliers to provide milk for Grass Fed in FY16. Our 2015 annual Synlait Supplier Conference was well attended again with more than 300 suppliers, rural professionals and other guests present. A unique industry event, we connect suppliers with our staff, customers, rural and financial professionals to learn from leaders in their field and access insights that drive value and practical applications on farm. This year the theme was Inspire and each keynote speaker presented a delivery that inspired suppliers to perform at the leading edge whilst connecting to a Lead with Pride™ pillar. Gerard Hickey from Firstlight Foods discussed how Leading With Greatness can be achieved with high quality, premium products while Dr Scott McDougall from Cognosco reinforced the need for strong animal health and welfare practices through his focus on Leading With Care. How to develop high performing teams through Leading With Integrity was outlined from Canterbury Crusaders’s Richard Smith and Dave Anderson from Icebreaker highlighted how Leading With Foresight can help create environmentally conscious and sustainable businesses in the primary industry. This year’s Conference announced our partnership with Munchkin. DairyNZ’s Principal Scientist, John Roche, supported the launch with a domestic focus on the virtues of grass feeding. ANZ Chief Economist Cameron Bagrie provided strong insight into the global dairy market, adding further perspective around the benefits of partnerships with businesses like Munchkin and how suppliers can make more from milk. The day event was followed by an awards dinner that included the 2015 Dairy Honours ceremony, rewarding supplier achievements throughout the 2014 / 2015 season around milk quality, special milks and Lead With Pride™. I PAGE 31 Synlait Milk Limited Annual Report 2015 OUR PARTNERSHIPS CONTINUED QUALITY RAW MATERIALS LOGISTICS PARTNERSHIP DELIVERS VALUE As a large scale purchaser of various goods and services, We have partnered with Canterbury-based transport company we develop strong relationships with our ingredient, primary Hilton Haulage since our site was commissioned in 2008. packaging and other suppliers to ensure all material we Tailored logistical support in milk collection, raw material procure meets the stringent standards and specifications and finished product storage, shipping container movements set by our customers. All goods and services are procured through a rigorous and finished product transportation provides supply chain confidence and year on year benefits for us and Hilton Haulage. selection programme, fair and transparent negotiating and In FY15 our milk collection costs, per 1,000 litres of milk a clear procurement governance structure. transported from suppliers to our site, reduced for the third We are committed to a robust audit programme of all raw material and primary packaging suppliers. successive year. More efficient collection scheduling, on-site servicing facilities for the tanker fleet and completion of a project to make the entire tanker fleet capable of maximising loadings under the road transport regulations contributed to this. Hilton Haulage’s ability to integrate their scheduling processes to our transport demands enable us to optimise the movement of containers to and from our 22,500m2 It allows us to understand our suppliers’ capabilities and drystore in Dunsandel. Throughout FY15, 99% of container provides opportunities to audit their facilities. We work truck movements were transporting goods as they arrived closely with our suppliers to ensure all audit observations and as they departed, virtually eliminating any costly empty are actioned appropriately to protect the quality of what movements. we procure from them. Newly introduced truck and trailer units in FY16 are expected In FY15 we completed 49 site audits across five continents, to halve the cost of moving standard 20ft shipping containers and we will continue with our audit programme in FY16. as two full containers will be able to be transported to Once a complete review of all of our audited suppliers has Lyttelton Port by the new units. been undertaken, we will determine the frequency of re-visits and audits for each approved supplier. By having the best people, up-to-date product handling equipment and modern facilities at Synlait and access to Hilton Haulage’s expertise, we make sure our logistical operation enhances the supply chain from farm to our customers. PAGE 32 I Synlait Milk Limited Annual Report 2015 OUR PLACE Synlait Milk Limited Annual Report 2015 I PAGE 33 OUR PLACE CONTINUED OUR PRODUCTION CAPABILITY The addition of our third large scale spray dryer, D3, increases our annual production capacity from 90,000 MT to 140,000 MT. Increased demand from our customers in FY15 resulted in a second shift being recruited and a third shift will be added in early FY16. The facility is capable of packaging 120 cans per minute and the response from customer audits has continued Almost identical to dryer two (D2), both are capable of producing seven MT per hour of nutritional product, infant to be positive. formula or special milk powders. Together with dryer one (D1), our anhydrous milk fat (AMF) plant and special milks dryer (SMD), we have some of the most sophisticated equipment in the world that can manufacture a range of products for our customers. Our ability to manufacture, test and package product seamlessly in a single process gives us total quality control throughout manufacturing. Throughout the first year of operation we have made operational improvements to increase productivity and assist staff as they work with different size formats of product cans. TECHNICAL CENTRE OF EXCELLENCE Our new quality testing laboratory will significantly strengthen our onsite quality and technical capability. In addition to the world class quality testing laboratory, several other capabilities contribute to a technical centre of excellence at Synlait. We will have greater control and visibility of the quality testing process, as well as improved testing turnaround times and faster release of products to customers, allowing us to meticulously monitor product quality throughout the Combined with our in-house research expertise, the regulatory manufacturing process. environment, packaging and export, we have a nutritional capability that has earned the confidence and trust of our customers. PACKAGING SUCCESS With more than six million cans of infant formula manufactured in FY15, our state of the art blending and consumer packaging facility has increased output significantly from the 40,000 cans produced following its commissioning in late FY14. From international experts to experienced dairy and food scientists and enthusiastic graduates, we have recruited some of the best people to work in our new centre. PAGE 34 I Synlait Milk Limited Annual Report 2015 OUR PLACE CONTINUED A product development laboratory will allow for formulation development and the evaluation of new ingredients. A pilot scale plant will provide the capability to evaluate new recipes at a small scale, utilising new and existing processing technologies and providing assurances that these products can be successfully made on a commercial scale. The centre will also provide capability to evaluate sensory attributes and assess the stability of product over time to guarantee product performance and ensure consumer satisfaction. In FY15 we concluded a three year process with the Selwyn District Council to rezone our site as a subset under the Rural zone to a Dairy Processing Management Area (DPMA). It is expected to be completed in September 2015 and following building handover it will undergo the rigorous process of validation and accreditation. The DPMA is unique and will enable sustainable development of our site in the future, in line with community and local government expectations discussed throughout the process. We will work closely with International Accreditation New As a result, we now have pre-approved processes to approach Zealand (IANZ) in FY16 to secure accreditation for our test future developments, addressing cost and time inefficiencies methods, ensuring we not only meet regulatory requirements experienced under the previous Rural zone. but can be trusted by our customers to deliver accurate and valid testing results for their products. Environment Canterbury (ECAN), the regional council for Canterbury, introduced the Land and Water Regional Plan Additionally, the quality testing laboratory will also be certified (LWRP) in 2014 to specify how land and water resources to ISO/IEC 17025 standards, the globally recognised standard in Canterbury must be used. Variations to the LWRP have designed specifically for testing laboratories. been created for each catchment in the region, and we have RESPONSIBLE MANUFACTURING We’re conscious of our environment in Dunsandel, which is why we’re actively involved with regional and local environmental affairs to ensure our interests are well represented. been actively involved with Variation 1 that sets out further conditions for the Selwyn district in which our Dunsandel site is located. Throughout FY15 we contributed to the public consultation process on Variation 1 and were able to help refine the conditions to sustainably support our presence in the Selwyn area. We will continue to engage with Variation 1 in FY16 as it continues to progress through the We have developed two further wastewater fields with consultation process. neighbouring farms to receive process wastewater from D3 production as irrigation water. We treat all process wastewater onsite to an acceptable quality for irrigation, and it is then irrigated thinly over a large area to manage farm conditions responsibly. I PAGE 35 Synlait Milk Limited Annual Report 2015 OUR PEOPLE PAGE 36 I Synlait Milk Limited Annual Report 2015 OUR PEOPLE BEST PLACE TO WORK Our goal is to become the best place to work by offering a collaborative workplace where staff feel they make a difference and are encouraged and supported to be their best. We continued our focus on engagement leadership, collaboration and communication as key elements of our people strategy in FY15 to achieve this goal. We revisited our purpose, vision, values and behaviours in FY15 to further develop our culture, improve employee engagement and overall business performance. All four elements were considered and debated through an intensive staff consultation process. This also provided a vehicle to communicate our key strategic objectives, and resulted in a refreshed purpose, vision, new values and behaviours developed by and for our staff. Another key milestone in FY15 was the delivery of our new administration office on 27 July 2015. Having outgrown our original administration office and being located in different buildings around our Dunsandel site, we wanted a single office that would cater for staff, facilitate teams working together, build relationships and get things done through easier communication and collaboration. DEVELOPING GREAT PEOPLE The significant increase in staff numbers and staff promotions in FY15 has been underpinned with a focus on capability development to ensure we remain agile and responsive in a fast-paced environment. The 37% growth in staff from 238 in FY14 to 326 in FY15 was primarily to support our blending and consumer packaging facility, the operation of dryer three and our quality testing laboratory. Following on from this initiative staff were provided with In FY15 we again awarded two Outward Bound Scholarships Game Plan 16. The plan outlines our operational and financial and two scholarships to the two year NZ Diploma in Dairy targets for FY16 and gives staff clear visibility of how their Processing. work will directly contribute to our success. I PAGE 37 Synlait Milk Limited Annual Report 2015 OUR PEOPLE CONTINUED LEADING FROM THE FRONT EVERYONE HOME SAFE, EVERY DAY Building leadership capability and confidence as a key area We recognise the importance of keeping our staff, contractors of competency is a priority for Synlait. and visitors safe and in FY15 we implemented the first year of Our overall leadership framework is a combination of elements from Blanchard’s Situational Leadership II™ (SLII) our four year Safety Strategy, which is framed to ensure we are prepared for anticipated legislative changes. programme; our vision, values and behaviours and the Gallup Key activities for the year included reviewing all safety Engagement Pyramid. We continue to offer SLII as our core leadership programme. It is facilitated by certified in-house trainers and 16 People Leaders and emerging leaders participated in this programme in FY15. Supporting SLII to build a high performance organisation is our Gallup Strengths programme. We have assessed the strengths of more than 50 staff using this programme in FY15, equipping them with knowledge around how to work to their strengths as individuals and as teams. Two in-house coaches will continue implementing this programme throughout FY16 to support increased engagement and team collaboration. In May 2015 we ran our second annual Leadership Conference with 61 People Leaders, concentrating on what it means to be a Synlait leader. Throughout the conference we focused on the roles and responsibilities of being a leader and how to facilitate cross functional relationships among People Leaders. For the second year we have also offered the NZQA Certificate of Business to emerging leaders, with 16 graduating with a business plans and updating health and safety responsibilities across position descriptions, the employee handbook and standard operating procedures. As part of this review, we also developed the Synlait Safe Work Behaviours to act as a guide for working safely in a consistent way. Health monitoring was introduced in high risk areas of our business to ensure current controls remain effective. Broader participation in health and safety across the site was achieved with a renewed Health and Safety Committee. We also undertook our third Accident Compensation Corporation (ACC) Workplace Safety Management Practices (WSMP) audit in FY15, resulting in being awarded tertiary status. Tertiary is the highest level and recognises we operate a continuous improvement framework for workplace health Certificate in People Leadership in FY16. and safety management. PAGE 38 I Synlait Milk Limited Annual Report 2015 Synlait Milk Limited Annual Report 2015 I PAGE 39 OUR PEOPLE CONTINUED MEET SOME OF OUR PEOPLE LEFT TO RIGHT; MATTHEW STEVEN CHRIS FRANCE KELLY ANDERSON JAISHREE RAVINDRAN ALAN MORRIS PHIL O’MALLEY PAGE 40 I Synlait Milk Limited Annual Report 2015 OUR PEOPLE CONTINUED Matthew Steven Kelly Anderson Alan Morris DRYER THREE (D3) PRODUCTION QUALITY MANAGER CANNING BUSINESS MANAGER MANAGER Matthew joined Synlait in January 2015 to oversee production in our newest spray dryer – D3. Based primarily in Switzerland, but also with a stint in the Philippines, Matthew’s ten years with a leading multinational dairy and nutrition business equipped him with a range of management, process optimisation and product development skills. His experience in manufacturing and corporate research and development roles build on his PhD in Food Science from Cornell University. With D3 set to be commissioned in September 2015, his focus is to have his team operating D3 to a world-class standard while also supporting their individual development. Chris France Kelly leads our quality team, who ensure we comply with the rules and regulations high-grade food manufacturers must follow. Having worked in the industry since 1995, Kelly has built on her Masters Degree in Veterinary Microbiology with auditing and risk management roles at dairy and beverage companies in Australasia, as well as overseeing dairy auditing in New Zealand for a well-established food safety and quality agency. With systems and processes in place to monitor product quality at all stages of the manufacturing process, Kelly and her team work with staff to ensure products meet the high standards demanded by Synlait customers. Jaishree Ravindran LACTOFERRIN DEVELOPMENT CHIEF INFORMATION OFFICER TECHNOLOGIST In a newly created role, Chris is charged with harnessing the vast amount of data and information generated at Synlait so our leaders can make informed decisions consistently and effectively. He brings more than 20 years of management consulting experience in Canterbury to the role. Drawing on his expertise in information technology, strategic planning and project management, Chris’ aim is to support Synlait in making decisions that contribute to operational excellence. Jaishree brings a wealth of research and technical expertise to the team behind our unique nutraceutical lactoferrin product. With a Masters Degree in Dairy Science and Technology, Jaishree is an innovator at heart and a pioneer with specialist knowledge on commercialising research and development trials. Using her experience from private business and academic environments in both New Zealand and Australia, Jaishree is developing new processes and products for lactoferrin to meet current and future customer needs. Our world-class blending and consumer packaging facility is overseen by Alan, who joined Synlait in 2010. Alan contributed two decades of infant formula packaging experience with medium and large multinational businesses to help bring Synlait’s value added strategy to life. Alan’s current focus is making sure our canning and blending facility continues to meet the rigorous standards of our nutritional customers and also to maximise productivity and efficiencies. Phil O’Malley MANUFACTURING MANAGER Phil works closely with managers of the teams behind our three world-class spray dryers, AMF plant and packing function. He supports our production teams to deliver results against our internal key performance indicators (KPIs), as well as customer standards for high quality products. Joining Synlait in 2010, Phil’s engineering background and 25 years’ experience in both the New Zealand and international dairy industries has been well utilised. Phil has an influential role helping our production staff and operational processes adapt to the increasing scale of our nutritional capability. I PAGE 41 Synlait Milk Limited Annual Report 2015 OUR GOVERNANCE PAGE 42 I Synlait Milk Limited Annual Report 2015 OUR GOVERNANCE OVERVIEW We continue to focus on ensuring we have the best people, frameworks and processes in place to ensure that Synlait Milk Limited’s owners – our shareholders – are well represented through excellent governors. Since our listing on the NZX on 23 July 2013 (see the code “SML” on www.nzx.com or visit our Investor Relations Centre on our website (www.synlait.com/investors/), we have been fortunate to retain the services of our current Directors. Bill Roest was re-elected as a Director at the AGM on 2 December 2014, and the Chairman of the Board (Graeme Milne), Chair of the Remuneration & Governance Committee (Hon. Ruth Richardson) and Chair of the Audit & Risk Committee (Bill Roest) were all unanimously reappointed for a further term on 27 March 2015. This continuity of our Board has enabled us to build on the last two years of our public listing to ensure even better governance and oversight is delivered for our shareholder owners. Governance highlights from FY2015: - With the release by the Financial Markets Authority (FMA) of “Corporate Governance in New Zealand: Principle and Guidelines”, we performed a complete review of every Charter, Policy and Standard to ensure we complied with the FMA’s principles and guidelines. We are pleased to whether there were any audit control gaps and any other areas to further review. We also reviewed accounts payable data for errors and fraud. - Director and Senior Management succession planning was advanced, with individual Director performance being assessed, and induction programmes created for the Board and each of our two Board Committees. Further Director training and development is to be the major focus for FY16. - Our Risk Management Framework continued to be embedded throughout the organisation and a culture of risk management now exists. This has led to better reporting and identification of potential business risks, and we are well placed in relation to crisis and incident management. We review high and emerging risks at each Board meeting. - We undertook a major review of Directors’ Fees – commissioning a report from Strategic Pay Ltd. looking into New Zealand boards’ remuneration generally. This lead to the realignment of present Directors’ Fees and the recalibration of future reviews to a 12 monthly cycle (previously fee reviews had been conducted once every two years, potentially causing a “lead or lag” result). This was passed by shareholders at our Annual General Meeting (AGM) in December 2014, and applied from 1 April 2015. report that we do meet all of the FMA’s criteria, and this is - The Board held two workshops during the year (in outlined in more detail below. - We refreshed our purpose, vision, values and behaviours with all staff through extensive consultation. This confirms and ties into our Corporate Strategy. December 2014 and March 2015), where the Board reviewed in detail our vision and values, strategic objectives / FY16 key targets and initiatives and the associated five year financial forecast. - We launched a new health and safety reporting tool for the Board and Senior Leadership Team. This has greatly increased the instant visibility of reported incidents, their causes and what is being done to mitigate their reoccurrence. - We have developed a performance questionnaire for Directors and Management to assess the performance of our auditors (Deloitte). In relation to audit and internal controls, an enterprise-wide internal audit review was commenced with a questionnaire to staff to identify - The Board reviewed and approved the Company’s Capital Structure Strategy. We believe we have a strong governance team going forward, and our shareholders can be proud of the Board and its achievements this year. I PAGE 43 Synlait Milk Limited Annual Report 2015 OUR GOVERNANCE CONTINUED OUR BOARD The Directors held the following meetings during the year: Our Board is responsible for the overall corporate governance of Synlait Milk Limited, including strategic direction, determination of policy, approval of significant contracts/ projects, capital and operating budgets and overall stewardship of our organisation. Our Board is committed to ensuring we not only make ‘More from Milk,’ but also make more from ourselves, efficiently and effectively managing Synlait Milk Limited to deliver on the results we all expect. We are a non-standard Company in terms of NZX listing requirements, with certain waivers from the NZX to this effect. More details on the NZX waivers are detailed in our ‘Statutory Information’ section of this Annual Report (page 102), but generally the waivers concern the appointment of our Directors. 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 Hon. Ruth Richardson, to fulfil this role. We also must have a Managing Director appointed by the Board 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 table. - Board: six meetings, four conference calls and two workshops. - Audit & Risk Committee: five meetings - Remuneration & Governance Committee: four meetings Overall Director attendance at all meetings, calls and workshops was over 90%, with five Directors having a perfect attendance record. OUR COMMITTEES We have the following permanent Board Committees: - Audit & Risk Committee – chaired by independent Director Bill Roest (other members – Dong Zongbo, Graeme Milne). It is charged with monitoring our internal control and risk management systems, financial reporting obligations, independent audit process and ensuring we comply at all times with all applicable laws, regulations, listing rules and our own company policies and procedures. - Remuneration & Governance Committee – chaired by Hon. Ruth Richardson (other members – Graeme Milne, Li Ke, Sam Knowles and Bill Roest). 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 All of our Directors are profiled on page 22 of this Annual at all levels of the Company. Report, and also on our website (www.synlait.com/about/ key-people/board-of-directors) . A third of our independent Directors will retire each year, and Bright Dairy may appoint their Directors as they wish (but one must always be a New Zealand resident, experienced Director). Both Committees have Charters governing their operation, membership and remit to ensure that Synlait Milk Limited is optimally managed and governed at all times. Both Committees meet at least three to four times a year, but are also available at any stage to consider any issue within their As mentioned in 2014 at our last AGM, Bill Roest retired responsibility. and was re-appointed in accordance with our Constitution. At our upcoming AGM in December 2015, Graeme Milne our Chairman will retire and is eligible for re-election. The following retirements are scheduled for 2016 (Sam Knowles), 2017 (Bill Roest) and 2018 (Graeme Milne). All of these positions are able to be re-appointed by shareholders, subject to the individual Director wishing to stand at that time. More details can be found in our Constitution on our website (www.synlait.com/site/uploads/2013/07/Synlait-Milk- Limited-Constitution.pdf). We also have a permanent Standing Committee: - Continuous Disclosure Committee – chaired by the Managing Director (other members being the Chief Financial Officer, with either the Chairman of the Board or the Chair of Audit & Risk Committee). It monitors compliance by the Company and staff in relation to our Share Trading Policy and Guidelines, and ensures that all “material information” that is required to be disclosed to the market under the NZX Listing Rules is immediately disclosed. PAGE 44 I Synlait Milk Limited Annual Report 2015 OUR CORPORATE GOVERNANCE REPORT Synlait Milk Limited Annual Report 2015 I PAGE 45 OUR CORPORATE GOVERNANCE REPORT In accordance with the FMA’s “Corporate Governance in New Zealand: Principles and Guidelines” we have reviewed all our Charters, Policies and Guidelines for compliance. We can confirm that we comply with all nine principles and the associated guidelines as outlined in the FMA’s Corporate Governance Handbook. 2. BOARD COMPOSITION AND PERFORMANCE As mentioned above, under our Constitution, we have a specific structure and appointment regime for our Directors. We are a non-standard Company in terms of NZX listing requirements, with certain waivers from the NZX to this effect. More details on the NZX waivers are detailed in our Statutory Information section in this Annual Report (page 102), but generally the waivers concern the appointment of our Directors. Our Constitution, as approved by the NZX, outlines the composition of the Board of Directors as follows (provided that Bright Dairy continues to hold at least 37% of our shares): - There must be a minimum of three Directors and a maximum of eight Directors - Four Directors may be appointed by Bright Dairy (1 of The following is the commentary of how we comply with whom must be New Zealand resident and experienced these FMA criteria. as a Director of a listed company in New Zealand) 1. ETHICAL STANDARDS High ethical standards are demanded from all staff and Directors at Synlait Milk Limited. We have two separate Codes of Ethics – one covers our Directors (Board Charter), and the other covers all our staff (Synlait Standards). Both of these documents are available on our website (www.synlait.com/investors/corporate- governance). These Codes have very explicit expectations of the expected behaviours from our people, and any transgression would - There must be at least three Independent Directors - The Chair must be an Independent Director (and the Chair of the Audit & Risk Committee) - The Board must appoint a Managing Director who cannot be one of the Bright Dairy appointed Directors. At each AGM, one third of the Independent Directors must retire and are eligible for re-election by the shareholders. The longest serving Independent Director must be the one to stand down. Each of our Independent Directors meets the criteria required be seriously dealt with. These Codes for our staff also need to be classed as “independent”. to be read in accordance with our applicable Employment Agreements and our Employee Handbook – which contains detailed whistle-blower provisions. These Codes have been circulated and presented to all Directors and staff, and are also available on our intranet portal. We have a schedule for reviewing the content of the Codes through our Remuneration & Governance Committee, as well as reinforcing the Codes’ core messages through our regular internal team meetings and Board meetings. We have reviewed compliance of our Board with the Board Charter this year, and plan to review compliance with our Synlait Standards for all staff in FY2017 (as we only launched our Synlait Standard in March 2015). The Board has its own Charter, and this is available on our website (www.synlait.com/investors/corporate-governance). It sets out the formal delegations, and this is then enshrined in our internal Delegated Authorities Policy. We operate a formal review of all Directors (including our Chairman), their performance, tenure plans, capacity and training once every three years. In FY16 ongoing Director training is a key area of focus, and the training programme is a mix of corporate governance training, specialist skills (tax, treasury management, health & safety management, financial reporting), NZX Rules training and industry awareness. PAGE 46 I Synlait Milk Limited Annual Report 2015 OUR CORPORATE GOVERNANCE REPORT CONTINUED We have induction programmes and succession plans at 4. REPORTING AND DISCLOSURE Board and Committee levels. Due to our smaller size relative to many other publicly listed entities, we do not have a standing Our Board has a rigorous process to ensure the quality and integrity of our Financial Statements. Nomination Committee. The Directors profiles are on our website (www.synlait.com/ about/key-people/board-of-directors), and are detailed on page 22 of this Annual Report. 3. BOARD COMMITTEES As mentioned above, both of our Committees have formal Charters, which are reviewed for compliance each year. These On a monthly basis the full Board is presented with a very detailed Business Performance Report (BPR), which looks at the financial performance of the organisation and identifies any risks, issues and opportunities, and attempts to quantify the upsides and downsides should any of these items eventuate. Bridges are also presented showing forecasts against actuals, and the reasons for any variances – including whether these are temporary timing differences or permanent Charters can be found on our website along with membership variances. details (www.synlait.com/investors/corporate-governance). We have an active company secretariat which takes minutes and makes all information available to Directors as required. We use on online portal tool “Board Papers” managed and securely hosted by Pervasent Inc. This means our Directors not only have the latest Board or Committee papers available to them, but also a library of reference material, past meeting minutes, resolutions and background papers available through the portal at any time. Each Committee’s recent proceedings are reported back to the full Board at each Board meeting. Our Audit & Risk Committee is chaired by Independent Director Bill Roest – who is a member of the Chartered Accountants Australia and New Zealand, and a fellow of the Association of Chartered Certified Accountants (UK). The majority of the Committee are Independent Directors, but Dong Zongbo who is a Bright Dairy appointed Director also is a member. Mr Dong brings a wealth of experience to the Committee, and is a member of the Institute of Public Accountants (Australia). Our Remuneration & Governance Committee is chaired by the Bright Dairy appointed Director Hon. Ruth Richardson. The majority of the Committee are Independent Directors. Our Strategic Remuneration Policy is available on our website (www.synlait.com/investors/corporate-governance). Each of the Directors individual experience and qualifications are set out on our website (www.synlait.com/about/key- people/board-of-directors). At each Board meeting, the BPR is reviewed in detail to understand the overall business performance. In respect of the financial reporting for the Interim and Annual Financial Statements, the process is first governed by the Audit & Risk Committee. This Committee is charged with reviewing in significant detail the Financial Statements and accompanying material. The Committee starts this process by receiving a report from Management – the “Detailed Management Report”. This Report considers the accounting policies used, preparation of the Financial Statements, accounting estimates, significant transactions, significant balances, additional disclosures, banking covenants and post-balance date events. There is a separately tabled “FAQs” on the applicable Financial Statements to assist Directors in getting quickly to the core issues, in relation to the financial reporting process, accounting policies and Financial Statements themselves. Specific specialised reports are also presented to the Committee for review, along with the complete set of draft Financial Statements (including notes to the accounts). For example, these reports may be in relation to treasury management functions and policies, stock and inventory provisions and underlying earnings. An audit report also accompanies the Financial Statements from our auditors (who are currently Deloitte). I PAGE 47 Synlait Milk Limited Annual Report 2015 OUR CORPORATE GOVERNANCE REPORT CONTINUED Finally, to support the robustness of the Financial Statements, At each Board meeting, a detailed Compliance Report is Management provide written representations to the Directors presented to the full Board (and also considered separately by in order for them to be satisfied with the internal systems the Audit & Risk Committee). This report looks at regulatory and compliance within the organisation, which underlay the matters and updates, continuous disclosure obligations Financial Statement production. After approval by the Audit & Risk Committee, then the complete set of Financial Statements is submitted for approval by the full Board with the recommendation of the Committee. around core headings and topics, earnings forecasts by analysts, core policy compliance, NZX disclosures issued during the period between meetings and a summary of where Synlait Milk Limited has been mentioned in the news. Each Director is then obliged to form a view on the quality, As previously mentioned, all our Charters, Policies and accuracy and integrity of the Financial Statements and give Standards are available on our website (www.synlait.com/ their approval (or not). investors/corporate-governance). In order to assist the Board reach a conclusion on the In addition, on our website we have all our previous financial robustness and accuracy of our financial statements, several statements readily available for our shareholders (www. projects in relation to internal controls have been conducted synlait.com/investors/annual-interim-reports), including all in FY15 or are planned for FY16. These include a full data our analyst briefings and investor presentations (www.synlait. analytics project being completed to ensure our payment com/investors/presentations). processes are robust and accurate, the integrity and stability of our IT systems being tested and confirmed, an internal controls survey completed across the organisation, and the establishment of an integrity testing policy for our key financial models. These initiatives will be continued and Analysts are strictly dealt with according to our published Analyst & Media Policy, also on our website (www.synlait. com/investors/analysts-media-policy). expanded in FY16. 5. REMUNERATION In relation to our obligations of continuous disclosure under the NZX Rules, we have a Continuous Disclosure Policy. Our Strategic Remuneration Policy is on our website (www. synlait.com/investors/corporate-governance). This Policy is on our website (www.synlait.com/investors/ This Policy is reviewed each year to ensure it meets the corporate-governance). Under that Policy, as mentioned above, the Board formed a Continuous Disclosure Committee chaired by our Managing Director and CEO. Other members are the CFO and either the Chairman of the Board or the Chair of the Audit & Risk Committee. A co-opted member is our General Counsel and Company Secretary. strategic policy objective of attracting, rewarding and retaining staff with the requisite skills and capabilities to ensure our successful business outcomes. The Board has a structured approach to remuneration, focusing on performance equity, internal equity and external equity. In addition, any change to remuneration is based on the consideration of the five factors of job size, market movement, an individual’s position in relation to the salary range, It is a standing committee, and meets as required to promptly individual performance and eligibility for review. and without delay consider whether an item of information identified is “material” and requires immediate disclosure. Meetings typically occur by email or phone as required, and have been very flexible and effective in considering issues of disclosure. The Remuneration & Governance Committee oversees the operation of our Remuneration Policy, and monitors the overall budgets for all employees. The Committee also recommends to the Board, for approval, the remuneration and bonus arrangements for our Senior Leadership Team and the The Board takes very seriously its obligation of ensuring Managing Director and CEO. there is a timely release of material information by Synlait Milk Limited to the NZX notifications platform. The Board can confirm during the FY15 that the continuous disclosure obligations were complied with. Our Senior Leadership Team and our employees’ remuneration details (including the Managing Director and CEO’s) are set out in the ‘Statutory Information’ section of this Annual Report at page 102. We also assess our Senior Leadership Team’s performance and the Directors’ Fees annually. PAGE 48 I Synlait Milk Limited Annual Report 2015 Synlait Milk Limited Annual Report 2015 I PAGE 49 OUR CORPORATE GOVERNANCE REPORT CONTINUED We have the following share incentive plan in place for our At part of the Senior Leadership Team, the short term senior staff: Senior employee IPO incentive scheme We are in the final year of a three year IPO Incentive for 18 incentive opportunity ranges from 20% of based remuneration for direct reports to the Managing Director and CEO, and 40% of base remuneration for the Managing Director and CEO. This short term incentive is awarded based on exceeding budgeted senior staff. This scheme provides the opportunity of an award NPAT (70%), and personal performance objectives (30%). of shares based on the successful achievement against a number of performance hurdles. Targets for years one and two have not been met and as such no award has been granted. The remaining maximum value opportunity per senior staff participating in the scheme is 25% of their base remuneration as at 1 August 2013. They can receive up to a maximum value of 25% of their base salary, by way of rights to shares valued at the IPO price, which will only vest at the end of the three year period, post IPO, on the condition that they are still employed at Synlait Milk and that the share price at that point is above the IPO price. We participate in Kiwisaver, and pay the employer contribution of 3% to all employees participating in the Kiwisaver scheme as part of their fixed remuneration. Our Directors’ remunerations (including our Managing Director and CEO’s remuneration) is set out in the ‘Statutory Information’ section of this Annual Report on page 102. 6. RISK MANAGEMENT As previously mentioned, we have a robust Risk Management Framework, which is well embedded in the organisation after The performance hurdles are split into two separate Company being launched last year. goals. The first is ensuring the Company over-performs on our budgeted net profit after tax (NPAT) by 10% or more, and the second is that certain annual compound growth targets in total shareholder returns (TSR) reaches the following set targets: TSR 20% or more 15% 12% Less than 12% Annual entitlement as a % of base salary 25.00% 18.75% 6.25% - The Framework consists of the: - Risk Management Policy: This sets out the high-level appetite of the Company for risk and identifies the major risk categories. It established the Board’s commitment to risk management. The Policy links all the underlying documents together (so provides the overall Risk Management Framework). - Risk Management Procedures and Guidelines: This is a more detailed document that sets out how we identify and define what a risk is (as opposed to an incident or a hazard), sets the levels for the severity and likelihood of a risk occurring (producing a risk assessment), If the performance hurdles are met for FY16 the approximate and introduces the capturing of risks in functional areas cost would be $502,000. through the Risk Matrix. We also have a short term performance bonus scheme - Crisis Management Plan: Defines a crisis, and puts the operating at various levels across our organisation. practical operational procedures in place to manage that For employees below the Senior Leadership Team (SLT) level crisis event should it ever occur. the short term incentive opportunity ranges from 5% to 15% of - Incident Management Plan: Defines an incident and the base remuneration and is based on a mixture of Company puts the operational procedures in place to manage an profit, team and individual objectives. incident. PAGE 50 I Synlait Milk Limited Annual Report 2015 OUR CORPORATE GOVERNANCE REPORT CONTINUED We have rigorously tested our Crisis Management Plan on As part of our Risk Management Strategy, our Board has several occasions, and it was used extensively and very assessed the Company’s appetite for risk (from zero to limited successfully to manage our response to the recent 1080 tolerance), and this drives the risk assessment placed on any terrorist threat in New Zealand. At each Board meeting, the Board receives a Risk Report – noting the top risks and emerging risks – which not only particularly identified event or series of related events – in terms of risk likelihood / probability (frequency) and risk impact (consequences). summarises the issue, but also rates the potential impact if it Our ability to effectively manage risk is also dependent on were to occur, trend data and the risk mitigation steps for the having an appropriate risk governance structure with well- Directors. This is then discussed in detail by the Board with defined role and responsibilities. senior Management. Our risk management structure is as follows. This structure Three to four times a year the full Risk Register is presented illustrates that risk management is not the sole responsibility to the Audit & Risk Committee, looking in detail of the top of one individual or a series of individuals, but rather occurs and emerging risks in each functional area of the business, and is supported at all organisational levels. potential impact, controls in place, mitigation options, whether or not it is insurable (and whether insurances are held) and trends. Internal controls have been a focus in FY15, with this detailed Board in Principle 4: Reporting and Disclosure. - Provides oversight and review Our Risk Management Strategy focuses around controlling and managing risks around seven key categories within our business: - Food safety: Affecting quality of products to such an extent to be hazardous to human health - Site event: Impacting on physical plant, equipment or manufacturing operations - Health and safety event: Harming our employees, contractors or visitors - Environmental event: Causing environmental damage or harm, breaching consents or statutory obligations - Supply event: Impacting supply of milk or raw materials for manufacture - Product / market development: Risks associated with new capital projects, new products or processes - Financial event: Loss or damage to financial systems, fraud or other financial loss Audit and Risk Committee - Reviews risk status - Endorses risk strategy, policy Risk Management Function SLT and management - Drives culture of risk management - Manages and identifies risks Staff and contractors • Comply with risk procedures • Identify risks I PAGE 51 Synlait Milk Limited Annual Report 2015 OUR CORPORATE GOVERNANCE REPORT CONTINUED To enable the Board to properly assess our risks within dependencies between different functional areas in terms of our business, we have a formalised reporting structure to risk management. capture enterprise-wide risks and also recognise the inter- The risk management reporting responsibilities are summarised as: GROUP Board RESPONSIBILITIES › Review reports › Communicate risk information issues back to the Company › Identify new and emerging risks Audit & Risk Committee › Review reports › Communicate risk information issues back to the Company › Communicate key risk issues to the Board › Identify new and emerging risks SLT and Management › Review reports › Communicate key risk issues to the Audit & Risk Committee › Closely monitor extreme risks › Identify new and emerging risks Risk owners › Monitor and review the risks which they own › Prepare reports for the risks which they own › Provide their respective managers with information on the risks which they own Risk Management Committee › Prepare reports › Identify new and emerging risks › Gather risk information from the relevant Company people, for example, Risk owners Staff and contractors › Provide risk information to those that request it › Identify new and emerging risks › Monitor and review risks within their areas › Identify new and emerging risks PAGE 52 I Synlait Milk Limited Annual Report 2015 OUR CORPORATE GOVERNANCE REPORT CONTINUED 7. AUDITORS As previously mentioned, our external auditors are presently the firm of Deloitte, with our lead audit partner Michael Wilkes (based in the Christchurch Deloitte office). Deloitte was originally appointed prior to the first AGM to provide auditing services to us as they are also the auditors used by Bright Dairy in China, and there are significant savings and administrative advantages in having both firms contracted in New Zealand and China, as Bright Dairy performs a consolidation of our accounts for their reporting purposes on the Shanghai Stock Exchange. We have this year put in place a review process for assessing the performance of our external auditors by both Directors and senior Management, which will be conducted annually starting in FY16. This survey looks at all aspects of the audit performance, relationship management and professional services supplied by Deloitte to us. Both Management and the Board have a strict policy to carefully review any services provided by Deloitte outside of their audit function. The Chair of the Audit & Risk Committee is consulted by Management where there may be a perception that independence could be threatened. Where there is any doubt or risk to the appearance of independence, then the required work is provided by another firm. Semi-annually during FY15, Deloitte provided us with an Independence Report, where all fees charged to Synlait Milk Limited were examined in detail to ensure there has been no threat to the independence, integrity and objectivity of their role as our external auditor. These confirmations have not highlighted any areas for concern. The work performed by Deloitte during FY15 is as follows: AREA OVERVIEW OF WORK INVOLVED BASIS OF DECISION TO INVOLVE DELOITTE INVOICED FEES Taxation › Various engagements including GST › These services are compliance in nature $95,000 review, assistance with the IRD audit and are not inconsistent with Deloitte’s and tax depreciation work role as auditor. Consulting › Review of the advance planning and › The Audit & Risk Committee is satisfied $148,000 advance scheduling system that these assurance and advisory services are not inconsistent with Deloitte’s role as auditor. › Advisory support in respect of the development of an IT strategy › Assistance with Commerce Commission submissions › Accounting advice on the early adoption of NZ IFRS 9 › Performing analytical procedures to identify potentially fraudulent transactions Modelling › Limited scope financial model review › This work was not inconsistent with $27,000 Deloitte’s role as auditor I PAGE 53 Synlait Milk Limited Annual Report 2015 OUR CORPORATE GOVERNANCE REPORT CONTINUED All matters were closely examined by Management and - Key dates in the investor schedule, such as our the Chair of the Audit & Risk Committee to make sure AGM, financial statements release dates, planned the Committee was satisfied that the objectivity and announcements or updates independence of Deloitte as our external auditor was not compromised. Deloitte operate a policy of rotating its lead audit partner every five years. Michael Wilkes (Deloitte Christchurch) is retiring from the engagement, and should Deloitte be reappointed at the next AGM in December 2015, then a new audit partner will be appointed by the Board in conjunction with the Audit & Risk Committee. The relationship between the Audit & Risk Committee (on - Copies of all our Annual Reports and Interim Reports (including our initial offer document) - All investor presentations - Shareholder information relating to our share register and how to contact our registry service provider (ComputerShare) - Our Corporate Governance section – with all our key governance documents available behalf of the Board) and Deloitte is very healthy, and separate - Our analyst and media policy sessions are held with just the Directors and the audit partner to ensure there is no undue pressure or other issues in relation - FAQs to the conduct of the audit engagement and reporting. If there - Contact details for investor matters were any complaints from our auditors, then these can be directly raised with the Board or the Audit & Risk Committee, and do not have to be elevated through Management. Our auditors attend every Audit & Risk Committee meeting which is considering our Financial Statements, and also are asked to attend our AGM each year. Shareholders can ask our auditors any questions during the open AGM forum. All fees paid to our auditors are also disclosed in our financial statements, and are in summary as follows (1 August 2014 to 31 July 2015): Audit work = $127,000 Non-audit work (as set out in the above table) = $270,000 This area is regularly updated by our Marketing and Communications team. Our AGM is held each year (in November or December), usually in the early afternoon, in the Christchurch area, unless otherwise advised. All shareholders are warmly invited to attend and actively participate in the Meeting. As mentioned above, our auditors are requested to attend the AGM and shareholders are given an opportunity to ask any questions of our auditors. From FY15, we are also hosting an annual on-site visit for our shareholders at our plant in Dunsandel, Christchurch. In FY16 this will be scheduled around the AGM, which will also be In accordance with section 207T of the Companies Act, held on our site for the first time. Deloitte will be automatically appointed at the AGM in December 2015 unless the there is a resolution to the contrary. Our shareholders will be asked at the AGM whether or not they approve the Board to fix the auditor’s fees and expenses for the following financial year (FY16) in accordance with section 207S of the Companies Act. 8. SHAREHOLDER RELATIONS We have an Investor Relations Centre on our website (www.synlait.com/investors). Here shareholders will find: - A live feed of our NZX listed share price, with historical 9. STAKEHOLDER INTERESTS As a publicly listed company, we have important relationships with our investors, employees, customers, suppliers, creditors, our local community where we are based and the wider region in which we operate. We have policies governing all our interactions with these various stakeholders, and this is enshrined at Board level within our Board Charter (Directors Code of Conduct – Appendix 1) and for all our employees in our Synlait Standards. Copies of both documents are on our website (www.synlait.com/investors/corporate-governance). pricing and trading data The Board assesses compliance with these policies annually. - A complete set of all announcements and releases made by us to the NZX or general media PAGE 54 I Synlait Milk Limited Annual Report 2015 Synlait Milk Limited Annual Report 2015 I PAGE 55 OUR FINANCIAL STATEMENTS PAGE 56 I Synlait Milk Limited Annual Report 2015 SYNLAIT MILK LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 CONTENTS Directors’ Responsibility Statement Financial statements Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Notes to the consolidated financial statements 1 Reporting entity 2 Basis of preparation 3 Summary of significant accounting policies 4 Critical accounting estimates and judgements 5 Underlying net profit after tax 6 Segment information 7 Revenue 8 Expenses 9 Finance income and expenses 10 Income tax 11 Current assets – Trade and other receivables 12 Current assets – Inventories 13 Non-current assets – Other investments 14 Non-current assets – Property, plant and equipment 15 Non-current assets – Intangible assets 16 Trade and other payables 17 Loans and borrowings 18 Deferred tax assets and liabilities 19 Share capital 20 Share-based payments 21 Reserves and retained earnings 22 Reconciliation of profit after income tax to net cash inflow from operating activities 23 Financial risk management 24 Financial instruments 25 Contingencies 26 Commitments 27 Related party transactions 28 Investments in other entities 29 Events occurring after the reporting period Auditor’s report PAGE 58 59 60 61 62 63 64 64 65 70 71 72 72 73 74 74 76 77 77 78 80 80 81 82 83 83 85 86 87 92 95 95 96 97 98 99 I PAGE 57 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 DIRECTORS’ DECLARATION AS AT 31 JULY 2015 DIRECTORS’ RESPONSIBILITY STATEMENT The Directors are pleased to present the financial statements for Synlait Milk Limited and its subsidiary set out on pages 59 to 98 for the year ended 31 July 2015. The Directors are responsible for ensuring that the financial statements present fairly the financial position of Synlait Milk Limited and its subsidiary (together ‘the Group’) as at 31 July 2015 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 Markets Conduct Act 2013. For and on behalf of the Board. Graeme Milne CHAIRMAN 21 September 2015 John Penno MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER 21 September 2015 PAGE 58 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 JULY 2015 Revenue Cost of sales Gross profit Other income Share of loss from associates Sales and distribution expenses Administrative and operating expenses Earnings before net finance costs and income tax Finance expenses Finance income Loss on derecognition of financial assets Net finance costs Unrealised foreign exchange losses Profit before income tax Income tax expense Net profit after tax (NPAT) for the year Earnings per share Basic earnings per share (cents) Supplementary Information Profit for the period Underlying adjustments Unrealised foreign exchange losses Adjustments before tax Tax credit on underlying adjustments Underlying net profit after tax Underlying net profit per share (cents) Group Year ended 2015 $’000 2014 $’000 448,136 600,518 (377,100) (523,430) 71,036 77,088 99 (378) (25,330) (19,082) 26,345 (9,161) 311 (37) (8,887) (2,326) 15,132 (4,580) 10,552 65 - (27,760) (16,954) 32,439 (6,516) 1,172 - (5,344) - 27,095 (7,492) 19,603 7.21 13.40 Group Year ended 2015 $’000 10,552 2,326 2,326 (651) 12,227 8.35 2014 $’000 19,603 - - - 19,603 13.40 Notes 7 8 7 28 8 8 9 9 24 9 10 19 Notes 5 5 Underlying net profit after tax is a non-IFRS financial performance measure that represents net profit after tax stated in compliance with NZ IFRS after excluding unrealised foreign exchange losses. It is presented to enable stakeholders to make an assessment and comparison of the Group’s underlying performance across different accounting periods. Further information can be found in note 5 to the financial statements. The accompanying notes form part of and are to be read in conjunction with these financial statements. I PAGE 59 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 JULY 2015 Notes Profit for the period Items that may be reclassified subsequently to profit and loss Revaluation of property, plant and equipment 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 (loss) / income for the year Group Year ended 2015 $’000 10,552 16,810 (48,368) 985 8,726 (21,847) (21,847) (11,295) 2014 $’000 19,603 - 1,875 (2,249) 104 (270) (270) 19,333 The accompanying notes form part of and are to be read in conjunction with these financial statements. PAGE 60 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JULY 2015 Group Equity as at 1 August 2013 Profit or loss for the year Other comprehensive income 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 Share issue costs Employee benefits reserve Total contributions by and distributions to owners Equity as at 31 July 2014 Profit or loss for the year Other comprehensive income Revaluation of property, plant and equipment Effective portion of changes in fair value of cash flow hedges Movement in time value hedge reserve Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Share capital Employee benefits reserve Cash flow hedge reserve Revaluation reserve Retained earnings Total equity Notes $’000 $’000 172,548 - - - - - 19 (301) - (301) 172,247 - - - - - - - - - $’000 (1,833) - 1,875 (2,249) 104 (270) - - - $’000 $’000 $’000 8,008 (14,685) 164,038 - - - - - - - - 19,603 19,603 - - - - - - - 1,875 (2,249) 104 (270) (301) 60 (241) (2,103) 8,008 4,918 183,130 - - (37,270) (11,098) 985 13,268 (34,115) - - - 10,552 10,552 16,810 - - - (4,542) 12,268 - - - - - - - - - - 16,810 (37,270) (11,098) 985 8,726 (21,847) 11 11 (36,218) 20,276 15,470 171,846 - - - - - - - 60 60 60 - - - - - - - 11 11 71 Employee benefits reserve 20 Total contributions by and distributions to owners Equity as at 31 July 2015 172,247 The accompanying notes form part of and are to be read in conjunction with these financial statements. I PAGE 61 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 JULY 2015 Notes 11 12 24 14 15 13 24 17 16 24 17 18 24 19 21 Group 2015 $’000 1,529 68,141 1,240 2,225 63,804 178 2014 $’000 2,393 89,046 8,880 786 71,262 1,632 137,117 173,999 436,038 298,186 4,651 1,976 - 442,665 579,782 85,646 80,367 137 33,677 4,589 70 42 302,887 476,886 63,113 116,730 2,618 2,916 199,827 185,377 177,921 13,600 16,588 208,109 407,936 172,247 (15,872) 15,471 171,846 579,782 91,376 16,525 478 108,379 293,756 172,247 5,965 4,918 183,130 476,886 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 Other investments Derivative financial instruments Total non-current assets Total assets Current liabilities Loans and borrowings Trade and other payables Current tax liabilities 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 earnings Total equity attributable to equity holders of the Company Total equity and liabilities The accompanying notes form part of and are to be read in conjunction with these financial statements. PAGE 62 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 2015 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 / (payments) Income tax refunds Net cash inflow from operating activities Cash flows from investing activities Interest received Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Acquisition of intangible assets Purchases of equity instruments Net cash outflow from investing activities Cash flows from financing activities Costs of issue of shares (net) Repayments of borrowings Receipt of borrowings Net movement in working capital and trade finance facilities Interest paid Net cash inflow from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of year Notes 22 Group Year ended 2015 $’000 2014 $’000 479,763 568,266 (311,877) (362,551) (157,823) (141,077) 7,640 (1,327) 16,376 (5,963) - 58,675 305 130 (106,982) (95,876) 119 (993) (2,284) 133 (1,508) (70) (109,835) (97,191) - (18,075) 102,488 22,533 (14,351) 92,595 (864) 2,393 1,529 (301) (17,699) 80,638 (16,890) (7,204) 38,544 28 2,365 2,393 The accompanying notes form part of and are to be read in conjunction with these financial statements. I PAGE 63 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 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 a FMC reporting entity for the purposes of the Financial Markets Conduct Act 2013 and its financial statements comply with that Act. Synlait Milk Limited is primarily involved in the manufacture and sale of dairy products. The Company is a limited liability company incorporated and domiciled in New Zealand. The address of its registered office is 1028 Heslerton Road, Rakaia, RD 13, New Zealand. 2 BASIS OF PREPARATION The consolidated financial statements of the Group have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (‘NZ GAAP’). They comply with New Zealand equivalents to International Financial Reporting Standards (‘NZ IFRS’) and other applicable Financial Reporting Standards, as applicable for profit oriented entities. The consolidated financial statements also comply with International Financial Reporting Standards (‘IFRS’). The financial statements were authorised for issue by the directors on 21 September 2015. Basis of Measurement These financial statements have been prepared on the historical cost basis except for the following: - 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 4. (a) Principles of consolidation The Group’s financial statements consolidate the financial statements of the Company and its subsidiary. A subsidiary is a controlled entity over which the Group has power, is exposed, or has rights, to variable returns from its involvement with the entity, and has the ability to use its power to affect its returns. Synlait Milk Finance Limited is set up primarily for holding all banking facilities for the Group and related interest rate swaps. Funds are loaned to Synlait Milk Limited and interest is charged at market rates. (b) Segment reporting The Group operates in one industry, being the manufacture and sale of dairy products. The Board makes resource allocation decisions based on expected cash flows and results of the Group’s operations as a whole and the Group therefore has one segment. Although the Group sells to many different countries, the Group operates in one principal geographical area being New Zealand. (c) New Accounting Policy Investments in subsidiaries, associates and joint ventures Associates are those entities in which the Group, either directly or indirectly, holds a significant but not a controlling interest, and has significant influence. Investments in associates are accounted for using the equity method and are measured in the statement of financial position at cost plus post acquisition changes in the Group’s share of net assets. Goodwill relating to associates and joint ventures is included in the carrying amount of the investment. Dividends reduce the carrying value of the investment. (d) Changes in accounting policies NZ IFRS 9 – Financial Instruments (2013) The Group has changed its accounting policy with respect to financial instruments and hedge accounting following the early adoption of NZ IFRS 9 (2013) as described in note 3(t). The application of NZ IFRS 9 and associated accounting policy changes has resulted in additional disclosures but has not had any material impact on the amounts recognised in these financial statements. (i) Impact on financial assets and financial liabilities NZ IFRS 9 establishes principles for the classification of financial assets, using a single approach to determine whether a financial asset is classified and measured at amortised cost or fair value. As a result of the early adoption of NZ IFRS 9, the Group has changed its accounting policy for financial instruments from 1 August 2014. The change did not result in a change in carrying value of any of the financial instruments on transition date. (ii) Impact on hedge accounting NZ IFRS 9 changes the qualifying criteria to be able to hedge account. The stringent NZ IAS 39 effectiveness testing thresholds have been replaced with a principles based requirement to demonstrate that there is an economic relationship between the hedged item and hedging instrument. Moreover, the ‘hedged ratio’ used to form the economic PAGE 64 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 relationship of the hedged item and hedging instrument has to be the same or similar as that resulting from the actual quantities of hedged items and hedging instruments the Group uses for risk management purposes. Furthermore NZ IFRS 9 changes the treatment of the time value of options, with gains and losses being recognised through other comprehensive income, rather than the income statement under NZ IAS 39. This permits the cost of vanilla options to be treated as a cost of hedging. The Group has reassessed all of its existing hedging relationships that qualified for hedge accounting under NZ IAS 39 and these have continued to qualify for hedge accounting under NZ IFRS 9. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of 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. (ii) Interest income Interest income is recognised using the effective interest method. When a loan or receivable is impaired, the 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) Income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the profit and loss component of 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. 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. 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 in relation to the revaluation of land. 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 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. (d) 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. (e) Leases Leases on terms where the 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 I PAGE 65 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 so as to achieve a constant rate of interest on the remaining balance of the liability. Other leases are operating leases and the leased assets are not recognised on the 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. (f) Impairment of non-financial assets The carrying amounts of the Group’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. 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 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 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. Impairment losses are first recognised as a deduction against revaluation reserves and then recognised in the profit or loss component of the statement of comprehensive income once those reserves have been exhausted. 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. (g) Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits and cash held on trust by Tax Management New Zealand Ltd. (h) 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 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. (i) Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and where applicable, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Cost is determined on a weighted average basis and in the case of manufactured goods, includes direct materials, labour and production overheads. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (j) Financial Instruments Classification The Group classifies its financial assets in three categories: at amortised cost, at fair value through other comprehensive income and at fair value through profit or loss. The classification of financial assets depends on the business model within which the financial asset is held and its contractual cash flow characteristics. The Group classifies its financial liabilities in two categories: at amortised cost and at fair value through profit or loss. (i) Financial instruments at amortised cost Financial assets are classified as measured at amortised cost if the Group’s intention is to hold the financial assets for collecting cash flows and the contractual terms give rise PAGE 66 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 on specified dates to cash flows that are solely payments of principal and interest. Where financial assets are subsequently measured at FVPL, all gains and losses are recognised in profit or loss. The Group currently classifies its cash and cash equivalents, restricted cash equivalents, accounts receivable and other receivables as financial assets measured at amortised cost. Financial liabilities are classified as measured at amortised cost using the effective interest method, with the exception of those classified at fair value. The Group currently classifies its accounts payable, accrued liabilities (excluding derivatives) and term debt as financial liabilities measured at amortised cost. (ii) Financial instruments at fair value through other comprehensive income (FVOCI) The Group has elected to designate certain investments in equity instruments that are not held for trading as FVOCI at initial recognition and to present gains and losses in other comprehensive income. Dividends earned from such investments are recognised in profit or loss. (iii) Financial instruments at fair value through profit or loss (FVPL) Financial assets that do not meet the criteria for classification as measured at either amortised cost or FVOCI are classified as FVPL. Derivative financial instruments that are not in an effective hedge relationship are classified as FVPL. Recognition and measurement The Group recognises a financial asset or a financial liability when it becomes a party to the contractual provisions of the instrument. Regular purchases and sales of financial assets are recognised on the trade date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not classified at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the profit and loss component of the statement of comprehensive income. Where financial assets are subsequently measured at amortised cost, interest revenue, credit losses and foreign exchange gains or losses are recognised in profit or loss. On derecognition, any gain or loss is recognised in profit or loss. Financial liabilities subsequently measured at amortised cost are measured using the effective interest method. Where investments in equity instruments are designated as FVOCI, fair value gains and losses are recognised in other comprehensive income. Dividends earned from such investments are recognised in profit or loss. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when the contractual obligations are discharged, cancelled or expired. Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. As the Group’s financial instruments are not traded in active markets their fair value is determined using valuation techniques. The Group use a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a current legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. There are master netting agreements in place for derivative financial instruments held, however these instruments have not been offset in the balance sheet as they do not currently meet the criteria for offset. Impairment of financial assets 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, with the exception of assets that are fair valued through profit or loss. 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. (k) Derivative financial instruments The 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 the derivative contact is entered into and are subsequently remeasured to fair value at each reporting date. For derivatives measured at fair value, the gain or loss that results from I PAGE 67 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 changes in fair value of the derivative is recognised in earnings immediately, unless the derivative is designated and effective as a hedging instrument. Hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments are designated as cash flow hedges by the Group. The full fair value of a hedging derivative is classified as a current asset or liability when the remaining term of the hedged item is 12 months or less from balance date, or when cash flows arising from the hedged item will occur within 12 months or less from balance date. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months and no cash flows will occur within 12 months of balance date. Trading derivatives are classified as a current asset or liability. (i) Hedge accounting The Group designates certain hedging instruments in respect of foreign currency risk and interest rate risk as cash flow hedges. Hedges of risk on firm commitments and highly probably transactions are accounted for as cash flow hedges. At the inception of the hedge relationship, the 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 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. (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, included in Revenue for foreign exchange instruments and Finance costs for interest rate swaps. 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 Group revokes the hedging relationships, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for 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. The Group separates the intrinsic value and time value of vanilla option and collar contracts, designating only the intrinsic value as the hedging instrument. The time value, including any gains or losses, is recognised in other comprehensive income until the hedged transaction occurs and is recognised 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. (l) 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 Costsî, 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, buildings and plant and equipment are carried at fair value. Any increase in the fair 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. Fair value estimation The fair valuation of land is undertaken on a cyclical basis, not exceeding three years, by an independent registered valuer. The valuation considered the highest and best use of the land, which is the current use, and was based on comparable sales for rural blocks within the locality on a per hectare PAGE 68 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 basis. The fair valuation of buildings, plant and equipment is undertaken on a cyclical basis, not exceeding three years, by an independent registered valuer. As the assets are specialised in nature, there is no comparable market data from which to derive a market based valuation. The valuation has consequently been prepared on a depreciated replacement cost basis and assumes that the current use of these assets is the best and highest use. The replacement cost was based on a volume basis for the dryers and an area basis for all other facilities. 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 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 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. Capital work in progress is not depreciated. The total cost of this work is transferred to the relevant asset category on the completion of the project and then depreciated. The estimated useful lives for the current and comparative periods are as follows: - Buildings - Plant and equipment - Fixtures and fittings 10-50 years 3-33 years 2-14 years Depreciation methods, useful lives and residual values are reassessed at each reporting date. (m) Intangible assets (i) Patents, trademarks and other rights Separately acquired patents and trademarks are shown at historical cost. Patents and trademarks acquired in a business combination are recognised at fair value at the acquisition date. Patents and trademarks have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost of patents and trademarks over their estimated useful lives of 10 years. (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 3 to 10 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 Group are recognised as intangible assets. (n) 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. (o) 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 value is recognised in the profit and loss component of the consolidated statement of comprehensive income over the period of the borrowings using the effective interest method. (p) 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. (q) 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. (r) 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. I PAGE 69 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 (s) 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 2015 or later periods but which the Group has not early adopted: - NZ IFRS 9 (2014) ‘Financial Instruments’ (effective 1 January 2018). NZ IFRS 9 (2014) consolidates previous issuances of NZ IFRS 9 and introduces a new expected loss impairment model that replaces the incurred loss impairment model in NZ IAS 39. The Group is considering adopting this standard in the 2016 financial year and is currently assessing the impact of adoption. - NZ IFRS 15, ‘Revenue from Contracts with Customers’ (effective 1 January 2018). NZ IFRS 15 will be effective from the Group’s 2019 financial year. The impact of this standard 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. (t) Standards, amendments, and interpretations effective in 2015 - NZ IFRS 9 (2013) ‘Financial Instruments’. The Group has early adopted NZ IFRS 9 (2013) effective from 1 August 2014. This standard replaces NZ IAS 39 Financial Instruments: Recognition and measurement (‘NZ IAS 39’) and previous versions of NZ IFRS 9. The standard provides revised guidance on the classification and measurement of financial assets and liabilities, adding guidance on general 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS 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. Estimates and assumptions are reviewed on an ongoing 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, the industry FGMP, the fair value of land, buildings, and plant and equipment, and the derecognition of financial assets. Inventories are valued at the lower of cost and net realisable 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. A key management estimation in determining inventory cost is the Monthly Milk Price which is derived from a forecast milk price for the year. The Monthly Milk Price forms a key component of the product standard cost through the year. The estimate of the industry FGMP 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. hedge accounting. This standard also increases required disclosures about an entity’s risk management strategy, Land, buildings and plant and equipment are recognised at fair value as described in note 14. cash flows from hedging activities and the impact of hedge accounting on the consolidated financial statements. In accordance with the transitional provisions of NZ IFRS 9, the group has not restated prior periods. The adoption of this standard did not have a material impact on the Group’s financial statements. A key management judgement is the assessment that substantially all the risks and rewards of ownership have been transferred in the derecognition of financial assets as described in note 24(b). PAGE 70 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 5 UNDERLYING NET PROFIT AFTER TAX Underlying net profit after tax reflects the underlying performance of the business for the relevant period after excluding from net profit after tax unrealised foreign exchange gains or losses arising from the revaluation of USD denominated inventory financing arrangements that do not qualify for hedge accounting. The Board does not believe that net profit after tax is reflective of underlying performance where these unrealised gains or losses occur in different periods to the underlying transactions. The unrealised foreign exchange losses for the period were as follows: Mitsui & Co. (NZ) Ltd. inventory finance facility revalued to NZD Total unrealised foreign exchange losses Group Year ended 2015 $’000 (2,326) (2,326) 2014 $’000 - - In November 2014 the Company negotiated and contracted a new financing facility with Mitsui & Co. (NZ) Ltd. to fund part of the Company’s finished goods inventory. The facility is denominated in USD and is secured against committed USD customer purchase orders. The revaluation of the drawn down facility to NZD at the reporting date results in unrealised foreign exchange gains or losses that must be recognised in profit and loss in accordance with NZ IAS 21. The finished goods inventory will be invoiced in USD in a future reporting period and will convert to a USD debtor and USD trade financing facility which will create a natural hedge relationship. I PAGE 71 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 6 SEGMENT INFORMATION (a) Description of segments The Group operates 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 Group’s operations as a whole and the Group therefore has one segment. Although the Group sells to many different countries, the Group operates in one principal geographical area being New Zealand. Revenues of approximately 40% (2014: 52%) are derived from the top three external customers. The proportion of sales revenue by geographical area is summarised below: China Rest of Asia Middle East and Africa New Zealand Rest of World Group Year ended 2015 10% 39% 26% 17% 8% 2014 30% 31% 30% 6% 3% 100% 100% In the financial statements for the year ended 31 July 2014 the Group presented proportional sales based on volume. For the year ended 31 July 2015 the Group has presented proportional sales based on revenue and has updated the comparatives accordingly. The Group has also updated the geographical segment grouping for the year ended 31 July 2015, reclassifying the New Zealand and Middle East regions from the Rest of World group. Group Year ended 2015 $’000 2014 $’000 448,136 600,518 99 - 32 33 448,235 600,583 7 REVENUE Dairy products Other sundry income Management fees PAGE 72 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 8 EXPENSES The following items of expenditure are included in cost of sales Kiwisaver contributions Depreciation and amortisation Employee benefit expense Repairs and maintenance Increase / (decrease) in inventory provision The following items of expenditure are included in sales and distribution Kiwisaver contributions Depreciation and amortisation Donations Employee benefit expense Export freight1 Rent expense Repairs and maintenance Research and development The following items of expenditure are included in administrative and operating expenses Kiwisaver contributions Depreciation Directors fees Employee benefit expense Repairs and maintenance Share based payments expense Deloitte services included in administrative and operating expenses Statutory audit fee Half year accounts review Taxation advice Financial modelling Accounting advice and other consulting Total Group Year ended 2015 $’000 325 12,039 13,708 4,426 (6,002) 131 1,318 3 6,759 8,702 371 783 352 179 1,246 451 6,838 129 11 100 27 95 27 148 397 2014 $’000 221 9,406 9,245 2,774 2,523 96 879 14 3,953 8,565 1,676 332 326 183 1,092 440 7,561 41 60 105 22 69 205 95 496 1Export freight costs are recovered from our customers. This recovery is included in the revenue line of the consolidated income statement. I PAGE 73 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 9 FINANCE INCOME AND EXPENSES Interest income on bank deposits Settlement of ineffective portion of cash flow hedges Total finance income Interest and facility fees Capitalised borrowing cost Total finance costs Loss on derecognition of financial assets Net finance costs 10 INCOME TAX (a) Income tax expense Current tax: Current tax on profits for the year Current tax on prior period adjustments Total current tax Deferred tax: Temporary differences Tax losses utilised Tax losses to carry forward Adjustment to prior year tax losses brought forward Other prior year adjustments Total deferred tax (note 18) Income tax (expense) / benefit PAGE 74 I Group Year ended 2015 $’000 305 6 311 (14,120) 4,959 (9,161) (37) 2014 $’000 130 1,042 1,172 (8,768) 2,252 (6,516) - (8,887) (5,344) Group Year ended 2015 $’000 2014 $’000 - (2,618) (137) (137) (4,464) - 110 - (89) (4,443) (4,580) - (2,618) (693) (4,298) - (84) 201 (4,874) (7,492) Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 10 INCOME TAX (CONTINUED) (b) Reconciliation of effective tax rate Profit before income tax Income tax using the Group’s domestic tax rate – 28% Other non deductible costs Adjustment to prior year tax losses brought forward Other prior year adjustments Income tax expense Group Year ended 2015 $’000 15,132 (4,237) (136) (4,373) - (207) (207) 2014 $’000 27,095 (7,587) (22) (7,609) (84) 201 117 (4,580) (7,492) Group Year ended 2015 $’000 2014 $’000 (c) Imputation credits Imputation credits available directly and indirectly to the shareholders of the parent company 1,416 2,618 (d) Income tax recognised in other comprehensive income The tax (charge)/credit relating to components of other comprehensive income is as follows: 31 July 2015 Revaluation of property, plant and equipment Cash flow hedges Other comprehensive income 31 July 2014 Cash flow hedges Other comprehensive income Before tax Tax (expense)/ benefit After tax $’000 $’000 $’000 16,810 (47,632) (30,822) (373) (373) (4,542) 13,268 8,726 104 104 12,268 (34,364) (22,096) (269) (269) I PAGE 75 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 11 CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables Provision for doubtful receivables Net trade receivables Other receivables Total receivables Group 2015 $’000 68,380 (635) 67,745 396 68,141 2014 $’000 88,585 (100) 88,485 561 89,046 The decrease in trade receivables is predominantly due to the first time receivables assignment to ANZ during the reporting period. The impact of lower sales prices as a consequence of lower dairy commodity prices is largely offset by a higher proportion of infant formula sales in July 2015 relative to July 2014. (a) Impaired receivables As of 31 July 2015, trade receivables of $2.5m were overdue but not impaired (2014: $9.7m). These relate to a number of independent customers for whom there is no recent history of default. The majority has since been collected but $0.6m remains unpaid which is expected to be collected in the 2016 financial year. The ageing analysis of these overdue trade receivables is as follows: 0 to 30 days 30 to 60 days Over 60 days Total trade receivables Group 2015 $’000 1,735 80 698 2,513 2014 $’000 7,079 1,508 1,142 9,729 (b) Allowance for bad and doubtful receivables and anticipated credit notes The Group have recognised a loss of $79,000 (2014: $100,000) in respect of bad and doubtful trade receivables during the year ended 31 July 2015. The Group has also recorded a provision of $456,000 during the year as an allowance for credit notes to be raised for Bright Dairy and Food Co Ltd, after balance date, in order to resolve a disputed invoice. (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$57.8m (2014: $81.2m) of USD denominated trade receivables. PAGE 76 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 12 CURRENT ASSETS – INVENTORIES Raw materials at cost Finished goods at cost Finished goods at net realisable value Total inventories Group 2015 $’000 11,542 47,725 4,537 63,804 2014 $’000 15,348 29,422 26,492 71,262 The total provision as at reporting date was $3.9m (2014 $9.9m) with $1.4m relating to infant formula. The provision has reduced from July 2014 as a consequence of estimated losses being realised during the financial year. 13 NON-CURRENT ASSETS – OTHER INVESTMENTS Equity securities Investment in associates (note 28) Total other investments Group 2015 $’000 110 1,866 1,976 2014 $’000 70 - 70 In December 2014, an additional capital contribution was made by all shareholders of Primary Collaboration New Zealand Limited in proportion to their shareholding, with Synlait Milk Limited contributing $40,000. I PAGE 77 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 14 NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Balance at 31 July 2014 3,217 61,114 241,534 Land Buildings Plant and equipment Fixtures and fittings Capital work in progress $’000 $’000 $’000 $’000 $’000 Total $’000 3,047 170 3,217 - - - 31,460 186,656 2,409 7,526 231,098 1,760 10,272 - - 12,202 33,220 196,928 2,409 7,526 243,300 - 27,894 - - 44,893 (287) - 452 - 587 - 13,615 - - 5,680 (136) (4,324) (33,533) - 98,126 98,126 1,099 (74) 3,434 - 557 (1) - (73,886) - - (361) 31,766 341,065 134,822 134,822 (20,304) - - - (137) (37,270) 4,256 70,405 213,545 3,990 146,284 438,480 - - - - - - - - - - - 4,244 270 4,514 1,208 90 - 5,812 2,028 25,077 1,475 26,552 8,266 509 (70) 35,257 10,409 (7,840) (45,636) - - (30) - 3,217 4,256 55,302 206,276 70,405 213,545 1,453 - 1,453 430 - (74) 1,809 634 - (1) 2,442 1,625 1,548 - - - - - - - - - - - 30,774 1,745 32,519 9,904 599 (144) 42,878 13,071 (53,476) (31) 2,442 31,766 298,186 146,284 436,038 Group Cost or valuation Cost Revaluation Balance at 1 August 2013 Additions Reclassification / transfer Disposals Additions Reclassification / transfer Disposals Revaluation Balance at 31 July 2015 Accumulated depreciation Cost Revaluation Balance at 1 August 2013 Depreciation Revaluation depreciation Disposals Balance at 31 July 2014 Depreciation Revaluation depreciation Disposals Balance at 31 July 2015 Carrying amounts At 31 July 2014 At 31 July 2015 PAGE 78 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 (a) Valuations of land and buildings Land, buildings, and plant and equipment were independently valued as at 31 July 2015 by Jones Lang LaSalle using either the depreciated replacement cost method (for buildings and plant and equipment) or market based valuation (for land). The policy in respect of revaluations is described in note 3(l). Management uses its judgement to assess the appropriateness of key valuation techniques and inputs for fair value measurement. For buildings, plant and equipment the depreciated replacement cost method represents a level 3 valuation under the fair value hierarchy. The depreciated replacement cost is defined as the gross current replacement cost reduced by factors providing for age, physical depreciation and technical and functional obsolescence taking in to account the assets’ total estimated useful life and anticipated residual value (if any). The depreciated replacement cost includes all the costs to purchase, deliver and install the asset. The key sensitivity of the depreciated replacement cost valuation relates to the estimated useful lives of the assets being valued. As there are a large number of assets all with varying estimated useful lives, it is not practical to determine a numerical sensitivity to this input factor. The valuation for land is also a level 3 valuation under the fair value hierarchy as there are unobservable inputs. While the valuation has been completed by reference to transactions which have been observed in the market, there is variation in the fair value of these transactions and the land transacted is not directly comparable to that of the Group. The fair value determined in the valuation assumes that there is a willing, but not anxious buyer and seller; a reasonable period within which to negotiate the sale, having regard to the nature and situation of the land and the state of the market for land of the same kind; no account is taken of the value of other advantages or benefit additional to market value to the buyer incidental to ownership of the property being valued; and the Group has sufficient resources to negotiate an agreement for the sale of the land. The key sensitivity to the market based valuation is the observable market transactions on which the valuation is based. It is impractical to provide numerical sensitivities for such valuations. In 2014 the land valuation was classified as level 2. On review of the 2015 valuation report we consider that it fits within level 3. Land, buildings, and plant and equipment were valued at $288.2m as at 31 July 2015. If the cost model had been used, the carrying value of land, buildings and plant and equipment would have been $3.5m, $65.5m and $193.1m respectively, at reporting date. (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) Capital work in progress Assets under construction includes capital expenditure projects, until they are commissioned and transferred to fixed assets. Capital work in progress of $146.3m at balance date is predominantly constituted of the project to date spend ($132.5m) on the construction of the third dryer. (d) Capitalised borrowing costs During the year, the Group has capitalised borrowing costs amounting to $5.0m (2014: $2.3m) on qualifying assets. Interest has been capitalised at the rate in which borrowing has been specifically drawn to fund the qualifying asset as disclosed in note 17. I PAGE 79 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 15 NON-CURRENT ASSETS – INTANGIBLE ASSETS Group Year ended 31 July 2014 Opening net book amount Additions Development costs recognised as an asset Disposals Amortisation charge Closing net book value Year ended 31 July 2015 Opening net book value Additions Development costs recognised as an asset Amortisation charge Closing net book value Patents, trademarks and other intangibles Computer software Intangibles in progress $’000 $’000 $’000 2,470 - 683 - (754) 2,399 2,399 - 1,627 (919) 3,107 311 4 - (97) (120) 98 98 - 90 (12) 176 1,271 1,504 (683) - - 2,092 2,092 993 (1,717) - 1,368 Total $’000 4,052 1,508 - (97) (874) 4,589 4,589 993 - (931) 4,651 Intangibles in progress of $1.4m at balance date is predominantly constituted of project to date spend on operational systems development. 16 TRADE AND OTHER PAYABLES Trade payables Accrued expenses Employee entitlements Total trade and other payables Group 2015 $’000 29,961 48,558 1,848 80,367 2014 $’000 69,523 45,628 1,579 116,730 Payables denominated in other currencies other than the functional currency comprise NZ$1.8m (2014: $0.5m) of USD, AUD, EUR and CAD denominated trade payables and accruals. The large decrease in payables and accruals from July 2014 has been driven by the decreased milk price and proportionately higher advance payments during the financial year. PAGE 80 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 17 LOANS AND BORROWINGS Current liabilities Working capital facility Trade finance facility Inventory finance facility Non-current liabilities Bank loans Loan facility fees Group 2015 $’000 25,370 36,181 24,095 85,646 178,274 (353) 177,921 2014 $’000 12,500 50,613 - 63,113 91,535 (159) 91,376 (a) Terms of loans and borrowings The 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 Bank and Bank of New Zealand. The Group facilities include: - A secured revolving credit facility of $75m that matures on 1 August 2016 - A secured term facility of $135m that matures on 31 July 2017 to fund the construction of Dryer 3 - A secured working capital facility of $70m that matures on 31 October 2015 (Management are currently finalising the level of this facility required during the 2016 financial year at which point this facility will be extended to October 2016) - An unlimited and unsecured finance facility from Mitsui & Co. (NZ) Ltd. that matures on 31 July 2017 - A USD denominated finance facility secured against inventory from Mitsui & Co. (NZ) Ltd. that matures on 31 July 2017 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 2015 and 31 July 2014. Secured term loan facility (D3) – ANZ / BNZ Secured revolving credit facility – ANZ / BNZ Secured working capital facility – ANZ / BNZ Trade finance facility – Mitsui & Co. (NZ) Ltd. Inventory finance facility – Mitsui & Co. (NZ) Ltd. Nominal Interest rate % Financial year of maturity Carrying amount 2015 Carrying amount 2014 4.51% 4.48% 4.28% 1.79% 1.79% 2017 2017 2016 2017 2017 103,280 74,994 25,370 36,181 24,095 16,678 74,857 12,500 50,613 - The nominal interest rate is calculated by adding the BKBM rate (or Libor rate for Mitsui trade finance facility) and the marginal rate. It excludes line fees and swap costs. I PAGE 81 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 18 DEFERRED TAX ASSETS AND LIABILITIES The balance comprises temporary differences attributable to: Group 2015 $’000 14,085 1,186 110 15,381 2014 $’000 817 3,128 - 3,945 (28,865) (20,460) (116) (28,981) (13,600) (10) (20,470) (16,525) Balance 1 Aug 2013 Recognised in profit or loss $’000 (17,108) 713 258 4,382 $’000 (3,352) - 2,860 (4,382) (11,755) (4,874) Recognised in other com- prehensive income Prior year adjustment Balance 31 July 2014 $’000 $’000 - 104 - - 104 - - - - - $’000 (20,460) 817 3,118 - (16,525) Balance 1 Aug 2014 Recognised in profit or loss $’000 (20,460) 817 3,118 - $’000 (3,898) - (655) 110 Recognised in other com- prehensive income $’000 (4,542) 13,268 - - Prior year adjustment Balance 31 July 2015 $’000 35 - (1,393) - $’000 (28,865) 14,085 1,070 110 (16,525) (4,443) 8,726 (1,358) (13,600) Assets Derivatives Other items Tax losses carried forward Total deferred tax assets Liabilities Property, plant and equipment Other items Total deferred tax liabilities Total deferred tax 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 PAGE 82 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 19 SHARE CAPITAL (a) Share capital Ordinary shares On issue at beginning of period Share issue costs The weighted average number of shares during the year of 146,341,197 (2014: 146,341,197) is used to calculate the Earnings per Share. (b) Ordinary shares All issued shares are fully paid and have no par value. 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 Group’s capital includes share capital, retained earnings and reserves. The 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 Group 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 Group are subject to various security ratios within the bank facilities agreement. The Group’s policies in respect of capital management and allocation are reviewed by the Board of Directors. 20 SHARE BASED PAYMENTS The Group operates an equity settled share based incentive plan for senior management. The plan is designed to enhance the alignment between Shareholders and the management of the company. (a) IPO Incentive Scheme The Group has entered into an agreement with each participant which will provide them with a conditional contractual right to be issued or transferred a predetermined number of shares on the third anniversary of completion of the listing of the Group on the NZX Main Board (the Performance 2015 Shares 2014 Shares 2015 $’000 2014 $’000 146,341,197 146,341,197 172,247 172,548 - - - (301) 146,341,197 146,341,197 172,247 172,247 Date). The issue or transfer of shares pursuant to this scheme will be at an issue price equal to the IPO listing price of $2.20. Each participant has been provided with an entitlement which has a value (calculated as the number of new shares they could receive multiplied by the IPO listing price) equal to a maximum of 75% of their base salary as at 1 August 2013. That entitlement is split into three equal tranches of 25%. The issue or transfer of new shares is conditional on the predetermined performance and service conditions being satisfied. The performance conditions will be assessed at the end of each of the three years following the listing of the Group on the NZX Main Board. There are two separate performance conditions each of which must be satisfied. The first requires the Group’s net profit after tax (NPAT) for the relevant financial year to be at least 10% above the budgeted NPAT for those periods. If this condition is not met in any period, then the award for this period will never vest, even if the condition outlined below is met. The second requires certain annual compound growth targets in total shareholder return (TSR) to be satisfied as follows: TSR growth target 20% or more 15% 12% Less than 12% Options granted (% of base salary) 25.00% 18.75% 6.25% - TSR means the total return, as determined by the Board of Directors (the Board) in consultation with an independent expert, to ordinary shareholders comprising any movement in the market price of the Shares plus gross dividends, expressed as a percentage of the market price at the start of the relevant year. For these purposes the market price is the volume weighted average market price of the Shares on the NZX Main Board over the twenty business days prior to the relevant assessment date. The market price at the start of the first year is the IPO listing price of $2.20. I PAGE 83 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 If the performance conditions are not satisfied in full for the first and / or second tranche, the relevant tranche(s) will be retested at the end of each following year up to and including on the Performance Date. Retesting of the TSR performance condition will be based on the compound growth in TSR over the relevant years since the IPO. The highest TSR performance result over the applicable testing dates will be adopted. Notwithstanding that the performance conditions may be satisfied in part or full for any or all of the three tranches, participants must also satisfy the service conditions. One of the service conditions is that the participant must continue to be in full time employment with Synlait Milk Limited at the Performance Date. In addition a participant will only be issued or transferred shares under this scheme if the closing price of the shares on the NZX Main Board on the Performance Date is above the IPO listing price of $2.20. There will be no restriction on the sale of the shares once they have been issued or transferred to participants however participants remain subject to the Group’s share trading policy applicable to all employees, and those shares will have full voting and dividend rights. Should any of the performance or service conditions not be met, other than for a qualifying reason, or the executive does not execute the option, the right to shares will be forfeited and the participant will receive no benefits under the plan (subject to the Board exercising a discretion to allow some or all of the shares or notional shares to vest). The IPO incentive scheme represents the grant of in substance nil price options. The fair value of the options granted under the IPO incentive scheme are estimated as at the date of grant using an option pricing model that takes into account the terms and conditions upon which the options were granted. In accordance with the rules of the plan, the model simulates the Group’s total shareholder return relative to the sliding performance scale over the vesting period. The model takes into account the paths of outcomes that would result in vesting in relation to the TSR performance condition, the cost of equity, share price volatilities and an assessment of the probability of vesting to produce a predicted fair value for each option. The fair value of each option is then applied to the number of options expected to vest to determine a total plan fair value. The NPAT performance condition and the service condition are taken into account in determining the number of options expected to vest. As some of the prerequisite conditions for this scheme were not satisfied during 2015, some of the options granted have been forfeited as summarised below. The following table sets out the number of, and movement in, share options during the year: Outstanding 1 August Granted during the year Forfeited during the year Outstanding 31 July Group Year ended 2015 1,043,139 2014 - - 1,564,709 (547,734) (521,570) 495,405 1,043,139 Given the extensive number of permutations of potential outcomes, the options have been valued using a probabilistic option pricing model. Management have assessed the likelihood of each of the outcomes in satisfying the varying TSR conditions and the other key inputs into this model are listed below: Risk free rate Market risk premium Market debt / equity Volatility Share price at grant date Total value of options granted at grant date ($000’s) Volatility has been estimated by reference to trading entities similar to the Group. PAGE 84 I First Tranche Second Tranche Third Tranche 3.0% 5.5% 30.0% 20.0% $2.20 862 3.6% 5.5% 30.0% 20.0% $3.65 897 3.6% 5.5% 30.0% 20.0% $3.70 155 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 (b) Expenses arising from share based payment transactions Total expenses arising from share based payment transactions recognised during the period as part of employee benefit expense were as follows: Expenses for equity settled share based payment transactions 21 RESERVES AND RETAINED EARNINGS (a) Nature and purpose of reserves Group Year ended 2015 $’000 11 2014 $’000 60 (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) Cash flow hedge reserve The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments and the cost of cash flow hedging instruments. Cash flow hedging instruments relate to hedged transactions that have not yet occurred. (iii) Employee benefits reserve The employee benefits reserve is comprised of the cumulative share based payment expense for share options not yet vested. (b) Dividends No dividends were declared by the Company or the Group during the year. I PAGE 85 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 Group Year ended 2015 $’000 10,552 2014 $’000 19,603 14,603 11,377 (13) - 378 11 9,167 (311) 37 5,731 1,053 2,326 84 97 - 60 5,474 (130) - 4,874 (2,249) - 20,739 (29,395) 166 (1,439) 7,458 7,640 (59,241) (2,481) 16,376 (517) (216) (6,237) (5,963) 59,195 2,618 58,675 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 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 noncurrent assets (Gain) / loss on sale of fixed assets Write off intangibles Share of loss from associate Non cash share based payments expense Interest costs classified as financing cash flow Interest received classified as investing cash flow Loss on derecognition of financial assets Deferred tax Gain / (loss) on derivative financial instruments Unrealised foreign exchange losses Movements in working capital: (Increase) / decrease in trade receivables (Increase) / decrease in other receivables (Increase) / decrease in prepayments (Increase) / decrease in inventories (Increase) / decrease in other current assets (Decrease) / increase in trade and other payables (Decrease) / increase in current tax liabilities Net cash inflow from operating activities PAGE 86 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 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 is exposed to foreign currency risk on its sales, which are predominantly denominated in US dollars. The Group is also exposed to foreign currency risk on the purchase of raw materials for production and capital equipment purchases from overseas. The Group enters into derivative arrangements in the ordinary course of business to manage foreign currency risk. These instruments include forward exchange contracts, option collars and vanilla options. These instruments enable the Group to mitigate the risk the variable exchange rates present to future cash flows for sales receipts or purchases by fixing or limiting the exchange rate at which these cash receipts or payments are exchanged into NZ dollars. The Group has a Board approved treasury policy that sets the parameters under which foreign exchange cover is to be taken. This policy requires a decreasing proportion of future cash receipts to have the Group’s exposure to foreign exchange movements either fixed or capped. As foreign exchange contracts are entered into based on forecast cash receipts or payments, variability in the expected timing or amounts of future cash flows can lead to ineffective hedging. To mitigate the risk of ineffectiveness the Group’s policy is to hedge a decreasing proportion of the risk exposure the further into the future the exposure exists given the increasing uncertainty of cash flows. Additionally the Group’s policy is that the proportion of risk exposure to be hedged changes on a monthly basis in response to the movement in market rates. As at 31 July 15, the Group has hedged 44% of its exposure to foreign exchange risk over the following 2 years. The Group’s exposure to foreign currency risk at the reporting date was as follows: Statement of financial position exposure before hedging activities Trade receivables Trade payables Trade finance facility Inventory finance facility 2015 USD $’000 Euro $’000 2014 USD $’000 38,037 1,092 24,785 15,919 - - - - 67,147 - 40,255 - Euro $’000 1,393 - 1,397 - The Group’s exposure to foreign currency in the period ended 31 July 2015 is limited to its sales of dairy products, purchases of raw materials for production and capital equipment purchases. As at the reporting date, the Group had the following foreign exchange derivative instruments outstanding in respect of future sales transactions: Less than 1 year 1 to 2 years 2015 Weighted average exchange Nominal rate Balance USD $’000 235,941 170,200 0.7084 0.6541 2014 Weighted average exchange rate Nominal Balance USD $’000 0.8485 151,500 -- I PAGE 87 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 (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 its interest rate risk by using interest rate swaps to convert a portion of its floating rate debt to fixed interest rates. As interest rate swaps are entered into based on forecast debt levels, variability in future cash flows and debt levels can lead to ineffective hedging. To mitigate the risk of ineffectiveness the Group’s policy is to hedge a decreasing proportion of the risk exposure the further into the future the exposure exists given the increasing uncertainty of cash flows. The Group has a Board approved treasury policy that sets the parameters to the extent of the cover taken. The policy requires the Group to hedge 30% to 80% of its exposure to interest rate risk that matures within 3 years, 20% to 60% of the risk that matures between 3 and 5 years, and 0% to 40% of the risk that matures between 5 and 10 years. As at the reporting date, the Group had the following 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 5 to 6 years 6 to 7 years 7 to 8 years 8 to 9 years 9 to 10 years 2015 2014 Weighted average interest rate % 4.60% 4.71% 4.73% 4.76% 4.82% 4.82% 4.85% 4.85% 4.86% - Nominal Balance $’000 129,000 116,500 94,000 71,750 50,000 35,000 25,000 19,167 15,000 - Weighted average interest rate % 4.85% 4.60% 4.71% 4.73% 4.76% 4.82% 4.82% 4.85% 4.85% 4.86% Nominal Balance $’000 68,583 129,000 116,500 94,000 71,750 50,000 35,000 25,000 19,167 15,000 The above balances include forward start swap contracts for various periods and do not necessarily reflect the current active contracts held at any one point in time. 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. (iii) Sensitivity analysis The following table summarises the sensitivity of the Group’s profit and equity to interest rate risk and foreign exchange risk. The sensitivity analysis below has been determined based on the mark to market impact on financial instruments of changing interest and foreign exchange rates at balance date. The analysis is prepared assuming the amount of the financial instrument outstanding at the balance sheet date was outstanding for the whole year, and by adjusting one input whilst keeping the others constant. PAGE 88 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 1% increase in interest rate 1% decrease in interest rate 5% increase in exchange rate 5% decrease in exchange rate Total increase/ (decrease) Group 2015 Profit $’000 - - 192 (212) (20) Equity $’000 5,027 (5,299) 17,793 (20,508) (2,987) 2014 Profit $’000 - - (1,630) 1,475 (155) Equity $’000 3,692 (3,902) (5,404) 4,675 (939) (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. The Group also retains a minimal amount of late payment risk in the derecognition of financial assets, as described in note 24(b). Synlait Milk Limited guarantees all facilities held by Synlait Milk Finance Limited. I PAGE 89 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 (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 and uses a variety of facilities to manage liquidity risk. The Group has negotiated banking facilities sufficient to meet its medium term facility requirements and has also contracted two facilities with Mitsui & Co. (NZ) Ltd. to fund part of the Group’s working capital: an unlimited and unsecured trade finance facility and a financing facility secured against inventory. 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. The total repayments and associated maturity of financial liabilities as at balance date is reported below. Group At 31 July 2015 Working capital facility Trade and other payables Trade finance facility Inventory finance facility Loans and borrowings Derivative financial instruments Total At 31 July 2014 Working capital facility Trade and other payables Trade finance facility Loans and borrowings Derivative financial instruments Total Less than 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years $’000 $’000 $’000 $’000 25,377 80,367 36,245 24,159 8,009 32,055 - - - - 182,936 11,317 206,212 194,253 12,513 116,730 50,666 4,449 2,916 - - - 79,306 88 187,274 79,394 - - - - - - - - - - 4,487 4,487 2,406 2,406 - - - 17,519 263 17,782 - - - - 127 127 Total $’000 25,377 80,367 36,245 24,159 190,945 50,265 407,358 12,513 116,730 50,666 101,274 3,394 284,577 PAGE 90 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 (d) Cash flow hedges The Group enters into cash flow hedges of highly probable forecast transactions and firm commitments, as described in note 23(a). Hedging instruments used in cash flow hedges Nominal amount Carrying amount At 31 July 2015 Assets Liabilities Hedge accounted amounts in cash flow reserve Total cash flow hedge reserve Intrinsic value Time value ’000 NZD’000 NZD’000 NZD’000 NZD’000 NZD’000 Foreign exchange risk Forward exchange contracts Foreign currency options Foreign currency collars Interest rate risk Interest rate swaps Total USD 122,941 USD 5,000 USD 278,200 NZD139,000 2 176 - - 178 17,495 17,493 - - - 42 17,493 42 25,238 14,182 11,056 25,238 7,532 50,265 7,532 39,207 - 11,098 7,532 50,305 Upon realisation of the hedged transaction, the intrinsic value and time value of vanilla options at that date will be reclassified to profit or loss. As foreign currency collars are zero cost collars their time value will be nil upon realisation of the hedged transaction and the intrinsic value is reclassified to profit or loss. Hedging instruments are located within the derivative financial instruments line items in the statement of financial position, classified as assets or liabilities, current or non-current. Effects of cash flow hedges on statement of comprehensive income At 31 July 2015 Foreign exchange risk Forward exchange contracts Foreign currency options Foreign currency collars Interest rate risk Interest rate swaps Total Hedging gains / losses recognised in other comprehensive income Hedge ineffectiveness recognised in profit or loss (17,567) (574) (23,566) (6,661) (48,368) - - - 6 6 Hedge ineffectiveness is included within the finance expenses line of the consolidated income statement. The Group has reclassified $991,000 of net losses from the cash flow hedge reserve to profit and loss upon realisation of hedged transactions during the reporting period. This reclassification is included within the revenue line of the consolidated income statement. I PAGE 91 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 24 FINANCIAL INSTRUMENTS (a) Financial instruments by category Financial assets Group At 31 July 2015 Cash and cash equivalents Derivative financial instruments Trade and other receivables Investments in equity Total At 31 July 2014 Cash and cash equivalents Derivative financial instruments Trade and other receivables Investments in equity Total At fair value through other comprehensive income At amortised cost At fair value through profit or loss Total Original category under NZ IAS 39 $’000 $’000 $’000 $’000 1,529 - 68,141 - 69,670 2,393 - 89,046 - 91,439 - - - 110 110 - - - 70 70 - 178 - - 1,529 Loans and receivables 178 Derivatives used for hedging 68,141 Loans and receivables 110 Available for sale financial assets 178 69,958 - 1,674 - - 2,393 Loans and receivables 1,674 Derivatives used for hedging 89,046 Loans and receivables 70 Available for sale financial assets 1,674 93,183 PAGE 92 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 Financial liabilities Group At 31 July 2015 At amortised cost At fair value through profit or loss Total Original category under NZ IAS 39 $’000 $’000 $’000 Derivative financial instruments - 50,265 50,265 Derivatives used for hedging Working capital facility Trade finance facility Inventory finance facility Trade and other payables Borrowings Total At 31 July 2014 25,370 36,181 24,095 80,367 177,921 343,934 - - - - - 25,370 Amortised cost 36,181 Amortised cost 24,095 Amortised cost 80,367 Amortised cost 177,921 Amortised cost 50,265 394,199 Derivative financial instruments - 3,394 3,394 Derivatives used for hedging Working capital facility Trade finance facility Inventory finance facility Trade and other payables Borrowings Total 12,500 50,613 - 116,730 91,376 271,219 - - - - - 12,500 Amortised cost 50,613 Amortised cost - Amortised cost 116,730 Amortised cost 91,376 Amortised cost 3,394 274,613 All derivative financial instruments are designated in effective hedge relationships. Carrying amounts are unchanged as a result of early adoption of NZ IFRS 9. For instruments held at amortised cost, carrying amount is considered a reasonable approximation for fair value. I PAGE 93 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 (b) Derecognised financial assets The Group has derecognised trade receivables that have been sold to the bank under the terms of a receivables purchase agreement entered into during July 2015. The Group has assessed the terms of the agreement and has determined that substantially all the risks and rewards have been transferred to the bank. Receivables selected for assignment are with customers with strong credit ratings and good payment histories. This minimises the risk (and therefore consequences of late payment or default) as well as resulting in little volatility in the present value of future cash flows in relation to assigned receivables under the various scenarios detailed in the terms of the agreement. An evaluation of external evidence of credit risk has also been performed for each customer. The Group has assessed its continuing involvement in the assigned receivables and determined that the fair value of continuing involvement is immaterial. The Group reassesses the facility for qualification for derecognition at each reporting date, when the terms of the facility are amended, and assesses each new customer at the initial assignment of a receivable. If the Group’s customers defaulted on all trade receivables that have been derecognised at balance date, the Group would be required to pay a late payment charge of $570 per day for each day that these receivables remain overdue, assuming that market conditions remain unchanged from reporting date. The likelihood that debtors will fall overdue or remain overdue for a long period of time is small, given the strong credit ratings and good payment histories of the customers whose receivables have been selected for assignment. The loss arising from derecognition of assigned receivables is $37,000 for the period. (c) Fair value estimation The methods of determining the fair value of financial instruments are categorised into three different valuation levels, defined as follows: - Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). All financial instruments held at fair value are included in level 2 of the valuation hierarchy. As financial instruments are not traded in an active market their fair value 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. As all significant inputs required to fair value an instrument are observable, financial instruments are all included in Level 2. If one or more of the significant inputs is not based on observable market data, the instrument will be 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 - The fair value of the forward foreign exchange options are valued by projecting the cash flows that will occur and then discounting the cash flows to the valuation date using a zero coupon yield curve. The future cash flows have been determined using an implied forward rate calculated with reference to exchange rate volatilities - Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial - Quoted prices (unadjusted) in active markets for identical instruments. 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). Note that all of the resulting fair value estimates are included in Level 2. PAGE 94 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 25 CONTINGENCIES As at 31 July 2015 the Group had no contingent liabilities or assets (2014: $nil). 26 COMMITMENTS (a) Capital commitments Capital expenditure contracted for at the end of the reporting period but not yet incurred is as follows: Dryer 3 Administration and laboratory building Transport yard Other Total Group 2015 $’000 3,815 2,472 - - 2014 $’000 78,322 11,946 775 266 6,287 91,309 The above balances have been committed in relation to future expenditure on capital projects. Amounts already spent have been included as work in progress. (b) Operating lease commitments – group as lessee Less than one year Between one and five years Total Group 2015 $’000 610 306 916 2014 $’000 69 120 189 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. I PAGE 95 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 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 (2014: 39.12%) (b) Other related entities 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. Funds are loaned to Synlait Milk Limited and interest is charged at market rates. In January 2015, the Group acquired 25% of the shares of New Hope Nutritionals, an infant formula company registered in China. This company owns and markets the “Akara” and “Akarola” infant formula brands in the Chinese market, which are exclusively manufactured by Synlait Milk Limited. Investments in subsidiaries and associates are set out in note 28. (c) Key management and personnel compensation Other than their salaries and bonus incentives, there are no other benefits paid or due to directors and executive officers as at 31 July 2015. The total short term benefits paid to the key management and personnel is set out below. Short-term benefits Share based payments expense (note 20) 2015 $’000 2,859 7 2014 $’000 3,538 34 (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 2015 (2014: $nil). (ii) Other transactions and balances Directors of the Company control 3.7% of the voting shares of the company at balance date (2014: 3.8%) (e) Transactions with other related parties Group Year ended 2015 $’000 2014 $’000 99 161 7,199 (70) 10,761 22,210 (64) - Purchase of goods and services Bright Dairy and Food Co Ltd – Directors fees Sale of goods and services Bright Dairy and Food Co Ltd – Sale of milk powder products Bright Dairy and Food Co Ltd – Reimbursement of costs Sichuan New Hope Nutritional Foods Co. Ltd – Sale of milk powder products All transactions with related parties are at arm’s length on normal trading terms. PAGE 96 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 (f) Outstanding balances The following balances are outstanding at the reporting date in relation to transactions with related parties other than key management personnel: Current receivables (sales of goods and services) Bright Dairy and Food Co Ltd – Sale of milk powder products Bright Dairy and Food Co Ltd – Reimbursement of costs Sichuan New Hope Nutritionals Ltd – Sale of milk powder products Group 2015 $’000 4,185 (88) 1,175 28 INVESTMENTS IN OTHER ENTITIES The Company held interests in the following entities at the end of the reporting period: Name of entity Country of incorporation Class of shares Equity holding Synlait Milk Finance Limited (Subsidiary) New Zealand Ordinary Sichuan New Hope Nutritional Foods Co. Ltd (Associate) China Ordinary 2015 % 100 25 2014 $’000 1,336 (64) - 2014 % 100 - Subsidiaries 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. Funds are loaned to Synlait Milk Limited and interest is charged at market rates. The consolidated financial statements incorporate the assets, liabilities and results of this subsidiary in accordance with the accounting policy described in note 2(a). Associates In January 2015, the Group acquired 25% of the shares of New Hope Nutritionals, an infant formula company registered in China. This company owns and markets the “Akara” and “Akarola” infant formula brands in the Chinese market, which are exclusively manufactured by Synlait Milk Limited. The investment is not individually significant to the Group. The Group’s share of this equity accounted investment is as follows: Loss from continuing operations Other comprehensive income Total comprehensive income 2015 $’000 (378) - (378) 2014 $’000 - - - I PAGE 97 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015 The carrying value of the investment in New Hope Nutritionals was $1.9m at balance date (2014: $nil): Opening balance Investment cost Share of losses Carrying value of investment As New Hope Nutritionals does not prepare NZ IFRS financial statements, the following summary information for New Hope Nutritionals has been prepared based on the most recent management financial statements presented to the Group: 2015 $’000 - 2,244 (378) 1,866 Summary income statement for New Hope Nutritionals Revenue Net loss after tax Summary statement of financial position for New Hope Nutritionals Total current assets Total non-current assets Total current liabilities Total non-current liabilities Net assets of New Hope Nutritionals 2015 $’000 3,943 (2,486) 17,956 1,287 (17,826) - 1,417 29 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 98 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF SYNLAIT MILK LIMITED REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS We have audited the accompanying consolidated financial statements of Synlait Milk Limited and its subsidiaries (‘the Group’) on pages 59 to 98, which comprise the consolidated statement of financial position as at 31 July 2015, and the consolidated income statement, statement of comprehensive income, statement of changes in equity and statement 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. 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 CONSOLIDATED FINANCIAL STATEMENTS The Board of Directors are responsible for the preparation and fair presentation of these consolidated financial statements, in accordance with New Zealand Equivalents to International Financial Reporting Standards, International Financial Reporting Standards and generally accepted accounting practice in New Zealand, and for such internal control as the Board of Directors determine is necessary to enable the preparation of consolidated 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 consolidated 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements 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 consolidated financial statements. I PAGE 99 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 AUDITOR’S REPORT CONTINUED 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 and the provision of taxation advice, financial modelling services and accounting advice and other consulting services, we have no relationship with or interests in Synlait Milk Limited or its subsidiary. OPINION In our opinion, the consolidated financial statements on pages 59 to 98 present fairly, in all material respects, the financial position of Synlait Milk Limited and its subsidiary as at 31 July 2015, and their financial performance and cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards, International Financial Reporting Standards and generally accepted accounting practice in New Zealand. Chartered Accountants 21 September 2015 Christchurch, New Zealand This audit report relates to the consolidated financial statements of Synlait Milk Limited for the year ended 31 July 2015 included on Synlait Milk Limited’s website. The Board of Directors is responsible for the maintenance and integrity of Synlait Milk Limited’s website. We have not been engaged to report on the in- tegrity of Synlait Milk Limited’s website. We accept no responsibility for any changes that may have occurred to the consolidated financial statements since they were initially presented on the website. The audit report refers only to the consolidated financial statements named above. It does not provide an opinion on any other information which may have been hyperlinked to/from these consolidated financial statements. If readers of this report are concerned with the inherent risks arising from electronic data communication they should refer to the published hard copy of the audited consolidated financial statements and related audit report dated 21 September 2015 to confirm the information included in the audited consolidated financial statements presented on this website. Legislation in New Zealand governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. PAGE 100 I Synlait Milk Limited Financial Statements for the year ended 31 July 2015 Synlait Milk Limited Financial Statements for the year ended 31 July 2015 I PAGE 101 STATUTORY INFORMATION PAGE 102 I Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION STOCK EXCHANGE LISTING Our shares are listed on the Main Board operated by NZX Limited (NZX). SHARES ON ISSUE As at 31 July 2015: Register Sub-register Current Holders Zero Holders New Zealand FASTER Class Total 2,615 2,615 1,806 1,806 Units 146,341,197 146,341,197 Our issued share capital has not changed since we listed on 23 July 2013. On 31 July 2014 we had 2,884 current holders. TOP 20 SHAREHOLDERS Our top 20 shareholders as at 31 July 2015 are as follows: Rank Name Units at 31 July % of Units 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 John Penno Mitsui & Co.(Australia) Limited Ben McFarlane Dingle Munchkin Inc. HSBC Nominees (New Zealand) Limited – NZCSD FNZ Custodians Limited Citibank Nominees (New Zealand) Limited – NZCSD National Nominees (New Zealand) Limited – NZCSD Juliet Maclean New Zealand Superannuation Fund Nominees Limited -NZCSD Custodial Services Limited Paul Leslie Lancaster + Bronwyn Anne Lancaster BNP Paribas Nominees (NZ) Limited – NZCSD Horo Holdings Limited Therese Roche Accident Compensation Corporation – NZCSD BNP Paribas Nominees (NZ) Limited – NZCSD 2015 57,247,647 16,713,244 7,373,331 5,423,817 4,915,556 4,543,666 4,452,883 3,839,498 3,593,702 2,509,550 1,494,113 1,298,212 1,202,156 1,100,143 1,098,723 906,619 902,292 900,000 790,000 781,605 39.12 11.42 5.04 3.71 3.36 3.10 3.04 2.62 2.46 1.71 1.02 0.89 0.82 0.75 0.75 0.62 0.62 0.62 0.54 0.53 Totals: Top 20 holders of Ordinary Shares Total Remaining Holders Balance 121,086,757 25,254,440 82.74 17.26 I PAGE 103 Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION CONTINUED SUBSTANTIAL PRODUCT HOLDERS As required under section 293 of the Financial Markets Conduct Act 2013, the Substantial Product Holders of the Company as disclosed under section 280(1)(b) of that Act as at 31 July 2015 are as follows: Bright Dairy Holding Limited FrieslandCampina Mitsui & Co. Limited Fully Paid Shares Percentage of Paid Capital 57,247,647 14,634,119 12,288,887 39.1% 9.999% 8.397% As at 31 July 2015, there were 146,341,197 fully paid ordinary shares on issue. DISTRIBUTION OF SHAREHOLDERS As at 31 July 2015, our shareholding is distributed as follows: 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 – 999,999,999 Rounding Total VOTING RIGHTS Total holders 4 27 103 188 419 999 470 336 19 27 11 12 2,615 Units 261 3,422 33,088 127,229 529,485 2,760,617 2,977,049 6,168,662 1,177,084 5,592,623 7,312,680 119,658,997 146,341,197 % of Issued Capital 0.00 0.00 0.02 0.09 0.36 1.89 2.03 4.22 0.80 3.82 5.00 81.77 100.00 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. On 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 on our website (www.synlait.com/investors/corporate-governance/). 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 period 1 August 2014 to 31 July 2015 are as follows: Minimum: Maximum: Range: Total Shares Traded: PAGE 104 I 2014 $2.60 $4.20 $2.60 – $4.20 34,131,443 2015 $2.39 (29 July 2015) $3.73 (9 October 2015) $2.39 – $3.73 27,861,688 Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION CONTINUED DIVIDEND POLICY 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 credit − Synlait’s 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 period ending 31 July 2015. 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 to the Company and the Subsidiary* for the year ended 31 July 2015 were as follows (including comparative figures for 2014): Director Class Position Graeme Milne Independent Chairman Bill Roest Independent Audit and Risk Committee Chair Sam Knowles Independent Director Retired / Appointed 2015 – Total Remuneration2 2014 – Total Remuneration Retired & Reappointed 100,333 62,000 96,500 60,000 56,667 55,000 John Penno1 Board Appointed Managing Director 804,308 871,8613 Hon. Ruth Richardson Bright Appointed Remuneration and Governance Chair Li Ke Bright Appointed Director Yang Suhang Bright Appointed Director Dong Zongbo Bright Appointed Director 62,000 56,667 56,667 56,667 60,000 55,000 55,000 55,000 1.Note: As Managing Director, John Penno does not receive Director’s Fees. His remuneration received in the year to 31 July 2015 listed above constitutes payment for his position as Managing Director and Chief Executive Officer. 2.Note: An increase in Director Fees was approved at the AGM on 2 December 2014 effective from 1 April 2015, so these reflect the 4 months until balance date. Full year Director Fees at the new rates are as follows: Chairman $108,000; Chair of Committee $66,000 and Director $60,000. 3.Note that in FY14 we incorrectly stated the Managing Director’s total remuneration at $661,000, as we omitted a bonus that was paid during the relevant period. The correct figure for 2014 is now shown in the table, along with the figure for FY15. I PAGE 105 Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION CONTINUED *The Directors do not receive any additional remuneration as Directors of the Subsidiary (Synlait Milk Finance Limited). DIRECTORS’ INTERESTS In addition to the disclosures made elsewhere in this Annual Report, the Directors have disclosed under section 140(2) of the Companies Act 1993 the following interests in the Interests Register of the Company and the Subsidiary (Synlait Milk Finance Limited) as at 31 July 2015: Nature of Interest Graeme Milne Director of Genesis Energy Limited Chairman of New Zealand Pharmaceuticals Ltd Chairman of Terracare Fertilisers Ltd Trustee of Rockhaven Trust Partner of G R & J A Milne Chairman of Johnes Disease Research Ltd Chairman of Rural Broadband Initiative National Advisory Committee Director of Farmers Mutual Group Director of Alliance Group Ltd. Chairman of Synlait Milk Limited Chairman of Synlait Milk Finance Limited Shareholder in Synlait Milk Limited Member Massey of University School of Advanced Engineering and Technology (SEAT) Advisory Board Chairman of Rimanui Farms Ltd Chairman of Pacific T and R Holdings Ltd Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access from Synlait Milk Limited Hon. Ruth Richardson Chairman of Jade Software Corporation Chairman of Kula Fund Advisory Committee Director of Ruth Richardson [NZ] Ltd SYFT Technologies Limited Chair. Chairman of Kiwinet Director of Synlait Milk Limited Director of Synlait Milk Finance Limited Chairman of New Zealand Merino Company Shareholder in Synlait Milk Limited Director of Bank of China (NZ) Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited PAGE 106 I Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION CONTINUED Deed of Indemnity and Access from Synlait Milk Limited Bill Roest Director of Fisher & Paykel Appliances Ltd Director of Housing Foundation Ltd Trustee of New Zealand Housing Foundation Trustee of WJ & IJ Family Trust Director of Metro Performance Glass Ltd Director of Synlait Milk Limited Director of Synlait Milk Finance Limited Shareholder in Synlait Milk Limited Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access from Synlait Milk Limited Li Ke Director of Synlait Milk Limited Director of Synlait Milk Finance Limited Member of Executive Committee of Tnuva Food Industries, Agricultural Co-Operative Association in Israel Ltd Member of Executive Committee of Tnuva Central Co-Operative for the Marketing of Agricultural Products in Israel Ltd Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access from Synlait Milk Limited Dong Zongbo Director of Synlait Milk Limited Director of Synlait Milk Finance Limited Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access from Synlait Milk Limited Yang Sihang Director of Synlait Milk Limited Director of Synlait Milk Finance Limited Member of Executive Committee of Tnuva Food Industries, Agricultural Co-Operative Association in Israel Ltd Member of Executive Committee of Tnuva Central Co-Operative for the Marketing of Agricultural Products in Israel Ltd Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access from Synlait Milk Limited John Penno Trustee of John Penno Trust Shareholder in Purata Limited Director of Purata Limited Managing Director of Synlait Milk Limited I PAGE 107 Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION CONTINUED Director of Synlait Milk Finance Limited Shareholder in Synlait Milk Limited Director of the Lincoln Hub Director of Sichuan New Hope Nutritional Foods Co., Ltd Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access from Synlait Milk Limited Sam Knowles Director of Trustpower Ltd Director of Rangatira Ltd Chairman of Umajin Ltd Chairman of Partners Life Ltd Chairman of OnBrand Ltd Chairman of Adminis Ltd Director of Magritek Ltd Director of SLI Systems Ltd Trustee of Te Omanga Hospice Trustee of United World College NZ Director of Angel HQ Inc Director of Com Investments Ltd Director of Growthcom Ltd Director of Habourside Rentals Ltd Trustee of Com Trust and Ian Samuel Knowles Children’s Trust Director of Synlait Milk Limited Director of Synlait Milk Finance Limited Shareholder in Synlait Milk Limited Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access from Synlait Milk Limited DIRECTORS’ SHAREHOLDING IN SYNLAIT The Directors’ respective shareholding in Synlait as at 31 July 2015 is as follows, with comparative figures for 2014: 2015 Directly Held 5,423,817 59,526 46,000 45,000 22,750 2014 Directly Held 5,423,817 59,526 46,000 45,000 22,750 John Penno Graeme Milne Hon. Ruth Richardson Sam Knowles Bill Roest PAGE 108 I Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION CONTINUED SUBSIDIARY COMPANY DIRECTORS The following Companies were subsidiaries of Synlait Milk Limited as at 31 July 2015. 1. Synlait Milk Finance Limited Directors: John Penno, Graeme Milne, Willem Roest, Sam Knowles, Hon. Ruth Richardson, Li Ke, Dong Zongbo, Yang Sihang. This remains unchanged since 2014. 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 Leadership Team and Board level as at 31 July 2015 is: Board Senior Leadership Team Female 2 1 Male 6 6 Total % Female 8 7 25% 14% Our reported gender breakdown as at 31 July 2014 was the same: Board Senior Leadership Team Female 2 1 Male 6 6 Total % Female 8 7 25% 14% In addition, we have the following alternative measures of diversity which may be of interest to investors. As at 31 July 2015: Ethnicity: Based on the place of birth Board Senior Leadership Team Domicile: Based on the place of current residence Board Senior Leadership Team Languages spoken Board Senior Leadership Team Highest qualifications held Board Senior Leadership Team Years of relevant work experience Board Senior Leadership Team New Zealand 4 3 New Zealand 5 7 Asia 3 - Asia 3 - Other 1 4 Other - - English only Two languages Three or more languages 3 5 4 2 - - Bachelor degree Post-graduate degree 2 6 6 1 Total Average per member 212 160 26.5 22.9 I PAGE 109 Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION CONTINUED EMPLOYEE REMUNERATION During the year ended 31 July 2015 the following employees and former employees received individual remuneration over $100,000 (with comparative figures for 2014) for Synlait Milk Limited. Note that its Subsidiary (Synlait Milk Finance Limited) has no employees of its own. Remuneration range 2015 2014 Number of employees Number of employees $100,000 – $110,000 $110,000 – $120,000 $120,000 – $130,000 $130,000 – $140,000 $140,000 – $150,000 $150,000 – $160,000 $160,000 – $170,000 $170,000 – $180,000 $180,000 – $190,000 $190,000 – $200,000 $200,000 – $210,000 $210,000 – $220,000 $220,000 – $230,000 $230,000 – $240,000 $240,000 – $250,000 $250,000 – $260,000 $260,000 – $270,000 $270,000 – $280,000 $280,000 – $290,000 $290,000 – $300,000 $300,000 – $310,000 $310,000 – $320,000 $320,000 – $330,000 $330,000 – $340,000 $340,000 – $350,000 $350,000 – $360,000 $360,000 – $370,000 $370,000 – $380,000 7 5 7 5 4 3 4 3 0 1 0 0 1 1 0 0 1 0 1 0 1 0 0 1 1 0 0 1 7 6 3 9 3 2 4 2 2 0 0 1 1 0 1 0 0 0 0 0 2 0 0 0 0 0 1 1 One employee was between $800,000-$810,000 in 2015; and one employee was between $870,000-$880,000 in 2014. PAGE 110 I Synlait Milk Limited Annual Report 2015 STATUTORY INFORMATION CONTINUED DONATIONS For the year ended 31 July 2015 we donated $3,000 to charitable and community 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 annual shareholders meeting will be held on 8 December 2015 at our plant at 1028 Heslerton Road, RD13, Rakaia 7783, unless otherwise notified. We will confirm the details for the meeting by notice to all our shareholders nearer to that date. ANNUAL REPORT Our Annual Report and all our past Annual Reports and Interim Reports are all available on our website (www.synlait.com/ investors/corporate-governance). We will email our Annual Report to those shareholders who have opted for e-communication with us and our share registry. We prefer to communicate with our shareholders by email without using up valuable printing resources and postage costs, but any shareholder who does request a hard copy of our Annual Report will be sent one in the regular post. FURTHER SHAREHOLDER INFORMATION ONLINE This Annual Report, all our core governance documents (our Constitution, most of our key Policies and all relevant Charters), our Investor Relations policies and plan, and all our Announcements can be viewed on our website: (www.synlait.com/investors/ corporate-governance). I PAGE 111 Synlait Milk Limited Annual Report 2015 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 (Sam) Knowles – Independent Director John William Penno (Managing Director) – Board Appointed Director Li Ke – Bright Dairy Director Dong Zongbo – Bright Dairy Director Yang Sihang – Bright Dairy Director Hon. Ruth Margaret Richardson (Chair of the Remuneration and Governance Committee) – Bright Dairy Director SENIOR LEADERSHIP John Penno – Chief Executive Officer and Managing Director Nigel Greenwood – Chief Financial Officer Matthew Foster – General Manager Supply Chain Natalie Lombe – General Manager Culture, Capability and Strategy Mike Lee – General Manager Sales Neil Betteridge – General Manager Manufacturing Michael Stein – General Manager Quality and Technical Services AUDITOR Deloitte 151 Cambridge Terrace Christchurch 8013 New Zealand LAWYERS Minter Ellison Rudd Watts Lumley Centre 88 Shortland St Auckland 1010 Duncan Cotterill Duncan Cotterill Plaza 148 Victoria Street Christchurch 8013 BANKERS ANZ Bank New Zealand Limited The Bank of New Zealand INVESTMENT BANKERS First NZ Capital Securities Limited Goldman Sachs New Zealand Limited SHARE REGISTRAR 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 PAGE 112 I Synlait Milk Limited Annual Report 2015 Synlait Milk Limited 1028 Heslerton Road RD13, Rakaia 7783 New Zealand P+ 64 3 373 3000 www.synlait.com