Synlait Milk Limited Annual Report 2020

FY2020 Annual Report · Synlait Milk Limited

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ANNUAL REPORT 2020
ANNUAL REPORT 2020

Synlait’s commitment to elevating
people and planet to the same level
as profit was recognised in June
2020 when it became part of the
B Corp™ community.

B Corp™ is a community of leaders
driving a global movement of people
using business as a force for good.
Certified B Corporations™ consider
the impact of their decisions on

their workers, customers, suppliers,
community, and the environment.

This movement resonates strongly
with Synlait’s purpose of Doing Milk
Differently For A Healthier World.

Learn more about what being a
B Corp™ means for our people,
our community, and our customers
at: synlait.com/bcorp

ABOUT THIS
REPORT

REPORT ICONS

Did you know

Learn more

SUSTAINABILITY

For shareholders interested in
Synlait’s environmental and social
impact, a standalone sustainability
report will be released in November.
This report will review Synlait’s
strategy and initiatives to deliver
on our sustainability objectives
and targets.

It is our intention to merge the
sustainability report into the annual
report over time.

Welcome to our Annual Report.

This annual report reviews
Synlait Milk Limited’s (Synlait) and
subsidiaries financial performance
and business achievements for the
year ended 31 July 2020.

It represents our first step towards
adopting Integrated Reporting
methodology. We have been guided
by the principles of Integrated
Reporting to demonstrate to you, our
shareholders, how we create value.

Driven by our purpose of Doing Milk
Differently For A Healthier World
we are making genuine progress
to diversify Synlait and progress
our ambition, which we call: 2 +
Zero. We are well placed to deliver
sustainable growth for you, while
balancing people, planet and profit in
our decisions. We hope you find our
progress encouraging.

We always look for ways to improve
our reporting, please email any
feedback to: investors@synlait.com

An online copy of this report and
our previous annual, interim and
sustainability reports are available
at: synlait.com/investors/

ANNUAL REPORT 2020PAGE 02 & 03

Tankers line up to unload at the Synlait Dunsandel

milk reception bay.

DIFFERENTIATED
MILK SUPPLY

Our differentiated milk supply is what
sets Synlait apart and enables us to
manufacture specialty products with a
higher value. Special milk programmes
require farmers to add value for our

customers behind the farm gate, such
as a1 protein-free, Lead With PrideTM or
grass fed milk. We recognise this value
by paying premiums on top of our
base milk price.

ANNUAL REPORT 2020PAGE 04 & 05

128

133

153

170

CONTENTS

About this report

Highlights from the year

Chair review

CEO review

Our strategy: Heart. Head. Hands.

How we create value

Where we operate

Where our milk goes

What matters to us and why

Two decades of progress

Our Board

Our executive team

CFO review

First impressions

Financial and performance metrics

Milk price

Review of financial performance

Financial contents

Financial statements

Auditors report

Corporate governance

Statutory information

Directory

Synlait Dunsandel

ANNUAL REPORT 2020`

PAGE 06 & 07

HIGHLIGHTS FROM THE YEAR

RESULTS AT
A GLANCE

Synlait remains a solid and highly
profitable business despite
COVID-19.

EBITDA grew strongly
demonstrating the strength of our
infant and lactoferrin businesses.

NPAT reduced reflecting
investments in new facilities and
acquisitions over the past two
years to create new opportunities
for growth.

We continue to balance people
and planet with profit.

27%

$1.3 B

REVENUE

13%

$171.4 M

EBITDA

$75.2 M

NPAT

$203.7 M

GROSS PROFIT

15%

49,180 MT

CONSUMER-PACKAGED INFANT
FORMULA SALES

46%

30 MT

LACTOFERRIN SALES

*All comparisons in this document are to the 12 months to 31 July 2019 (FY19) unless stated otherwise

ACHIEVEMENTS AT
A GLANCE

CORE INFANT BUSINESS
CONTINUES TO PERFORM

SYNLAIT POKENO
COMMISSIONED

NEW MULTINATIONAL CUSTOMER
OPPORTUNITY BEING FINALISED

INVESTMENT IN THE
PLANET REMAINS A FOCUS

DAIRYWORKS AND TALBOT
FOREST CHEESE ACQUIRED

MANUFACTURING
EXCELLENCE CONTINUES

ENGAGEMENT AT
RECORD LEVELS

B CORP™
CERTIFIED

MANAGING THROUGH
COVID-19 WELL

ANNUAL REPORT 2020PAGE 08 & 09

CHAIR
REVIEW

In this, our eighth report to
shareholders since we listed the
company in July 2013, I am pleased
to report that our purpose of Doing
Milk Differently For A Healthier
World has proven its resilience and
value when viewed against several
significant challenges.

Sadly, the world is not healthier
since I last wrote to you. We have all
faced extraordinary challenges due
to COVID-19. Synlait’s purpose was
critical to our pandemic response and
I am pleased to report that despite
COVID-19 we made significant
strategic progress and delivered a
strong financial performance in the
year to 31 July 2020.

A strong result in an extraordinary year
Synlait remains solid and profitable
with EBITDA showing our core
business is growing strongly, up 13% to
$171.4 million. This is however behind
the rate originally planned for when we
built our new facilities, with customer
opportunities taking longer than
expected to materialise. NPAT was
$75.2 million, which is consequently
down on the 2019 financial result,
reflecting manufacturing overheads
and financing costs absorbed as we
invest for future growth.

COVID-19: the opportunity and the
challenge for our industry
Synlait is primarily an export-focused
company. For that reason, world
markets are extremely important to
us. Our new reality is that COVID-19

will have a long-term impact on
what was a strongly growing world
economy until the virus emerged.

Our core business is the
manufacturing of essential food
to relatively affluent middle classes
who can afford optimal nutrition.
This is still the case, but when
overlaying a global recession and
people’s ability to afford premium
products, sales of high-value items
will be impacted to some degree.
However, there is no doubt that
high-quality, nutritious, sustainable,
New Zealand-made products will
continue to be in demand.

This situation is not unique to Synlait.
In a world challenged economically
due to COVID-19, relatively expensive
animal and dairy-based proteins will
be tested due to consumers reduced
buying power. We expect plant-based
foods will make headway. We need
to monitor trends and be prepared
and agile to participate in a way that
creates value.

If we look at New Zealand’s export
story, it is a great platform to operate
on – a clean, green image with an
excellent record of food quality and
safety. The strength of the food
and fibre sector, and its importance
to New Zealand’s economy, was
showcased during COVID-19.
Despite recent community outbreaks
our country has remained relatively
COVID-free compared to our global
peers. Hopefully, we can keep adding

this layer of positivity to Synlait’s
brand story.

Our internal response to COVID-19
was admirable. Management and
employees re-organised early to
ensure production would continue
in a safe way. Our manufacturing
teams were extremely resilient during
New Zealand’s COVID-19 lockdown
with increased demand for fresh
milk, cream, cheese and infant
formula due to changing consumer
behaviours and pantry stocking.
We maintained operational and supply
chain continuity while responding
quickly to our customers changing
demand profiles.

This was well supported by our
administration team who worked from
home. Everyone adapted swiftly and
without complaint to working virtually.
A testament to Synlait’s culture,
agility and resilience.

We were therefore well-prepared for
the subsequent community outbreak
and continue to remain prepared
should the virus spread again.

Implementing our strategy
Despite these challenges,
Synlait made considerable gains
by continuing to implement and
execute our strategy throughout
the financial year.

and is integral to our strategy and
profitability. On the other hand,
the Board and management have
the view that we have become too
reliant on a single product – infant
formula, a single site – Dunsandel,
a single market – China, and a single
customer – The a2 Milk Company.

We achieved geographical site
diversification with the commissioning
of Synlait Pokeno. The next phase
was to diversify our product range.
We needed to attract a customer
who would lead us to new markets
and categories. While China remains
extremely important, we wanted to
diversify in terms of geography as
well as customer-base.

This process is progressing well
and as signaled last month a new,
multinational customer opportunity
is being finalised.

The Supreme Court appeal regarding
Synlait Pokeno was unfortunately
necessary this year. We are still
awaiting a judgment but remain
confident of a favourable outcome.
We are pleased this has not impacted
our ability to attract a new customer.
We consider it unlikely that an
adverse decision at the Supreme
Court or subsequent proceedings
would result in a materially negative
impact on our ability to continue to
operate Synlait Pokeno.

To date, our success has been largely
based on our core infant nutrition
business, which has grown strongly

Perhaps the most notable strategic
progress this year was the acquisition

of two existing cheese businesses –
Talbot Forest Cheese and Dairyworks
– as pillars of our Everyday Dairy
strategy. This marked the first time we
have brought existing businesses into
our network. Dairyworks provided
us with instant scale in the cheese
sector, new growth opportunities,
and a diversified earnings base.
We are now closer to Australasian
consumers and own a fully vertically
integrated value chain.

DID YOU KNOW

Dairyworks is a New Zealand leader
in the Everyday Dairy category,
with a growing Australian presence.
It supplies New Zealand consumers
with almost half of its cheese,
a quarter of its butter, as well as milk
powder and ice cream. Learn more
at: dairyworks.co.nz

ANNUAL REPORT 2020PAGE 10 & 11

Finally, Synlait’s strategic decision
to elevate people and planet to the
same level as profit was recognised
by the company becoming a Certified
B Corporation™ (B Corp™) in June.
We joined more than 3,300 B Corp™
businesses across 71 countries
who have undertaken a stringent
assessment process which measures
a business’s ongoing impact on its
workers, community and suppliers,
customers, governance and the
environment.

DID YOU KNOW

A team of more than 30 Synlait
staff were engaged to complete
the comprehensive B Impact
Assessment. The process took more
than a year and Synlait’s accreditation
will be reviewed every three years.
Synlait will use the assessment as
stimulus to continue to make positive
change within the company.

Refreshing our leadership
In 2019 the Board commissioned
a comprehensive review of its
capability and succession planning.
This highlighted that we have had
relatively few Board changes since
listing, though in the context of Synlait’s
rapid growth, stability of representation
was considered important.

This is about to change with Bill Roest
retiring. Bill joined the Board in 2013 as
a highly qualified former Chief Financial
Officer and professional Director.
He has Chaired the Audit and Risk
Committee since joining Synlait and
has done a superb job overseeing our
capital requirements and bond offers
as well as contributing strongly to the
overall governance of our company.

The Board will nominate Simon
Robertson as its preferred candidate
to replace Bill at our annual meeting
in November. Simon has extensive
executive and governance experience
in finance, strategy, risk, operations,
technology and stakeholder
management. His skills align with
Synlait’s growth priorities and he is
passionate about working in NZX-listed
environments having been the former
Chief Financial Officer of Auckland
International Airport. We hope you
will support us in endorsing Simon’s
Board candidacy.

Under the succession plan, my own
term comes to an end next year, and I
do intend to stand down and make way
for a suitable replacement at that time.

Synlait has continued to develop at a
rapid pace. In his second year as CEO,
Leon Clement, has certainly responded
well to the challenges. The Board is
very pleased with his performance,
strategic development and leadership.

Leon has also done a great job
developing the executive team.
While we said goodbye to our former
CFO, Nigel Greenwood, Leon has
been able to attract and recruit new
talent with Angela Dixon (CFO) and
Mark Toomey (Director, Operations)
joining the team. Angela and Mark
bring experience from their careers
in significant corporates which will
assist Synlait as it enters the next
phase of growth.

It has been a challenging year for
many reasons. I thank my fellow
Directors, our leadership team and
employees for stepping up and
responding so positively.

Where to from here?
The Board’s focus for the next financial
year is to continue growing our core
infant nutrition business while delivering
returns on our investments and
diversification initiatives. Having built a
world class facility in Synlait Pokeno and
seeing a slower growth trajectory than
anticipated, we need to ensure our new
facilities are fully utilised through new-
customer development. We are also
focused on the integration of Dairyworks
and Talbot Forest Cheese and the
commissioning and product verification
of Synlait Dunsandel’s long-life facility.

Synlait has developed a track record
of delivering high returns on capital
by investing in a differentiated value
chain to meet customer needs, and
we are confident that our recent
investments will be no different.

year-on-year, with lower demand in
the first half of FY21 due to higher
than normal stock levels in the
supply chain. Synlait expects a
return to growth in the second half
of FY21 once stocks have cleared.

A further update will be provided
at Synlait’s half year result in
March 2021.

Thank you for your ongoing support.

Graeme Milne ONZM
Synlait Chair

We acknowledge that our share
price has experienced some
pressure as we work to achieve our
growth ambitions. The Board remain
confident that these investments will
drive an improved return for you, our
shareholders, over the long-term.

As an essential industry the impact
of COVID-19 on supply and demand
has not been a severe as on other
sectors and therefore the financial
performance of Synlait was relatively
resilient when viewed against the
backdrop of a global pandemic.
We do have a strong and profitable
business, but we acknowledge there
are market headwinds and unused
capacity that will restrict our short-
term financial performance until
fully utilised.

Outlook
There continues to be significant
global uncertainty regarding COVID-19.

While Synlait has proven its ability to
maintain operational continuity over
recent months, in terms of demand
for the products it manufactures,
it expects:

•

Strong underlying EBITDA
and operating cash flows to
continue, with growth delivered
from a full year of Dairyworks
earnings and the integration of
Talbot Forest Cheese.

• No disruption to manufacturing

or demand for its ingredient and
lactoferrin business.

This guidance is subject to the
unpredictable effects of COVID-19,
with consumer behaviour, channel
dynamics and supply chain
disruptions all subject to change.

This is offset by the carrying costs
of investing in Synlait Pokeno and
Synlait Dunsandel’s Advanced Dairy
Liquid Packaging facility. Earnings
from these investments are expected
to be delivered in FY22 and beyond.

As previously disclosed, Synlait is in the
process of finalising a long-term supply
agreement with a new, multinational
customer for packaged products which
is expected to have a positive impact
on earnings from FY23.

•

Consumer-packaged infant
formula volumes to be similar

Against this, we are targeting a
similar, or slight improvement on,
our FY20 NPAT result.

ANNUAL REPORT 2020
PAGE 12 & 13

Milk reception bay, Synlait Dunsandel

ANNUAL REPORT 2020PAGE 14 & 15

CEO
REVIEW

Kia ora Synlait whānau

efficiency, utilisation and waste
reduction continues.

When I reflect on the last financial
year it is hard not to think about
COVID-19. Organisations can be their
most creative in times of uncertainty,
and when the future is difficult to
predict being adaptable and resilient
is an asset. Our team’s response
to the pandemic was first class, but
COVID-19 also confirmed that our
strategy to create a strong, diverse
company, is more relevant given the
uncertain world ahead.

The financial year to 31 July 2020 saw
us deliver strong growth in our core
business and make genuine progress
to further diversify Synlait.

We are building a sustainable,
diverse and recurring revenue base
that comes from multiple customers,
sites, markets and categories, while
balancing the needs of people,
planet and profit in our decisions.

Strong underlying performance
achieved
It was great to see our strong growth
momentum continue in this current
environment with revenue up 27%
to $1.3 billion. EBITDA rose 13% to
$171.4 million demonstrating our core
business strength, driven by the strong
relationship we have with The a2 Milk
Company, increased sales from a full
year’s production from our expanded
lactoferrin facilities, and our ability to
extract margins from the raw milk we
source. We see opportunities to keep
growing as the focus on operational

NPAT fell 9% to $75.2 million
reflecting strategic investments
and acquisitions over the past two
years to achieve our diversification
ambitions. We acknowledge that a
less ambitious strategy may have
resulted in a stronger short-term NPAT
performance, but it would not have
created the growth capacity we now
have or addressed our strategic risks.

Yes, we were disappointed when
downgrading our performance in
February due to changing market
dynamics and demand outlook for
some of our products. This highlighted
our over-reliance on a narrow set of
value drivers that can quickly change,
again reinforcing the importance of our
diversification strategy. Our recovery
in the second half, especially given
COVID-19, gives us confidence in just
how agile and resilient we can be.
There are simply too many stories to
mention, but I am proud of how our
team responded here.

Progressing towards our ambition:
2 + Zero
Our purpose of Doing Milk Differently
for A Healthier World keeps us on
track. Our ambition is a simple formula
for success: 2 + Zero. Our goal is to
achieve $2 billion in revenue.

The + part of our equation talks to
people and planet. Our goal is to
have a net positive impact on our
environment and communities,

and to create a positive place to
grow with 100% team engagement.
We are balancing people and planet,
with profit, in all decisions.

The Zero focuses on a fundamental
part of our business – keeping our
people safe, our focus on quality,
and reducing all forms of loss. Zero
injuries, Zero defects and Zero losses.
We believe this is possible.

Our progress over the last year
towards 2 + Zero was satisfying.
Revenue is up 27%, staff engagement
is at record levels, we became
a Certified B Corporation™, Total
Recordable Injury Frequency Rate
(TRIFR) is down 38% and our right
first-time performance lifted 34%.

Setting the foundations to diversify
In last year’s annual report, Synlait
was to an extent, one-dimensional.
We had an infant nutrition business
focused predominantly on our
strategic partnership with The a2
Milk Company, and a freshly-inked
fresh milk and cream contract with
Foodstuffs South Island. We were
also reliant on one site, Dunsandel,
predominantly manufacturing infant
formula for China. Twelve months on
we are in better shape.

Customer diversification
We have taken a major step towards
achieving a strong, diverse but
complementary customer portfolio.
In less than two years we have moved
from one key relationship to several,
creating a well-rounded and long-

term customer portfolio,
which includes: The a2 Milk Company,
a fast-growing player in China;
Foodstuffs South Island, a domestic
New Zealand retailer; and the new,
multinational customer opportunity,
that utilises Synlait Pokeno, which we
are working to finalise.

These relationships are supported by
a balanced portfolio of multinational
ingredient and lactoferrin customers,
while the Dairyworks and Talbot
Forest Cheese acquisitions enable us
to connect directly with consumers in
a complementary category that help
us optimise our milk supply.

Market diversification
We are also broadening our markets
effectively. Foodstuffs South Island,
Talbot Forest Cheese and Dairyworks
provided instant market share in
Australia and New Zealand. These
markets are experiencing strong
sector growth as consumers seek
nutritional products that support
better health. Synlait is excited to play
a role in this journey.

China remains our largest export
market. However, there are real,
albeit nuanced, shifts happening in the
regulatory landscape. We are seeing
sentiment shift towards increased
consumer trust in Chinese-made infant
formula and retail channels, which
along with the regulatory landscape,
is accelerating market consolidation.
This represents opportunity and risk for
Synlait, and while we must continuously
adapt, we remain highly committed to

playing an important role in this critical
market with our strategic partner and
shareholder The a2 Milk Company.

We are well positioned to continue
enabling The a2 Milk Company’s
growth aspirations via our
highly integrated infant formula
manufacturing organisation that
meets China’s high standards.
Navigating regulatory environments
is core to our value proposition
and service. The renewal process
required for canned infant formula to
be physically sold in Chinese stores
every five years is well progressed.
New Zealand’s reputation as a trusted
source of safe dairy nutrition has
also been reinforced by our country’s
response to COVID-19.

Site diversification
We removed our single site and milk
pool risk with the commissioning of
Synlait Pokeno, some 1,000 kilometres
from Synlait Dunsandel. This facility
has considerably de-risked Synlait
and provides optimisation benefits
in the way we manufacture. We now
have two infant capable facilities and
a1 protein free milk pools at both
ends of New Zealand. Synlait Pokeno
is a world class facility. Its quality
is evidence of our experience built
through designing, commissioning and
operating these facilities over
the past 10 years.

Category diversification
Our core Infant Nutrition category
remains solid and profitable.
As previously indicated, we are

ANNUAL REPORT 2020PAGE 16 & 17

working to finalise a new multinational
customer opportunity which expands
our category reach.

confident in this opportunity and our
strategy. First sales are expected at the
end of this financial year.

Our Everyday Dairy strategy made
another step forward in April following
the Dairyworks acquisition. The focus
here is on bringing Talbot Forest
Cheese and Dairyworks together
to create a uniquely integrated
value chain to enhance our market
competitiveness and realise synergies.

This category also includes the fresh
milk and cream line we operate for
Foodstuffs South Island, which we
had our first full financial year of sales
from. The operational performance of
this line is now exceeding expectation
and increased demand during
COVID-19 was met with almost 100%
accuracy. Fresh milk sales rose 2.8%
and cream 20% during COVID-19.

Our Foodservice category is being
established with the focus on
functional UHT whipping creams.
Progress was initially delayed
due to commissioning challenges
on the fresh milk and cream line.
Subsequently, commissioning the
new UHT line has been further
impacted due to COVID-19 as it has
been difficult to get the technical
capabilities required to New Zealand.

With just over 10 years’ experience in
producing powdered products, lessons
are being learnt and our new Director
Operations, Mark Toomey, is using
his beverage sector experience to
drive this project forward. We remain

Our strategic concentration risk has
materially reduced over the last year,
while maintaining underlying earnings
growth in our core business. This
approach came with risk as we built
in front of the demand curve and
acquired complementary businesses,
but it is in our DNA to be ambitious
and move at pace. We still have work
to do, but we have achieved our
underlying goal of laying the foundations
to build a more diversified Synlait.

Investment in people and the planet:
growing in a balanced way
We are pursuing shareholder value
creation in a way that enhances the
needs of people and the planet.
We believe that one drives the other,
therefore sustainable thinking is core
to what we do. Our investments,
and the choices we make, will lead
us to being net positive for the planet
and help all to thrive.

Our environmental and social
progress was recognised in June
when we became a B Corp™. We
publicly pledged to use business
as a force for good and intend to
be transparent about our goals and
progress towards them. We are
committed to creating a future of
sustainable farming and integrated
food production. This is our core
value proposition and we believe it
will continue to create value in many
ways for our company.

We have some great plans forming
to reach our off-farm GHG emissions
reduction target of -50% per kilogram
of product by 2028. For example,
we trialled substituting coal for wood
pellets in one of our Dunsandel
boilers, which has the potential to
remove 30% of the coal we burn.

Whakapuāwai, our native tree planting
programme at Synlait Dunsandel,
is progressing. The nursery has been
constructed and 11,000 trees planted.
I am really inspired by our team’s
commitment to this project. We are
truly living Synlait’s purpose here.

DID YOU KNOW

Whakapuāwai was launched by Prime
Minister Jacinda Ardern in December
2019. Our staff receive one paid day
per year to plant natives as a way
of supporting commitments to our
farmers and communities to jointly
restore land in Canterbury.

Our operational response to
COVID-19 was also an indicator of
our team’s commitment to Synlait and
a driver of engagement. Those who
were needed to run our facilities did
so in the knowledge that they were
safe and contributing to our company
and country’s economy. We were
privileged to be one of the fortunate
few operating as an essential service.

We keep a close watch on
engagement with a quarterly
measurement programme. We use
Gallup’s Australia, New Zealand and
Oceania database as a benchmark
which has seen us move from the
65th to 82nd percentile over the
last year, demonstrating our people
understand Synlait’s purpose and
know how to contribute to it.

High engagement correlates
to health, safety and wellbeing.
In FY18, TRIFR was 18.9
and now it is 8.5. We have work to
do, but progress is encouraging.
The next step is to ensure a
consistent approach at Dairyworks
and Talbot Forest Cheese.

Our focus for the year ahead
Our core business is sound and
producing solid returns on capital.
We are approaching the end of a
substantial investment period into
manufacturing capacity and people.
While this has, for now, had a short-
term impact on our bottom line,
it has set us up to deliver earnings
growth to become a more diversified
company. We have the facilities

and capability to respond to market
opportunities, whether they are
new customers, changing consumer
tastes, or new products.

Our team delivered a strong result
in exceptional circumstances. I leave
this financial year proud of Synlait,
its people and, and our performance.

To ensure we optimise our
performance, we will be focused
on three areas this year.

Ngā manaakitanga

Leon Clement
Synlait CEO

The first is an intense focus on our
customer relationships. We must
focus on embedding new customer
partnerships and continuing to grow
existing ones.

The second is the need to fully
optimise our assets and create
value. We have invested in strategic
facilities. It is time to make sure these
investments work for us, and you.
We are focused on running our
facilities smarter and more efficiently.

The third is the simplification and
standardisation of our structures and
systems. We will continue to build an
organisation that is future-ready,
and a culture that supports our
purpose and ambition.

This is a year to consolidate, focus,
and set ourselves up for success.
Not all the assumptions we made when
we invested in our facilities have played
out. Our world has changed, and so
must we. We are not going to dwell on
what did not work, we are going to do
what we need to do to keep creating
value for you, our shareholders.

I want to thank those who have been
part of the Synlait story.

ANNUAL REPORT 2020
PAGE 18 & 19

OUR STRATEGY

HEART OUR PURPOSE

HEAD OUR AMBITION

HANDS OUR STRATEGY

DOING MILK
DIFFERENTLY FOR A
HEALTHIER WORLD

$2 billion in revenue

Net +ve impact on
planet and communities
+ve place to grow with
100% engagement

ZERO

Zero injuries
Zero defects
Zero losses

F
O
R

H
E
A
L
T
H

E
R
W
O
R
L
D

Net Positive for
the Planet

A Healthier
Synlait

World Class
Value Chain

D
O

N
G
M
I
L
K

F
F
E
R
E
N
T
L
Y

Sports Nutrition

Everyday Dairy

Infant Nutrition

Foodservice

Next Big Thing

ANNUAL REPORT 2020

PAGE 20 & 21

DID YOU KNOW

When running at capacity, our
Dunsandel and Auckland blending
and canning lines tip 6,500 kgs of
dry powdered ingredients, including
essential vitamins and minerals,
per hour into a very large blender
to make infant formula.

Blending and canning operator carrying

out quality control at Synlait, Dunsandel

ANNUAL REPORT 2020PAGE 22 & 23

HOW WE
CREATE VALUE

WHAT WE HARNESS

Natural
Water, energy, land, milk

Social
Customers, farmer suppliers, regulators,
community

Human
New Zealand and China-based staff

Strengths-based approach to development

Health and safety leadership

Physical
Owned New Zealand-based assets

Integrated manufacturing systems

Financial
NZX/ASX listings

Intellectual
Lead with Pride™ programme

Long-term strategic shareholder base
linked to growth markets

Expertise to design, build and operate
world-class facilities

Shareholder capital

Innovation centre

WHAT WE DO

On-farm

Operations

Products

Customers

Sustainability

Reward New Zealand’s most
innovative farmer suppliers

Source differentiated milk streams

Operate world-class facilities

Process differentiated milk streams

Implement best practice food safety,
quality and regulatory systems

In-house laboratory

OUTCOMES

Invest in infant nutrition, ingredients and
everyday dairy

Develop and manufacture specialised
products for global brands

Set industry-leading targets and roadmaps

Nutritional, safe products
Health and essential nutrition

Trusted brands, product traceability

Extensive product range

Industry challenger
Recognised for on-farm sustainability
standards: Lead With Pride™

Market access
Achieved due to regulatory and
quality accreditations

Catalyst for change

Capability to grow

Long-term, high-growth partnerships

Talented employees
Innovative and agile culture: Kotahitanga

World-leading engagement results

Environmental stewardship
On-track to reduce on-farm and off-
farm environmental impacts

Safety record improving

Certified B Corp™

Financial capability
Lead With Pride™ incentive payments

Competitive margins

Access to capital for growth

Revenues reinvested

D
O

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M
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K

F
F
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N
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L
Y

F
O
R

H
E
A
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T
H

E
R
W
O
R
L
D

ANNUAL REPORT 2020

PAGE 24 & 25

WHERE WE
OPERATE

We have a history of bringing out
the best in nature and unlocking
its potential through new thinking,
new technologies and new attitudes.
We have grown to operate across eight

locations in New Zealand and China.
Our state-of-the-art assets are run by
an engaged and highly capable team,
backed by some of the best of New
Zealand’s farmer suppliers.

Synlait Dunsandel (838 people)
Our homebase. As well as being our primary manufacturing facility, Synlait
Dunsandel has an administration office and is where Whakapuāwai is based,
our environmental programme which includes an industrial scale nursery.

Facility
Dryer 1

Dryer 2

Dryer 3

SMD
AMF
Advanced Dairy Liquid
Packaging Facility
Lactoferrin 1
Lactoferrin 2
Wetmix Kitchen 1
Wetmix Kitchen 2
Blending and Canning

Capacity
45,000 MT

45,000 MT

1,800 MT
25,000 MT
110ML

17 MT
17 MT
40,000 MT
45,000 MT
40,000 MT

Output
Infant grade whole milk powder and skim
milk powder
Infant formula base powder, Infant grade
whole milk powder and skim milk powder
Infant formula base powder, Infant grade
whole milk powder and skim milk powder
Specialty milk powders
AMF liquid milk products
Milk, cream and long life products

Lactoferrin
Lactoferrin
Infant formula base powder
Infant formula base powder
Infant formula

DID YOU KNOW

80% of our South Island farmer
suppliers are within a 75 kilometre
radius of Synlait Dunsandel.

80% of our North Island farmer
suppliers are within a 130 kilometre
radius of Synlait Pokeno.

Synlait Auckland (97 people)
Our second blending and canning facility.

Facility
Blending and Canning 40,000 MT

Capacity

Output
Infant formula

Synlait Pokeno (110 people)
Our newest infant-capable site in the North Island.

Facility
Dryer

Capacity
45,000 MT

Wetmix Kitchen

45,000 MT

Output
Infant formula base powder, Infant grade
whole milk powder and skim milk powder
Infant formula base powder, Infant grade
whole milk powder and skim milk powder

Synlait Palmerston North (17 people)
Our research and development centre based at Massey University.

Synlait China (6 people)
Our teams in Shanghai and Beijing are focused on regulatory affairs,
business development and sales.

Synlait Christchurch
Our satellite office for administration staff.

Dairyworks (229 people)
Our newest member of the Synlait family based in
Christchurch.

Facility
Secondary cheese
processing

Output
Cheese, butter, yogurt, milk powder
and ice cream

Talbot Forest Cheese (76 people)
Our first cheese acquisition, based in Temuka, two hours south
of Christchurch.

Facility
Primary cheese
manufacture

Capacity
Output
12,000 MT Cheese

ANNUAL REPORT 2020PAGE 26 & 27

WHERE OUR
MILK GOES

Our differentiated milk supply is what
sets Synlait apart. It enables us to
manufacture a range of nutritional
milk products that provide genuine
benefits for human health and

wellbeing for our global customers.
New Zealand’s unique environment is
reflective of the quality of the milk we
produce, and our milk finds its way all
over the world.

Netherlands

Denmark

Algeria

Nigeria

Ghana

Guyana

Trinidad and Tobago

Dominica

Peru

Jamaica

Chile

South Africa

Jordan

Egypt

Kuwait

Pakistan

Bangladesh

China

Thailand

Sri Lanka

Oman

United Arab Emirates

Qatar

Saudi Arabia

Madagascar

Singapore

Malaysia

Japan

South Korea

Taiwan

Hong Kong

Philippines

Vietnam

Indonesia

Papua New Guinea

Fiji

Australia

DID YOU KNOW

Commercial product, including
instant whole milk powder, skim milk
powder, infant formula base powder
and cream, has been manufactured

at Synlait Pokeno since September
2019. The first shipment of whole
milk powder was dispatched in
December 2019 to Vietnam.

DISTRIBUTION BY
PRODUCT

Countries

exported to

Synlait
Anhydrous milk fat
Butter milk powder
Consumer packaged infant formula
Infant formula base powder
Lactoferrin
Skim milk powder
Whole milk powder

Dairyworks
Cheese
Flavoured butter
Ice cream
Salted and unsalted butter
Whole milk powder

21
3
3
3
4
17
23

20
1
18
18
16

KEY: DISTRIBUTION
BY COUNTRY

Synlait manufactured

Dairyworks manufactured

Wallis and Futuna

Samoa

Tahiti

Rarotonga

Tonga

New Caledonia

New Zealand

ANNUAL REPORT 2020PAGE 28 & 29

WHAT MATTERS MOST
TO OUR STAKEHOLDERS
AND TO OUR BUSINESS

To improve as an organisation we
need to identify, understand and
closely manage our performance on
the topics that are most material to
us and our stakeholders.

This year we performed a desktop
materiality assessment, reviewing
reports from suppliers, customers,
investors and other external
stakeholders to assess relevant
issues that can affect value.
The outcomes of the materiality
assessment inform our decision
making on where we aim to make an
impact and feed into our corporate
reporting framework.

The materiality assessment focuses
on those topics that are most relevant
or impactful for the company and its

stakeholders, covering economic,
social, and environmental topics.

Working from a long list of
topics, a shortlist was created for
further discussion with internal
stakeholders to assess their views
on Synlait’s impact and to find out
which subjects are important for
our stakeholders.

The topics with the highest priority
for stakeholders and the biggest
estimated impact on our business
or on society appear in this matrix.
All topics shown in the top right
corner of the chart are considered
material and high priority. Our goal
is to refine this materiality analysis
and matrix by interviewing external
stakeholders over the coming years.

LEARN MORE

More information on our risk
management framework can be
found in the Corporate Governance
section of this report on page 133.

MATERIAL
TOPICS

MATERIALITY
MATRIX

Food safety

Animal welfare

Water quality

Climate change

Safety and wellbeing
of employees

Land degradation

Customer diversity

Market access / geopolitical
unrest

Plant-based foods / innovation

Product provenance
and traceability

Plastic packaging, waste,
reuse and recycling

Social responsibility

Nutrition

Recessionary conditions /
Net debt risk and return
on investment

Cyber security

Organisational capability
and culture

s
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Significance of Synlait’s impact

ANNUAL REPORT 2020

PAGE 30 & 31

TWO DECADES
OF PROGRESS

THE SYNLAIT STORY 2000 - 2020

2000

2005

2007

The Synlait dream begins

Synlait is formed

The Synlait Dunsandel dream begins

Dairy farmers and entrepreneurs Ben
Dingle, Juliet Maclean and Dr John
Penno purchased Robindale Dairy Farm
in Canterbury.

Synlait Milk launched. The name Synlait
was derived from the words ‘synergy’ and
‘lait’ (French for milk).

Synlait Milk entered an agreement to
deliver all milk collected to Westland Milk
Products during construction of Dryer 1.

2008

First milk processed at
Synlait Dunsandel

2009

Development continues at
Synlait Dunsandel

In June Synlait Dunsandel received its
first milk from third-party farmer suppliers.

The special milks spray dryer was
commissioned in August.

Dryer 1 was commissioned in August
and the Anhydrous Milk Fat facility was
commissioned in September.

2014

2013

New facilities come on-line

A big year for Synlait

At Synlait Dunsandel, the Lactoferrin
extraction and purification facility was
commissioned in April and the blending
and consumer packing facility in July.
Also, in July, Dry Store 3 was completed.

In April, Synlait Milk launched its
internationally accredited ISO/IEC 17065
dairy farm assurance programme, Lead
With Pride™, which recognises and
financially rewards farmer suppliers who
achieve dairy farming best practice.

On 23 July Synlait Milk Limited listed
on NZX, New Zealand’s Exchange.

2012

2011

2010

Supply agreement signed with the
A2 Corporation Limited

First milk processed in Synlait
Dunsandel’s infant formula facility

Bright Dairy joins the Synlait family

In March, an agreement was signed with
A2 Corporation Limited (later known as
The a2 Milk Company™ Limited) for Synlait
Milk to process and supply The a2 Milk
Company™ Limited’s a2 Platinum®
infant formula.

On 15 September the first milk was
processed in Synlait Dunsandel’s infant
formula facility.

Bright Dairy invested capital in Synlait
Milk and became a 51% shareholder in
November.

Dryer 2 is commissioned. Synlait Milk
has the capability to manufacture infant
formula and nutritional products to unique
customer specifications.

Synlait Dunsandel commenced
construction of Dryer 2, a sophisticated
purpose-built infant formula facility.

ANNUAL REPORT 2020PAGE 32 & 33

2015

2016

2017

2018

Synlait Dunsandel upgrades continue

Capital raising and ASX listing

Focused on growth

Celebrating 10 years of operations …

Dryer 3, an infant formula grade spray
dryer, was commissioned in September
at Synlait Dunsandel.

In October, Synlait Milk completed a
$98 million capital raise.

Synlait Milk Limited listed on the
Australian Securities Exchange (ASX)
on 25 November.

2020

Twenty years on and the focus on
growth continues

Synlait Milk became the owner of
Dairyworks Limited in April.

Synlait Milk became a Certified B
Corporation™ in June.

Synlait Milk acquired farmland adjacent

to Synlait Dunsandel. The land will enable
Synlait Milk to pursue several strategic
supply chain and sustainability initiatives
that support Synlait Dunsandel’s long-term
operation and expansion.

Synlait Auckland, a blending and
consumer packaging facility, was
commissioned in November. This was
formerly the site of The New Zealand
Dairy Company Limited, which Synlait
Milk purchased in May that year.

The Wetmix kitchen at Synlait Dunsandel
was officially opened in December,
doubling Synlait’s infant formula
powder capacity.

In February, Synlait announced the
conditional purchase of 28 hectares
of land in Pokeno, North Waikato to
establish its second nutritional power
manufacturing site.

This was followed by the official opening
of the Synlait Research and Development
Centre in Palmerston North, a partnership
with Massey University and Food HQ,
in March.

In August, Dr John Penno, founder and

former Managing Director stepped
down from the role of CEO, and Leon
Clement was appointed.

Synlait announced bold 10-year
sustainability targets in September and
launched a new corporate brand identity
and purpose ‘Doing Milk Differently For
A Healthier World’ in November.

Construction of the Advanced Dairy
Liquid Packaging Facility commenced
at Synlait Dunsandel.

South Island Limited

2019

Synlait continues to grow and grow …

New Zealand’s first large-scale electrode
boiler was commissioned at Synlait
Dunsandel in March. This was a significant
social and environmental performance
milestone for Synlait Milk.

Synlait Milk commenced supply of fresh
liquid milk and cream to Foodstuffs
South Island in April from its newly
commissioned Advanced Liquid Dairy
Packaging Facility at Synlait Dunsandel.

The acquisition of selected assets of Talbot
Forest Cheese was completed in August.
This acquisition supported Synlait Milk’s
broader growth and diversification strategy.

Synlait Milk announced in September that
revenue exceeded $1 billion for the first
time in the company’s history.

Synlait Pokeno processed its first milk
in September.

Lactoferrin facility expansion at Synlait
Dunsandel commissioned in October,
doubling the manufacturing capacity.

Whakapuāwai programme and electrode
boiler officially opened by the Prime
Minister at Synlait Dunsandel in December.

Synlait Milk listed $180 million
subordinated bonds on NZX’s Debt
Market in December.

ANNUAL REPORT 2020PAGE 34 & 35

Dry Store 4 during construction shortly after the

roof was completed in August 2020

DRY STORE 4

Dry Store 4 will provide an
additional 30,000 square metres of
warehousing at Synlait Dunsandel.
It will streamline logistics activities
and bring offsite South Island storage
back to Dunsandel, supporting
growth and generating supply chain
efficiencies. It enables greater control

over our inventories, value add
services, improves our sustainability
footprint, and improves lead times
for our customers. New technology
and infrastructure improvements will
enhance the health and safety of our
people too. It will be completed in
November 2020.

ANNUAL REPORT 2020PAGE 36 & 37

OUR BOARD

Graeme Milne ONZM (Chair)

Bill Roest

Dr John Penno

Min Ben

Qikai Lu

Hon. Ruth Richardson

Sam Knowles

Sihang Yang

LEARN MORE

The Board’s full profiles are available
on our website: synlait.com/people

Other information about Board
composition and performance
is disclosed in the corporate

governance section on page
133. Information on Directors
remuneration, participation in
Synlait securities, and other interests
are disclosed in the statutory
information section on page 153.

The pink health and safety pathway at

Synlait Dunsandel

ANNUAL REPORT 2020PAGE 38 & 39

OUR EXECUTIVE TEAM

Leon Clement
Chief Executive Officer

Angela Dixon
Chief Financial Officer

Boyd Williams
Director, People, Culture
and Performance

Chris France
Director, Strategy and Business
Transformation

Deborah Marris
Director, Legal, Risk and Governance

Hamish Reid
Director, Sustainability and Brand

Mark Toomey
Director, Operations

Martijn Jager
Director, Sales and Business
Development

Dr Suzan Horst
Director, Quality, Regulatory and
Laboratory Services

LEARN MORE

The Executive Team’s full profiles
are available on our website:
synlait.com/people

Milk reception bay, Synlait Dunsandel

ANNUAL REPORT 2020PAGE 40 & 41

A Synlait Dunsandel warehouse operator loads an order

of fresh milk and cream from the coolstore for delivery to

Foodstuffs South Island stores

FOODSTUFFS
SOUTH ISLAND

“During New Zealand’s COVID-19
Alert Level 4 lockdown we saw a
significant increase in consumer
demand for fresh milk and cream
across the South Island. The Synlait
team pulled out all stops to deliver on

our unscheduled requirements –
this is a testament to the solid
relationship we have developed.”

Phil Lemon, GM Merchandise,
Foodstuffs South Island

ANNUAL REPORT 2020PAGE 42 & 43

CFO
REVIEW

Angela Dixon joined Synlait as
Chief Financial Officer in June
2020. She has more than 20
years’ experience in the financial,
professional services and
insurance sectors in New Zealand
and the United Kingdom, holding
senior roles with Public Trust,
IAG, Auckland International
Airport, Telewest Communications,
Royal Sun Alliance and PwC.

FIRST IMPRESSIONS
FROM OUR NEW CFO

I am a recent recruit to Synlait’s
Executive Leadership Team and
this, my first report to you, our
shareholders, provides a unique
opportunity to introduce myself
and share some first impressions
of our business.

Although I come from a background
in corporate finance and insurance,
I know the dairy industry well. I grew
up on a dairy farm in the Waikato,
gaining a first-hand appreciation of
how our industry worked, including
watching the creation of Fonterra Co-
operative Group unfold over the years
as a result of many mergers around us.

Our farm was not far from the
Tatua Co-operative Dairy Company
catchment, and we were very aware
of the successes of Tatua as it was
evidence of the virtues of being small
and competitive. Because of this, I was
attracted to the proposition of Synlait
as a challenger who is showing the
industry how to do milk differently.

I was also attracted to Synlait’s
sustainability story. Coming from an
extended family of dairy farmers, we
were encouraged to respect and care
for the land. My family believed in being
sustainable, competitive and nimble.
These values were instilled in me. I am
a passionate and proud New Zealander

who wants to contribute to a more
sustainable world. Synlait is a change-
maker influencing the food and fibre
industry for the better. I am excited to
be part of this journey.

Getting fit and ready for the next
phase of growth
Through the recruitment process I
discovered Synlait had grown to be
larger than meets the eye. This is
when I realised my skill set would
benefit Synlait. I have spent my
career working for large corporate
organisations and have experience
working through complexity to
find simplicity.

Synlait has had a successful run up
the curve, but we are no longer a
start-up. We are a significantly sized
company by New Zealand standards,
operating across multiple sites and
countries. We must navigate how we
will continue to grow with a maturing
company mindset, without losing
the entrepreneurial spirit we were
founded on.

I do not have manufacturing
experience, but I know that every
dollar is hard won in a mature market.
You must watch costs and margins
closely. I also bring experience in
diversifying businesses. When you
buy another company, you need to
realise value and deliver the results
quickly. Synlait is experiencing this
with Dairyworks. We will integrate it
strategically, while showing you the
value we are creating by owning it.

We are taking Synlait to the world
Synlait’s brand and reputation have
enabled it to attract intelligent people.
I am impressed by the culture.
Our team is full of fresh and optimistic
people who care about being part of
this organisation and see the growth
possibilities. We are attracting global
talent because of this.

Synlait has done the hard yards.
It has built first-class facilities. It has
world-class expertise in manufacturing
and exporting. It is partnered with
successful brands and provided quality
products repeatedly. Now, we need to
pivot to partner with more customers.

There are natural constraints right now
due to COVID-19, and our current and
potential customers are being rightly
cautious. But the pandemic will not
destroy the value already invested into
Synlait. We have the building-blocks in
place – the facilities, the expertise, the
partnerships and market intelligence.
The future for Synlait is about how
we accelerate and fully utilise those
building-blocks to keep growing.

Thank you for making me feel
welcome. I look forward to continuing
to hear your perspectives on Synlait as
I build my knowledge of our company
and industry.

Angela Dixon
Chief Financial Officer

ANNUAL REPORT 2020PAGE 44 & 45

FINANCIAL AND PERFORMANCE METRICS

MILK PRICE

FY2016

FY2017

FY2018

FY2019

FY2020

This table shows how Synlait take the milk supplied by our contracted farmer suppliers, value the milk components,
and make a pay-out via the average base milk price.

Key financial metrics 1
Currency as stated (in millions)

Income statement
Revenue
Gross profit
EBITDA 2
EBIT 2
NPAT
Revenue (USD per MT) 3
Gross profit per MT (NZD) 3
EBIT per MT sold (NZD) 3
Net cash from / (used in) operating activities

Balance sheet
Net operating assets 4
Return on net operating assets
Net return on capital employed (pre-tax)
Debt / debt + equity (excl derivatives)
Net debt / EBITDA6
Earnings per share
Average FX conversion rate (NZD:USD)
Base milk price
Total milk price (kgMS)5

Key operational metrics
Sales (MT)
Powders and cream
Consumer packaged Infant Formula
Lactoferrin
Total sales (MT)3
Production (net production)
Powders and cream
Consumer packaged Infant Formula
Lactoferrin
Total production (MT)3
Milk purchases ('000 kg MS)
Milk purchased from contracted supply
Milk purchased from other suppliers
Total milk purchases ('000 kg MS)

546.9
102.1
83.7
62.9
35.7
3,316
877
540
104.4

455.2
16.2%
14.5%
48.7%
2.5
23.50
0.7058
3.91
4.02

100,393
15,999
10
116,402

104,703
16,043
8
120,754

54,125
3,573
57,698

759.0
112.1
88.8
67.6
39.5
3,659
792
478
115.2

423.5
15.4%
14.8%
18.7%
0.9
22.82
0.6814
6.16
6.30

122,606
18,776
11
141,393

115,991
19,403
12
135,407

63,255
1,700
64,954

879.0
166.5
138.6
113.1
74.6
4,815
1,294
879
98.4

493.3
24.7%
22.7%
20.9%
0.8
41.60
0.7047
6.65
6.78

93,042
35,580
16
128,637

102,833
36,651
12
139,496

63,639
(2,853)
60,785

1,024.3
186.3
152.1
124.5
82.2
4,602
1,268
855
136.7

633.9
22.1%
18.3%
39.2%
2.2
45.89
0.6792
6.40
6.58

106,802
42,907
21
149,730

103,131
43,168
23
146,322

64,189
1,877
66,066

1,302.0
203.7
171.4
123.3
75.2
5,181
1,359
858
105.5

1,043.3
14.7%
12.6%
47.1%
3.1
41.95
0.6651
7.05
7.30

101,222
49,180
30
150,432

107,098
50,918
29
158,045

76,875
(6,079)
70,796

1 The group uses several non-GAAP measures when discussing financial performance. Management believes these measures provide
useful insight on the performance of the business, to analyse trends and to assist stakeholders in making informed decisions.

2 EBIT is calculated by excluding financing costs and income tax, with EBITDA also excluding depreciation & amortisation accordingly.
A reconciliation of EBIT and EBITDA is provided in the CFO Review on page 49.

3 Synlait Milk Limited only and fresh milk is excluded in FY20 and FY19 (part year in FY19)

4 Net operating assets includes current assets, PPE and intangible assets. It excludes capital work in progress, derivatives, goodwill,
trade payables and tax liabilities.

5 Total milk price for Synlait Milk suppliers on standard milk supply contract, includes value and seasonal premiums. This is a milk
season reflective payment that runs 1 June to 31 May.

6 Net debt calculation excludes lease liabilities, for banking covenant purposes lease liabilities are included.

The 2019/20 milk price had not been fully paid out at the time the annual report was released. Figures represent what
has been paid and is accrued to be paid.

It also highlights the incentive payments made to our farmer suppliers in addition to the average base milk price.

This information represents payments made in the milk season which runs 1 June to 31 May as opposed to Synlait’s financial year.

For the recently completed 2019/2020 milk season we paid out an average base milk price of $7.05 with an average
additional incentive payment of $0.25 per kgMS.

kgMS collected
Average fat %
Average protein %
Average lactose %

Volume of components collected (kg)
Fat
Protein
Lactose

Component value1
Fat
Protein
Lactose

Component value ratio
Fat
Protein
Lactose

Total $ paid per component
Fat
Protein
Lactose
Volume charge
Average base milk price2

2016/17

2017/18

2018/19

2019/20

63,249,602
4.90
3.92
5.06

63,616,077
4.86
3.89
4.99

63,438,694
4.91
3.92
4.99

76,550,913
4.90
3.98
4.99

35,123,275
28,126,327
36,292,742

35,289,377
28,327,076
36,221,310

35,270,506
28,168,188
35,894,766

42,252,084
34,298,829
42,977,611

$4.70
$6.56
$1.87

1
1.397
0.398

$6.97
$4.63
$2.03

1
0.664
0.291

$7.36
$4.18
$1.53

1
0.567
0.208

$8.44
$4.20
$1.67

1
0.497
0.198

$164,998,609
$184,528,391
$67,823,876
($27,732,308)

$245,903,402
$131,063,290
$73,377,129
($27,289,173)

$259,645,339
$117,657,713
$54,987,988
($26,283,402)

$356,688,641
$143,911,349
$71,818,527
($32,746,784)

$6.16

$6.65

$6.40

$7.05

Total incentive payment
Average incentive payment per kgMS3

$8,908,367
$0.14

$8,127,045
$0.13

$11,530,895
$0.18

$19,249,791
$0.25

Total average Synlait payment per kgMS4

$6.30

$6.78

$6.58

$7.30

1 Rounded to two decimal places

2 Amount paid for components + volume charge / kgMS collected = base milk price

3 Includes incentives and winter incentive payments

4 Base milk price + average incentive payment

ANNUAL REPORT 2020

PAGE 46 & 47

REVIEW OF FINANCIAL PERFORMANCE

OVERVIEW

The Group has continued to execute on its strategy of growing both our Nutritional (infant and lactoferrin) and Everyday
Dairy businesses which is reflected through revenues exceeding $1 billion for the second time in FY20 with revenues
of $1,302.0 million. Earnings before interest, tax, depreciation and amortisation (EBITDA) grew 13% to $171.4 million
demonstrating the strength of our infant and lactoferrin businesses. Reported after tax earnings were a profit of $75.2
million, a 9% decrease reflecting investments in new facilities and acquisitions over the past two years to achieve
growth ambitions as well as increased overhead expenditure in areas of the business that support future growth
opportunities aligned to our strategy.

FINANCIAL PERFORMANCE

Sales
Revenue in FY20 at $1,302.0 million is $277.7 million or 27% higher than FY19 ($1,024.3 million), with total sales volume
of 150,432 MT (excluding Everyday Dairy, which is discussed in a separate section below) in line with FY19 but product
mix significantly moving from commodities to higher value canned infant formula.

This revenue growth was driven by a 15% increase in high value canned infant formula sales, and a 46% increase in
lactoferrin sales volumes. The uplift in higher value product sales was enabled by the investments made in prior years
as well as from manufacturing efficiencies which have delivered through our Integrated Work Systems (IWS) programme.

Sales (metric tonnes)

Ingredients
Consumer packaged powders
Lactoferrin
Total

FY20

101,222
49,180
30

150,432

FY19

Growth %

106,802
42,907
21

149,730

(5)%
15%
46%

0.5%

We received 76.8 million kilograms of milk solids (kgMS) from our contracted suppliers, 12.4 million kgMS more than FY19
to support the Pokeno facility. We also sold (net) 6.0 million kgMS over the season of which 1.4 million kgMS was cream
sold from the Pokeno facility, resulting in an overall 7% or 4.4 million kgMS increase in milk processed in FY20. Again, this
was enabled by the investments and implementation of the IWS programme as mentioned above – the IWS programme
increased facility production capacities validating the investment management has made into this programme.

Average reference commodity prices increased steadily in the first half of the 2019/20 milk season until February.
Reference commodity prices fell steadily from February through May as global uncertainty driven by COVID-19 impacted
commodities. The average reference basket price in the 2019/20 season increased to $3,128, a 4% increase vs the
2018/19 season. This increase, as well as a lower FX rate, are the key contributors to the $0.65 increase in the average
base milk price paid to our suppliers in 2019/20, which moved from $6.40 to $7.05 per kgMS.

Gross profit performance
Sales
Our total gross profit per MT of $1,359 is 7% higher than last year’s $1,268 per MT. A direct result of the favourable sales
product mix in FY20. Continued investment in people to support key growth projects, higher Lead With Pride™ supplier
engagement costs, and the full impact of depreciation from the completion of the investment program in prior years
tempering the upside. Over time, as we grow into our capacity, we will see a positive incremental impact on gross profit
and increased ROCE with fixed costs per MT at its highest immediately after the completion of a new facility.

Consumer packaged gross profit improved $24 per MT, generated from higher utilisation of our consumer packaging
facilities in Dunsandel and Auckland.

Lactoferrin margin per MT has materially increased over FY19 due to a favourable market pricing environment.
Lactoferrin production volume also increased following the facility upgrades which were completed in November 2019
(up 26%), and overall contributed $28 million of gross profit in FY20 (FY19: $13 million).

Everyday Dairy
The Everyday Dairy category represents the acquisition of Talbot Forest Cheese and Dairyworks, along with the
Advanced Dairy Liquid Packaging Facility at Dunsandel. Gross Profit from this area is net $0.4 million, a result reflecting
some initial commissioning challenges in the Advanced Dairy Liquid Packaging Facility at Dunsandel and low fixed
overhead recoveries as we move from commissioning phase to a focus on increasing utilisation. Dairyworks and Talbot
Forest Cheese are tracking to expectations generating Gross Profit of $2.6 million combined in FY20. In FY21 we will
focus on integrating Dairyworks and Talbot Forest Cheese and leverage synergies with the core Synlait business.

ANNUAL REPORT 2020PAGE 48 & 49

Gross profit by category1

FY20

FY19

% Change

Sales Volume (MT)
Gross Profit ($M)
Gross Profit / MT

Powders and Cream

Consumer Packaged
Infant Formula

Lactoferrin

Total Powders

101,222
134.4
1,327

106,802
142.2
1,331

(5%)
(6%)
0%

49,180
40.5
824

42,907
34.3
800

15%
18%
3%

30
28.4
943,074

21
13.3
646,099

46%
113%
46%

150,432
203.3
1,359

149,730
189.8
1,268

0%
7%
7%

1 Gross profit per MT includes both external sales volumes and internal transfers of bulk infant formula to blending and consumer packaging.

Milk price
Raw milk remains Synlait’s most significant component of our cost of goods sold. Our final average base milk price
for the 2019/20 season is $7.05 per kgMS, compared to our 2018/19 average base milk price of $6.40 per kgMS. In
addition, we paid out $0.25 per kgMS in incentive and premium payments through a2, Lead With PrideTM, Grassfed and
winter milk payments, increasing the average total milk payment to $7.30 per kgMS compared with $6.58 per kgMS in
2018/19. Premiums and incentive payments are higher in 2019/20 predominantly through an increase in our winter milk
payments. This resulted in our contracted suppliers receiving a total of $19.3 million in additional value-added
premiums in the 2019/20 season, compared to $11.5 million in 2018/19.

Overhead expenditure
Overhead expenses for FY20 at $80.9 million were up $18.7 million from $62.1 million in FY19. Notable increases
in these overhead costs include overhead expenditure from acquired subsidiaries ($4.6 million), depreciation
($4.0 million), employee costs ($4.4 million) and multi-site distribution ($1.4 million).

As previously signalled, increases in overhead expenditure reflect continued investment to help run the new facilities
that we are bringing on-line and enter new categories.

The impact of COVID-19 on expenditure is not evident in the year-on-year comparison. However, there was a reduction
in training, entertainment, travel and consulting costs totalling $2.5 million across the business. This is partially offset by
higher cleaning costs of $0.3 million and additional warehouse space costs of $0.2 million to mitigate against the risk of
export channels slowing down.

EBITDA
Earnings before interest, tax, depreciation and amortisation (EBITDA), at $171.4 million, grew strongly demonstrating the
strength of our infant nutritional and lactoferrin businesses. The 13% increase on the FY19 result of $152.1 million was
driven by increased sales volumes and a favourable product mix.

$ million

Profit before tax
Add back: net finance cost

EBIT
Add back: depreciation and amortisation

EBITDA

Net financing costs
Net financing costs at $21.4 million increased 127% over FY19’s $9.4 million.

Gross term debt interest
Less capitalised interest

Net term funding interest
Working capital funding interest
Interest received
Loss on derecognition of financial assets

Net short-term funding interest
Interest on lease liabilities

Net finance costs

FY20

$101.9
$21.4

$123.3
$48.1

$171.4

FY19

(9.4)
7.5

(1.9)
(6.9)
1.2
(1.8)

(7.5)
0.0

(9.4)

FY19

$115.1
$9.4

$124.5
$27.6

$152.1

Var.

(5.8)
(5.4)

(11.2)
0.7
(1.1)
0.1

(0.3)
(0.5)

(12.0)

FY20

(15.2)
2.1

(13.1)
(6.2)
0.1
(1.7)

(7.8)
(0.5)

(21.4)

The $12.0 million increase in net financing costs is due to an increase in interest-bearing debt as a result of continued
capital expenditure and lower capitalised interest.

Gross interest on term debt increased by $5.8 million to $15.2 million in FY20 with higher average interest-bearing debt
year-on-year as a result of the acquisition of subsidiaries and continued capital expenditure across both years, with
lower interest rates providing some offset. Capitalised interest decreased by $5.4m to $2.1m in FY20 with Synlait Pokeno
commissioned in early FY20 and the Advanced Dairy Liquid Packaging Facility at Dunsandel commissioned in FY19.

ANNUAL REPORT 2020PAGE 50 & 51

Working capital funding interest has decreased by $0.7 million due to lower interest rates, partly offset by higher
working capital requirements in FY20 than in FY19. Those working capital requirements being Synlait’s continued
growth; inventory build of infant nutritional products to ensure customer demand is able to be met, to protect against
COVID-19 supply chain disruption, and to ensure optimal utilisation of our plant through peak milk collection; together
with the additional working capital requirements of Dairyworks and Talbot Forest Cheese, which were acquired in FY20.

Loss on derecognition of financial assets is the financing cost associated with our receivables financing programme. It
has decreased slightly with lower interest rates offset by increased utilisation of these facilities.

Further, the Group adopted NZ IFRS 16 effective from 1 August 2019, resulting in $0.5m interest on lease liabilities for
FY20 (FY19: nil).

Foreign Exchange
The management of foreign exchange exposure is one of the key risks of the business with many product sales being
to overseas markets creating a primarily United States Dollar (USD) exposure risk. Our foreign exchange policy seeks to
achieve the lowest annual average New Zealand Dollar (NZD)/USD exchange rate for the year. In FY20 we achieved a
net annual average NZD/USD exchange rate of 0.6651 (FY19: 0.6792).

Earnings per share and return on capital employed
Our reported basic and diluted earnings per share (EPS) for FY20 was 41.95 cents and 41.85 cents respectively, against
45.89 cents and 45.77 cents in FY19. The dilutive shares are basic EPS adjusted for contingently issuable shares in
accordance with the Employee Share Scheme. The Group also generated a pre-tax return on average capital employed
of 12.6% in FY20 compared with 18.3% in FY19.

FINANCIAL POSITION

Overview
In FY20 the Group continued to invest for the future, completing the construction of assets and acquisition of
businesses to allow us to successfully implement our strategy.

Inventories
Our inventory holdings increased to $269.4 million (FY19: $164.8 million). $53.3 million of this increase relates to the
inventory holdings of subsidiaries acquired during the year. The balance of the increase at Synlait is largely due to
increased holdings of canned and bulk infant nutritional products to ensure customer demand is able to be met, to
protect against potential Covid-19 supply chain disruption (increased safety stock), and to ensure optimal utilisation of
our plant through peak milk collection in FY21.

Synlait Milk Limited
Dairyworks Limited
Synlait Foods (Talbot Forest) Limited

FY20

$ million

216.1
40.1
13.2

40,787*
4,889*
1,766

FY19

$ million

164.8
-
-

34,625*
-
-

* inventory not measured in metric tonnes is excluded as not material to our volumes.

Raw materials increased to $71.3 million (FY19: $40.1 million). Tonnage of raw materials increased to 13,614 (FY19: 11,307
MT). Higher raw materials balances reflect the acquisition of subsidiaries inventories, which, due to the nature of their
operations, are weighted towards holding higher volumes of raw material to enable cheese aging. Work in progress in
FY20 of $11.6m (FY19: nil) predominantly relates to bulk cheese manufactured at Talbot Forest Cheese that is awaiting
further manufacturing.

Finished goods inventory has increased to $186.5 million (FY19: $124.7 million). Tonnage of finished goods has
increased to 32,109 MT (FY19: 23,318 MT). The increase relates to a larger holding of our core infant nutritional products
and finished goods inventory held by Dairyworks and Talbot Forest Cheese.

Inventories were reviewed for impairment, resulting in a stock impairment provision totalling $2.0 million relating to
finished goods ($1.8 million) and raw materials ($0.2 million) (FY19: $0.3 million all relating to finished goods). This
increase primarily relates to production in late May which did not pass our stringent quality standards. Impaired finished
goods were written down to net realisable value.

Our reported net profit after tax of $75.2 million, plus the movement in reserves, has increased total equity to $606.5
million at 31 July 2020 from $492.4 million.

In addition, we have an onerous contracts provision of $0.3 million (FY19: $0.5 million); the reduction from prior year is
due to product mix and a declining cost to manufacture.

Trade and other receivables
At $63.1 million, Group trade and other receivables have increased by $1.2 million on FY19 ($61.9 million). Synlait’s
trade and other receivables have decreased significantly year on year to $36.1m (FY19: $61.9m) driven by an increased
balance of receivables assigned as at 31 July 2020 (FY20: $131.3, FY19: $109.0). The differential is the trade and other
receivables of the subsidiaries acquired during FY20 (Dairyworks and Talbot Forest Cheese).

Property, plant and equipment
Property, plant and equipment at $965.1 million, increased $119.9 million from FY19 at $845.2 million. The year-on-year
increase is a consequence of total capital expenditure of $129.4 million, acquisitions through business combinations of
$34.3 million, less depreciation of $40.0 million, impairment of $3.2 million, and net disposals of $0.6 million. The capital
expenditure of $129.4 million primarily relates to our growth initiative projects with $93.9 million of total spend in FY20.

ANNUAL REPORT 2020PAGE 52 & 53

In February 2020, we commissioned our new North Island nutritional spray drier and related assets located in Pokeno.
The construction of the nutritional spray dryer was budgeted to cost $258.3 million (excluding the cost of the land). Total
spend on the project in FY20 was $64.1 million (FY19: $181.1 million, FY18: $12.7 million) for total spend to date of $257.9
million (excluding land).

During FY20 we also commissioned the capacity upgrade of our milk separation plant. Total spend in FY20 was $7.4
million (FY19: $6.5m) for total project spend of $13.9 million. In the year we also ramped up construction of our new
dry storage facility. Total spend on the project in FY20 was $18.7 million (FY19: $0.9 million, FY18: $0.2 million) for total
spend to date of $19.8 million.

Operational capital expenditure increased to $35.5 million from $18.5 million in FY19. The increase in expenditure
was attributable to the upgrades at Talbot Forest Cheese ($4.7 million) and Dairyworks ($1.9 million), acquisition of
replacement lactoferrin resin ($3.6 million), the fitout of the Christchurch office and upgrades to Dunsandel office
building ($3.2 million), the upgrade of the Wetmix kitchen ($1.2 million), and Blended Steam Supply project ($1.2 million).
The higher level of operational capital expenditure reflects the significant growth of the Group and its asset base over

FY19 and FY20.

Acquisitions of Talbot Forest Cheese and Dairyworks
On 1 August 2019 the Group completed the purchase of Talbot Forest Cheese when Synlait Foods (Talbot Forest)
Limited formally acquired Talbot Forest Cheese’s Temuka assets and operations. Total consideration paid was $38.3
million. Brands of $1.7 million were acquired and $16.1 million of goodwill arose on acquisition.

On 1 April 2020 the Group completed the acquisition of 100% of the shares of Dairyworks for a purchase price of $112
million on a debt-free basis with the equity price being locked in with an effective date of 30 September 2019. After
effective date adjustments for debt, working capital, and leakage – consideration of $63.6m was transferred to the
vendors on 1 April 2020. Brands of $15.8 million were acquired and $43.4 million of goodwill arose on acquisition.

Contingent liability
The Group has included a contingent liability note in the annual financial statements relating to the Pokeno land
covenant issue. There are a range of possible outcomes in this dispute meaning the Group is not able to reliably
estimate a potential liability, if any. For further information please refer to the Contingent Liability note in the financial
statements, page 125.

Total net debt
Total net debt (excluding lease liabilities) at year end, including both current and term debt facilities less cash on hand,
was $527.0 million, an increase of $193.4 million over the FY19 balance of $333.6 million.

$ million

Current debt
Term debt (carry amount)
Transaction costs
Cash on hand

Total Net Debt (excluding lease liabilities)

FY20

$102.8
$426.8
$3.2
($5.9)

$527.0

FY19

$99.6
$249.5
$0.5
($16.0)

$333.6

Cash spent on investing activities of $225.0 million (FY19: $337.4 million) during the financial period, offset by cash
from operating activities of $105.5 million (FY19: $136.6 million), resulted in a free cash outflow of $119.5 million from
operating and investing activities. This together with cash outflows from interest and financing fees paid of $26.4 million
(FY19: $18.1 million), repayment of lease liabilities $4.2m, and Dairyworks loans and borrowings of $43.2 acquired on
acquisition account for the movement in net debt*. Operating cash flows are discussed further below.

With Net Debt* of $527.0 million, our gearing (Net Debt* / Net Debt* + Equity) is 46.5% (FY19: 40.4%) and our leverage
(Net Debt* / EBITDA) is 3.08x (FY19: 2.19x).

Trade and other payables
Trade and other payables at $238.8 million is up $22.8 million on last year’s balance of $216.0 million. This variance is
due to the trade and other payables balances of Dairyworks and Talbot Forest Cheese at 31 July 2020.

* Net debt excluding lease liabilities

ANNUAL REPORT 2020PAGE 54 & 55

Derivatives
As at 31 July 2020 we held USD$525.5 million (net) in foreign exchange contracts as detailed in note 15 of the annual
financial statements. These have been placed across a 24-month future period, in accordance with our Treasury Policy.

Given the recent appreciation in the NZD/USD exchange rate, we have mark to market unrealised gains associated with
these contracts at year-end of $17.5 million after tax, a movement of $38.5 after tax year-on-year. As our foreign exchange
contracts fully hedge against future USD receipts and payments, this unrealised gain 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 NZD/USD exchange rate in those periods.

We also have in place a nominal balance of $57.3 million of interest rate swap agreements at year-end (FY19: $79.5
million) at various weighted average interest rates, generating an unrealised mark to market loss of $4.9 million after
tax, a movement of $0.2m after tax year-on-year, with swap agreements unwinding partly offset by lower interest rates.

We continue to use dairy commodity derivatives to support the management of the risk of movement in dairy
commodity prices. Dairy commodity derivatives with a nominal balance of NZD $12.0 million were in place at year end
(FY19: NZD $5.3 million).

Year-on-year there was a $38.8 million movement in the cash flow hedge reserve from ($26.1) million in FY19 to
$12.6 million in FY20. The cash flow hedge reserve relates to derivatives and the year-on-year movement is primarily
explained by the movement in fair value of foreign exchange contacts as detailed above.

Funding facilities and covenants
At reporting date, the Group had in place four syndicated bank facilities with ANZ and BNZ:

1. Working Capital Facility – reviewed annually in September with a year-end facility limit of NZD $320.0 million.

This is a dual currency (NZD & USD) facility.

2. Revolving Credit Facility A – maturing 1 August 2021 with a fixed facility limit of $150 million.

3. Revolving Credit Facility B – maturing 1 August 2023 with a fixed facility limit of $50 million.

4. Revolving Credit Facility C – maturing 1 August 2023 with a fixed facility limit of $50 million.

In addition to banking facilities, the company has on issue a $180.0m unsecured, subordinated, fixed rate bond maturing
17 December 2024.

Subsequent to reporting date, we have entered into an additional Revolving Credit Facility of $100m commencing 1
October 2020, stepping down to $70m on 1 January 2021 and maturing 1 May 2021. We have also reduced the working
capital facility of $320m down to $250m and extended the revolving credit facility A to mature on 1 October 2021.

We have five bank covenants in place within our syndicated bank facility agreement. These are:

Interest cover ratio - EBITDA to interest expense of no less than 3.00x based on full year forecast result
(FY20: 8.01x).

2. Minimum shareholders’ funds – must exceed $295.5 million (FY20: $469.9 million).

Operating cash flows
Operating cash flows at $105.5 million are down $30.9 million on FY19 ($136.6 million). The primary reason for this
decrease was due to an unfavourable movement in working capital year-on-year with an increase in infant formula
product on hand and additional working capital requirements of Dairyworks and Talbot Forest Cheese.

3. Working capital ratio – must exceed 1.50x (FY20: 3.40x).

4. Leverage ratio – no more than 4.0x (FY20: 3.19x).

5. Senior leverage ratio - no more than 3.0x (FY20: 2.14x).

The company was compliant with our bank covenants at all times during the financial period.

Note that the covenants are calculated in accordance with our banking facilities agreement and include adjusting items
that are not presented in the financial statements.

Angela Dixon
Chief Financial Officer

ANNUAL REPORT 2020PAGE 56 & 57

FINANCIAL STATEMENTS

FINANCIAL
CONTENTS

Synlait Pokeno, Waikato

Director’s responsibility statement

Financial statements

Income statement

Statement of comprehensive income

Statement of changes in equity

Statement of financial position

Statement of cash flows

Notes to the financial statements

Performance
01 Revenue recognition and segment information
02 Expenses
03 Reconciliation of profit after income tax to net cash inflow from

operating activities

Working Capital
04 Trade and other receivables
05
06 Trade and other payables

Inventories

Long Term Assets
07 Property, plant and equipment
08
09 Leases

Intangible assets

Debt and Equity
10 Finance income and expenses
11 Loans and borrowings
12 Share capital
13 Share based payments
14 Reserves and retained earnings

Financial Risk Management
15 Financial risk management
16 Financial instruments

Income tax

Other
17
18 Business combinations
19 Other investments
20 Related party transactions
21 Contingencies
22 Commitments
23 Events occurring after the reporting period
24 Other accounting policies

Auditors report

68
69
71

73
74
78
79

80
81
84
88

90
91
92
94
95
97

98
99
106

111
112
116
120
122
125
126
127
127

128

ANNUAL REPORT 2020
PAGE 58 & 59

DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors are pleased to present the financial statements for Synlait Milk Limited and its subsidiaries, Synlait Milk Finance
Limited, The New Zealand Dairy Company Limited, Eighty Nine Richard Pearse Drive Limited, Synlait Business Consulting
(Shanghai) Limited, Synlait Foods (Talbot Forest) Limited, Dairyworks Limited and Dairyworks (Australia) Pty Limited (together
“the Group”) as set out on pages 57 to 127 for the year ended 31 July 2020.

The Directors are responsible for ensuring that the financial statements present fairly the financial position of the Group
as at 31 July 2020 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
Chair
25 September 2020

Willem Jan (Bill) Roest
Independent Director
25 September 2020

INCOME STATEMENT
For the year ended 31 July 2020

Revenue
Cost of sales

Gross profit

Other income
Share of profit/(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

Profit before income tax
Income tax expense

Net profit after tax for the period

Earnings per share
Basic earnings per share (cents)
Diluted earnings per share (cents)

Notes

1
2

1
19
2
2

10
10
10,4
10

12
12

2020

$’000

1,302,025
(1,098,292)

203,733

404
33
(32,318)
(48,561)

123,291

(19,777)
134
(1,747)

(21,390)

101,901
(26,693)

75,208

41.95
41.85

2019

$’000

1,024,305
(837,976)

186,329

898
(580)
(26,836)
(35,303)

124,508

(8,819)
1,232
(1,842)

(9,429)

115,079
(32,840)

82,239

45.89
45.77

ANNUAL REPORT 2020The accompanying notes form part of and are to be read in conjunction with these financial statements.PAGE 60 & 61

STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 July 2020

STATEMENT OF CHANGES IN EQUITY
For the year ended 31 July 2020

Profit for the period
Items that may be reclassified subsequently to profit and loss
Effective portion of changes in fair value of cash flow hedges
Exchange differences on translation of foreign operations
Income tax on other comprehensive income
Total items that may be reclassified subsequently to profit and loss

Other comprehensive income for the year, net of tax
Total comprehensive income for the year

Notes

2020

$’000

75,208

53,882
(12)
(15,087)
38,783
38,783
113,991

2019

$’000

82,239

(21,323)
-
5,971
(15,352)
(15,352)
66,887

Group

Equity as at 1 August 2018
Profit or loss for the year

Share
Capital

Employee
Benefits
Reserve

Cash Flow
Hedge
Reserve

Notes

$’000

Foreign
Currency
Translation
Reserve
$’000

Retained
Earnings

Total
Equity

$’000

268,074
-

930 (10,796)
-

- 166,536 424,744
-
82,239

82,239

Other comprehensive income
Effective portion of changes in fair value of cash flow hedges
Movement in time value hedge reserve
Income tax on other comprehensive income

Total other comprehensive income

Employee benefits reserve

13,14,17

Total contributions by and distributions to owners

-
-
-

-
-

-
-
-

(21,410)
87
5,971

(15,352)

728
728

-
-

-
-
-

-
-

-
-
-

-
-

(21,410)
87
5,971

(15,352)

728
728

Equity as at 31 July 2019
Profit or loss for the year

268,074
-

1,658 (26,148)
-

- 248,775 492,359
-
75,208

75,208

Other comprehensive income
Effective portion of changes in fair value of cash flow hedges
Exchange differences on translation of foreign operations
Income tax on other comprehensive income

Total other comprehensive income

Employee benefits reserve

Total contributions by and distributions to owners

-
-
-

53,882
-
(15,087)

38,795

13,14,17

470

(336)

-
(12)
-

(12)

-
-
-

53,882
(12)
(15,087)

38,783

134
134

Equity as at 31 July 2020

268,544

1,322

12,647

(12) 323,983 606,484

ANNUAL REPORT 2020The accompanying notes form part of and are to be read in conjunction with these financial statements.The accompanying notes form part of and are to be read in conjunction with these financial statements.PAGE 62 & 63

STATEMENT OF FINANCIAL POSITION
As at 31 July 2020

STATEMENT OF CASH FLOWS
For the year ended 31 July 2020

ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Intangible assets
Goods and services tax refundable
Income accruals and prepayments
Inventories
Derivative financial instruments
Other current assets
Total current assets

Non-current assets
Property, plant and equipment
Intangible assets
Goodwill
Other investments
Derivative financial instruments
Right-of-use assets
Total non-current assets
Total assets

LIABILITIES
Current liabilities
Loans and borrowings
Trade and other payables
Current tax liabilities
Derivative financial instruments
Lease liabilities
Total current liabilities

Non-current liabilities
Loans and borrowings
Deferred tax liabilities
Derivative financial instruments
Lease liabilities
Total non-current liabilities
Total liabilities

Equity
Share capital
Reserves
Retained earnings
Total equity attributable to equity holders of the Group
Total liabilities and equity

Notes

4
8

5
15,16

7
8
8,18
19
15,16
9

11
6

15,16
9

11
17
15,16
9

12
14
14

2020
$’000

2019
$’000
(restated)

5,887
63,057
4,230
6,398
12,404
269,384
22,530
2,500
386,390

965,104
42,503
65,545
143
14,084
18,497
1,105,876
1,492,266

102,837
238,770
24,561
14,148
4,422
384,738

426,754
54,647
4,805
14,838
501,044
885,782

268,544
13,957
323,983
606,484
1,492,266

16,007
61,933
3,686
3,689
9,554
164,849
2,358
20,500
282,576

845,202
16,428
6,026
110
45
-
867,811
1,150,387

99,626
216,020
29,220
27,960
-
372,826

249,482
25,034
10,686
-
285,202
658,028

268,074
(24,490)
248,775
492,359
1,150,387

Comparative numbers for goodwill and deferred tax have been restated due to a prior period error. Refer to Note 18 for further detail.

Cash flows from operating activities
Cash receipts from customers
Cash paid for milk purchased
Cash paid to other creditors and employees
Net movement in goods and services tax
Income tax payments

Net cash inflow from operating activities

Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired
Interest received
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchase of intangible assets

Net cash outflow from investing activities

Cash flows from financing activities
Proceeds from the issuance of subordinated bonds
Transaction costs paid on issue of subordinated bonds
(Repayment)/drawdown of borrowings
Net movement in working capital facility
Interest paid
Repayment of lease liabilities

Net cash inflow from financing activities

Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the financial year
Effects of exchange rate changes on cash and cash equivalents

Cash and cash equivalents at end of year

Notes

2020

$’000

1,316,076
(545,792)
(635,402)
(2,709)
(26,633)

105,540

(72,927)
134
(139,212)
242
(13,262)

(225,025)

180,000
(3,370)
(43,224)
3,211
(23,048)
(4,185)

109,384

(10,101)
16,007
(19)

5,887

2019

$’000

1,025,168
(461,369)
(403,420)
2,846
(26,670)

136,555

(18,000)
1,232
(309,314)
(147)
(11,127)

(337,356)

-
-
152,300
50,305
(18,069)
-

184,536

(16,265)
32,129
143

16,007

NOTES TO THE FINANCIAL STATEMENTS

REPORTING ENTITY

The consolidated financial statements (“financial statements”) presented are those of the Group, including Synlait Milk
Limited and its subsidiaries Synlait Milk Finance Limited, The New Zealand Dairy Company Limited, Eighty Nine Richard
Pearse Drive Limited, Synlait Business Consulting (Shanghai) Limited, Synlait Foods (Talbot Forest) Limited, Dairyworks
Limited and Dairyworks (Australia) Pty Limited.

Synlait Milk Limited is primarily involved in the manufacture and sale of dairy products.

The parent company, Synlait Milk Limited, is a profit oriented entity, domiciled in New Zealand, registered under the
Companies Act 1993 and listed on the New Zealand Stock Exchange and the Australian Securities Exchange. Synlait
Milk Limited is a FMC reporting entity under the Financial Market Conducts Act 2013 and its financial statements comply
with that Act.

BASIS OF PREPARATION

The financial statements of the Group have been prepared in accordance with Generally Accepted Accounting
Practice. 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’).

Certain comparative figures have been reclassified during the year for consistency with the current year presentation.
These classifications had no effect on the reported results of operations.

The financial statements were authorised for issue by the directors on 25 September 2020.

Basis of measurement
These financial statements have been prepared on the historical cost basis except for certain items as identified in
specific accounting policies.

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).

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.

Use of accounting estimates and judgements
The preparation of these 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 and key judgements relate to derecognition of financial assets, the assessment of
impairment of inventory and property plant and equipment, and the identification and valuation of goodwill and any other
indefinite life intangible assets. The individual notes in the financial statements provide additional information.

COVID-19

In March 2020, the World Health Organisation declared the outbreak of COVID-19 as a pandemic. The Group’s operations
were deemed an essential service and therefore continued throughout the various New Zealand Government COVID-19
alert levels. The Group’s primary focus in responding to the pandemic has been to protect the safety of its staff and to
implement appropriate controls around its production facilities. Access restrictions were put in place at all facilities,
including staff working from home where possible, additional cleaning and security provisions were also put in place on site
and other social distancing measures were adopted.

The COVID-19 pandemic has resulted in an increase in uncertainty in both global and local markets. Management assessed
the impact of COVID-19 on all aspects of the balance sheet, in particular the carrying value of receivables and inventory,
impairment of assets such as goodwill, and any impact from currency volatility during this period on the Group’s portfolio of
derivatives. Management has determined that there has been a modest impact on the balance sheet and the performance of
the Group in FY20.

The Group has continued to assess the impact of any changes to New Zealand Government COVID-19 alert levels which
have occurred subsequent to balance date and up to the date of the approval of the financial statements. The Group
has considered the impact of these changes and they are not expected to have a material impact on either the Group’s
operations or its financial statements.

BASIS OF CONSOLIDATION

The Group’s financial statements consolidate the financial statements of Synlait Milk Limited and its subsidiaries, accounted
for using the acquisition method, and the results of its associates, accounted for using the equity method. Intercompany
transactions and balances between group companies are eliminated upon consolidation.

ANNUAL REPORT 2020PAGE 66 & 67

SIGNIFICANT ACCOUNTING POLICIES

Accounting policies, accounting estimates and judgements that summarise the measurement basis used and are
relevant to the understanding of the financial statements are provided throughout the accompanying notes and are
designated by a shaded area.

The accounting policies adopted have been applied consistently throughout the periods presented in these financial
statements, except for the change in accounting policy relating to the adoption of NZ IFRS 16.

Standards, amendments and interpretations to existing standards that are not yet effective
There are no standards that are not yet effective and expected to have a material impact on the entity in the current or
future reporting periods and on foreseeable future transactions.

Changes in accounting policies
During the period the Group adopted the following new standards;

NZ IFRS 16 ‘Leases’ (effective 1 August 2019)
Effective 1 August 2019, the Group has adopted NZ IFRS 16, which supersedes NZ IAS 17 Leases (NZ IAS 17) and related
interpretations. Under NZ IAS 17, leases were previously classified as either operating or financing for lessees based on
an assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the
underlying asset to the Group. As the Group’s leases were previously classified as operating, straight-line operating lease
expense was recognised over the lease term in the comparative period.

NZ IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees, with a right-of-use asset (“ROU
asset”) representing the Group’s right to use the underlying asset, and a lease obligation representing its obligation to make
lease payments. Amortisation expense for ROU assets and interest expense for lease obligations replaces the straight-line
operating lease expense recognised under NZ IAS 17.

The Group has applied NZ IFRS 16 using the modified retrospective approach, under which the initial ROU asset is
measured at an amount equal to the lease liability resulting in no impact to retained earnings at 1 August 2019. Short-term
and low-value recognition exemptions were applied, as well as practical expedients allowing for the use of hindsight to
assess the lease term for contracts with extension options and the exclusion of leases with a term of less than one year
remaining at the transition date. The Group also utilised the practical expedient which allowed for all existing contracts which
were previously identified as leases to be treated as leases under NZ IFRS 16. NZ IFRS 16 was not applied to contracts which
were not previously treated as leases under NZ IAS 17 as at transition date.

The impact of transition is outlined under Note 9, with changes in accounting policies outlined below:

Lease definition
At inception of a contract, the Group assesses whether the contract is, or contains, a lease. A contract is, or contains,
a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
An identified asset may be implicitly or explicitly specified in a contract, but must be physically distinct, and must not have
the ability for substitution by a lessor. The Company has the right to control an identified asset if it obtains substantially all
of its economic benefits and either pre-determines, or directs how and for what purpose the asset is used.

Measurement of right-of-use assets and lease obligations
On initial application, the Group elected to record ROU assets equal to the corresponding present value of the
remaining lease liability. Subsequent additions were measured at the initial amount of the lease obligation adjusted for
any lease payments made at, or before, the commencement date, plus any initial direct costs incurred, less any lease
incentives received.

The ROU asset is subsequently depreciated on a straight-line basis over the shorter of the term of the lease, or the
useful life of the asset determined on the same basis as the Group’s property, plant and equipment. The ROU asset is
periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease obligation.

The lease obligation is initially measured at the present value of lease payments remaining at the lease commencement
date, discounted using the Group’s incremental borrowing rate. Lease payments included in the measurement of the
lease obligation, when applicable, may comprise fixed payments, variable payments that depend on an index or rate,
amounts expected to be payable under a residual value guarantee and the exercise price under a purchase, extension or
termination option that the Group is reasonably certain to exercise.

The lease obligation is subsequently measured at amortised cost using the effective interest method. It is remeasured
when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the
Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes
its assessment of whether it will exercise a purchase, extension or termination option. When the lease obligation is
remeasured, a corresponding adjustment is made to the carrying amount of the ROU asset.

Recognition exemptions
The Group has elected not to recognise ROU assets and lease obligations for short-term leases that have a lease
term of twelve months or less or for leases of low-value assets. Payments associated with these leases are recognised
as an operating expense on a straight-line basis over the lease term within costs and expenses in the consolidated
Income Statement. The Group has also elected to apply a single discount rate to portfolios of leases with reasonably
similar characteristics.

ANNUAL REPORT 2020PAGE 68 & 69

PERFORMANCE

This section covers the Group’s financial performance and includes the
following notes:

01. REVENUE RECOGNITION AND SEGMENT INFORMATION

01 Revenue recognition and segment information

02 Expenses

03 Reconciliation of profit after income tax to net cash inflow

from operating activities

Sales of goods
The Group manufactures and sells a range of milk powder, milk powder related products, liquid milk, cheese and
butter to customers. Revenue from contracts with customers is recognised when the control of the goods has been
transferred to customers, being at the point when the goods are delivered. Delivery of goods is completed (i.e. the
performance obligation is fulfilled) when the goods have been delivered pursuant to the terms of the specific contract
agreed with the customer and the risks associated with ownership have been transferred to the customer.

Revenue is measured according to the contracted price agreed with customers, which represents fair value of
the consideration received or receivable, net of returns, discounts and allowances. Revenue is only recognised
to the extent that it is highly probable that a significant reversal will not occur. The payment terms vary
depending on the individual contracts. No deemed financing components are present as there are no
significant timing differences between the payment terms and revenue recognition.

Dairy products
Other sundry income

Total income

2020

$’000

1,302,025
404

1,302,429

2019

$’000

1,024,305
898

1,025,203

Description of segments
The Group operates in one industry, being the manufacture and sale of milk powder, milk powder related
products, liquid milk, cheese and butter. 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.

ANNUAL REPORT 2020
PAGE 70 & 71

As a result of the recent acquisitions of both Synlait Foods (Talbot Forest) Limited and Dairyworks Limited, Management
is currently reviewing the way in which it internally reports on the business activities of the Group and this may result in
changes to how activities are reported to the Chief Operating Decision Maker in the future. Any changes made may
have a corresponding impact on segment results reported in the financial statements.

Revenues of approximately 64% (2019: 66%) 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
Australia
Rest of World

Total

2020

5%
19%
8%
43%
22%
3%

100%

2019

8%
24%
7%
34%
24%
3%

100%

* The Group operates in one principal geographical area being New Zealand. Although the Group sells to many different countries,
it is understood that a significant proportion of both infant nutritional and ingredients sales are ultimately consumed in China.

02. EXPENSES

The following items of expenditure are included in cost of sales
Depreciation and amortisation
Employee benefit expense
KiwiSaver contributions
Export freight
Rent and storage
Increase/(decrease) in inventory provision
Decrease in onerous contract provision

The following items of expenditure are included in sales and distribution
Depreciation and amortisation
Employee benefit expense
KiwiSaver contributions
Rent and storage

The following items of expenditure are included in administrative and operating
Depreciation and amortisation
Employee benefit expense
KiwiSaver contributions
Information services
Directors fees
Share based payments expense
Impairment of intangible assets
Consultancy
Strategic Initiatives

Deloitte services included in administrative and operating expenses
Statutory audit fee
Half year accounts review
Other assurance services
Taxation compliance

2020

$’000

38,851
78,748
1,656
11,104
2,471
1,702
(156)

5,936
13,137
376
1,284

3,273
21,467
618
5,118
802
523
1,561
3,268
1,362

276
57
130
53

516

2019

$’000

24,289
48,711
1,166
9,524
874
(1,805)
(809)

1,625
10,195
252
3,637

1,725
17,986
480
3,502
752
644
123
2,768
162

185
45
77
69

376

The year on year increase in some expenditure categories is in part due to the acquisition of Dairyworks Limited and Synlait Foods
(Talbot Forest) Limited. These two subsidiaries contributed $1.4m to sales and distribution expenditure and $3.7m to administrative and
operating expenditure since 1 August 2019. Refer to Note 18 for further detail on both acquisitions.

ANNUAL REPORT 2020PAGE 72 & 73

03. RECONCILIATION OF PROFIT AFTER INCOME TAX
TO NET CASH INFLOW FROM OPERATING ACTIVITIES

WORKING CAPITAL

The working capital section gives information about the short term assets and
liabilities of the Group. This section includes the following notes:

04 Trade and other receivables

05 Inventories

06 Trade and other payables

Profit for the year

Non-cash and non-operating items
Depreciation and amortisation of non-current assets
Depreciation of right-of-use assets
Loss on sale of property, plant and equipment
Impairment of property, plant and equipment and intangible assets
Impairment recovery on property, plant and equipment
Share of (gain)/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/(gains)

Movements in working capital
Decrease/(increase) in trade and other receivables
(Increase) in prepayments
(Increase) in inventories
(Increase)/decrease in goods and services tax refundable
Increase in trade and other payables
(Decrease)/increase in current tax liabilities
Working capital items acquired

Net cash inflow from operating activities

2020

$’000

75,208

43,112
4,948
355
4,761
(2,958)
(33)
523
19,777
(134)
1,747
9,291
(23)
6

1,833
(2,850)
(104,533)
(2,709)
34,673
(4,659)
27,205

105,540

2019

$’000

82,239

27,639
-
147
123
-
580
644
8,819
(1,232)
1,842
4,341
22
(143)

(14,788)
(5,214)
(19,444)
2,846
46,306
1,828
-

136,555

ANNUAL REPORT 2020PAGE 74 & 75

04. 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 they are classified as current assets. If
not, they are classified as non-current assets.

Impairment
The Group recognises a loss allowance for expected credit losses (“ECL”) on trade and other receivables. The Group
measures the provision for ECL using the simplified approach to measuring ECL which uses a lifetime expected loss
allowance for all trade receivables. The Group’s credit loss model requires the Group to account for expected credit
losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since
initial recognition of the financial assets. Therefore, it is no longer necessary for a credit event to have occurred
before credit losses are recognised.

The model is based on the Group’s historical credit loss experience, adjusted for factors that are specific to the
debtors, general economic conditions and an assessment of both the current as well as the forecast direction of
conditions at the reporting date.

Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected
life of a financial instrument. The expected credit loss is estimated as the difference between all contractual cash
flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to
receive, discounted at the original effective interest rate.

The Group writes off a financial asset when there is information indicating that the debtor is in such severe financial
difficulty and there is no reasonable and realistic prospect of recovery.

Furthermore, other 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.

Credit Risk Management
The Group activities expose it to credit risk which refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Group. Trade and other receivables are potentially subject
to credit risk. The Group performs credit evaluations on trade customers. The Group continuously monitors the
credit quality of its major receivables and does not anticipate non-performance of those customers, nor has
there been historical non-performance of these customers. The Group also maintains strict controls for any credit
reviews such as credit increases.

The receivables assignment processes ensure that the Group’s trade receivables are materially managed in an
efficient and effective basis.

The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum
exposure to credit risk.

Included in trade receivables are debtors which are past due at balance date, as payment was not received within 30
days, and for which no provision has been made as there has not been a significant change in credit quality and the
amounts are still considered fully recoverable. No collateral is held over these balances and trade credit insurance
cover was not obtained in respect of these receivables. Interest is not charged on overdue debtors.

In the past six financial years, the Group has not written off any bad debts, although it has recognised provisions
for debts when collection was considered doubtful. The historical analysis of bad debts on a customer basis
assists in the determination of any increases in credit risk since initial recognition. There are no significant
credit risk concentrations as at 31 July 2020. Three customers represent 70% of the overdue receivables. There
were no other forward looking indicators to indicate increases in credit risk. Refer to the basis of preparation section
of the accounts for further detail on the impact of COVID-19 on receivables.

For cash and cash equivalents the Group has determined that all bank balances have low credit risk at each
reporting period as they are held by reputable international banking institutions.

The Group has not changed its overall strategy regarding the management of risk from 2019.

Trade receivables
Provision for doubtful and impaired receivables

Net trade receivables

Other receivables

Total receivables

2020

$’000

56,484
(977)

55,507

7,550

63,057

2019

$’000

58,076
(395)

57,681

4,252

61,933

ANNUAL REPORT 2020PAGE 76 & 77

04. TRADE AND OTHER RECEIVABLES (CONTINUED)

(a) Impaired receivables
As at 31 July 2020, trade receivables of $9.2m were overdue (2019: $7.1m). These relate to a number of independent
customers for whom there is no recent history of default. The majority has since been collected but $3.9m remains
unpaid which is expected to be collected in the 2021 financial year. The aging analysis of these overdue trade
receivables is as follows:

Overdue by
0 to 30 days
30 to 60 days
Over 60 days

Total overdue trade receivables

2020

$’000

5,950
549
2,725

9,224

2019

$’000

6,021
60
1,044

7,125

(b) Allowance for bad and doubtful receivables
The Group has recognised a loss of $0.4m in relation to unrecoverable trade receivables during the year (2019: $0.3m).
This relates to debtors that are overdue by more than 60 days. The Group has also recognised a loss of $0.1m for
estimated receivables impairment under NZ IFRS 9 Financial Instruments (2019: $0.1m).

Receivables denominated in currencies other than the functional currency comprise NZ$38.5m (2019: $52.6m) of USD
and AUD denominated trade receivables.

(d) Derecognised financial assets
The Group has derecognised trade receivables that have been sold to two banks under the terms of receivables
purchase agreements entered into during January 2015 and January 2016. The Group routinely assess the terms
of the agreements and has determined that substantially all the risks and rewards have been transferred
to the banks. 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 two agreements. An evaluation of external evidence of credit risk
has also been performed for each customer. The Group has assigned $131.3m of receivables as at 31 July 2020
(2019: $109.0m).

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. No new customers were assigned during the period.

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 $5,351 per day (2019: $9,003) 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 for the period of $1.7m (2019: $1.8m) arising from derecognition of assigned receivables is the discount paid to
the banks for acquiring these receivables.

ANNUAL REPORT 2020PAGE 78 & 79

05. 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.

Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous
contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the
obligations under the contract exceed the economic benefits expected to be received under it.

Key management judgement is applied in assessing inventory impairment, and therefore net realisable value
of inventory. Impairment is tested in three ways, stock provision, onerous contracts provision, and inventory
impairment. The stock provision considers the condition of inventory and therefore requires a high level of
management judgement, whereas the onerous contracts and impairment calculations are largely formulaic.

The stock provision tests for the physical impairment of both raw materials and finished goods. Physical impairment
can be for a variety of reasons, including damage, expiry, or obsolescence. Management judgement is required as
often indicators of impairment can be removed through further investigation or rework meaning that no write-down
to net realisable value is required. Management consider historical rework process results and future rework plans
in making that judgement.

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. Net realisable value is determined
by reference to historic achieved market prices, future contracted sales and global dairy trade auction results.
Reviewing the net realisable values is carried out by management on a monthly basis, using their judgement in
determining expected future proceeds based on current indicators of the condition of inventory.

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 cost through the year.

Raw materials at cost
Work in progress at cost
Finished goods at cost
Finished goods at net realisable value

Total inventories

2020

$’000

71,305
11,573
178,336
8,170

269,384

2019

$’000

40,058
-
118,090
6,701

164,849

Raw material inventories at $71.3m (13,614 MT) have increased (2019: $40.1m, 11,307 MT), primarily due to the acquisitions
of subsidiaries. The tonnage has increased at a slower rate than the value as Synlait Milk Limited holds less raw materials
by volume but comparatively more high-value infant additives.

Finished goods have increased to $186.5m (32,109 MT) (2019: $124.8m, 23,318 MT). The increase relates to inventory held
by subsidiaries and an increased holding of our core infant formula products. Finished goods held at net realisable value
have increased as a result of our acquisitions of subsidiaries.

The cost of inventories recognised as an expense during the year was $1,098.3m (2019: $838.0m). The cost of inventories
recognised as an expense includes $10.9m (2019: $7.4m) in respect of write downs of inventory to net realisable value.

The total inventory provision as at reporting date was $2.0m, of which $1.8m related to finished goods and $0.2m to raw
materials (2019: $0.3m, all related to finished goods). The increase primarily relates to production in late May which did not
pass our stringent quality standards.

In addition, the total onerous contracts provision as at reporting date was $0.3m (2019: $0.5m).

06. 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 otherwise 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. Payables that are settled within
a short duration are not discounted.

Trade payables
Accrued expenses
Employee entitlements
Other payables

Total trade and other payables

2020

$’000

106,942
118,853
12,809
166

238,770

2019

$’000

82,122
126,690
7,208
-

216,020

Payables denominated in currencies other than the functional currency comprise NZ$11.9m (2019: $0.5m) of USD, EUR and AUD
denominated trade payables and accruals.

ANNUAL REPORT 2020PAGE 80 & 81

LONG TERM ASSETS

The assets section provides information about the long term investments made
by the Group to operate the business and generate returns to shareholders.
This section includes the following notes:

07. PROPERTY, PLANT AND EQUIPMENT

07 Property, plant and equipment

Intangible assets

09 Leases

Recognition and measurement
Property, plant and equipment are initially measured at cost less accumulated depreciation.

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed
assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a
working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on
which they are located.

When a self-constructed asset meets the definition of a qualifying asset under NZ IAS 23 Borrowing Costs, borrowing
costs directly attributable to the construction of the asset are capitalised until such a time as the asset is substantially
ready for its intended use or sale.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

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.

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. 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.

Estimation and judgement is also required in the selection and application of useful lives. It is management’s best
estimate that the useful lives adopted adequately reflect the flow of resources and the economic benefits required and
derived in the use and servicing of property, plant, and equipment.

The estimated useful lives for the current and comparative periods are as follows:

Buildings

10 - 50 years

Plant and equipment 3 - 35 years

Fixtures and fittings 2 - 25 years

Depreciation methods, useful lives and residual values are reassessed at each reporting date.

ANNUAL REPORT 2020PAGE 82 & 83

07. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

Impairment
Estimation and judgement is required in the impairment of property, plant, and equipment. The Group estimates or
exercises judgement in assessing indicators of impairment, forecasting future cash flows and determining other key
assumptions used for assessing fair values (less costs of disposal) or value in use.

Cost
Balance as at 1 August 2018

Additions
Reclassification/transfer
Disposals

Balance as at 31 July 2019

Additions
Additions through business combinations (note 18)
Reclassification/transfer
Impairment
Disposals

Balance as at 31 July 2020

Accumulated depreciation
Balance as at 1 August 2018

Depreciation (note 2)
Disposals

Balance as at 31 July 2019

Depreciation (note 2)
Impairment
Disposals

Balance as at 31 July 2020

Carrying amounts
As at 31 July 2019
As at 31 July 2020

Land

Buildings

$’000

Plant
and
Equipment
$’000

Fixtures and
Fittings

$’000

Capital
Work in
Progress
$’000

Total

$’000

7,457

136,711

419,849

9,557

80,675

654,249

27,500
-
-

34,957

-
1,350
458
-
-

-
46,457
(127)

-
95,610
(2,251)

-
4,499
(1,283)

306,100
(146,566)
-

333,600
-
(3,661)

183,041

513,208

12,773

240,209

984,188

-
4,610
103,202
-
(75)

-
26,060
185,441
(1,050)
(2,777)

-
2,021
11,213
-
(746)

129,381
233
(300,314)
(2,301)
-

129,381
34,274
-
(3,351)
(3,598)

36,765

290,776

720,882

25,262

67,208

1,140,893

-
-

-
-
-

18,360

92,847

4,236
(44)

22,552

6,909
-
(33)

20,060
(1,964)

110,943

29,869
(151)
(2,300)

29,426

138,363

5,373

1,403
(1,283)

5,493

3,177
-
(668)

8,000

-
-

-
-
-

116,580

25,699
(3,291)

138,988

39,955
(151)
(3,001)

175,789

34,957
36,765

160,489
261,350

402,265
582,521

7,282
17,260

240,209
67,208

845,202
965,104

(a) Impairment
During the period, property, plant, and equipment have been examined for impairment. A $3.2m (2019: $nil) impairment
charge has been recognised to reflect the write-down of select assets to the higher of their fair value less costs of
disposal (FVLCOD) and value-in-use. Of the $3.2m impairment charge, $3.0m related to the write-down of blending and
canning over-cap equipment determined to not be fit for purpose due to engineering and design deficiencies and $0.2m
related to other projects which were assessed as being unlikely to provide future economic benefit. Compensation
for impairment of $3.0m has been recognised in profit and loss on the basis that the Group is contractually entitled to
compensation relating to the write-down of the blending and canning over-cap equipment which was determined to not
be fit for purpose. FVLCOD and value-in-use was determined to be $nil for all assets determined to be impaired.

(b) Capital work in progress
Assets under construction includes capital expenditure projects, until they are commissioned and transferred to property,
plant and equipment. Capital work in progress of $67.2m is significantly lower than 2019 ($240.2m) due to the completion
of Synlait Pokeno and resulting transfer from work in progress to fixed assets.

(c) Capitalised borrowing costs
During the year, the Group has capitalised borrowing costs amounting to $2.1m (2019: $7.5m) on qualifying assets.
Interest has been capitalised at the rate at which borrowing has been specifically drawn to fund the qualifying asset.
In the year, borrowing costs were capitalised for Synlait Pokeno and the Dry Store 4, enterprise resource planning
system, and separator capacity upgrade projects. Borrowing costs continue to be capitalised for the Dry Store 4 and
enterprise resource planning system upgrade projects.

ANNUAL REPORT 2020PAGE 84 & 85

08. INTANGIBLE ASSETS

Goodwill
Goodwill arises on the acquisition of subsidiaries and represents the excess of the cost of the acquisition over the
net of the fair values of the assets and liabilities of the subsidiaries acquired. Goodwill is tested for impairment
annually and is carried at cost as established at the date of acquisition of the subsidiary, less accumulated
impairment losses, if any.

For the purposes of impairment testing, goodwill is allocated to cash-generating units (CGU) that are expected to
benefit from the business combination in which the goodwill arose. The recoverable amount of CGUs is the higher
of fair value less costs to sell and value in use. If this recoverable amount is less than the carrying amount of the
CGU an impairment loss is recognised immediately in the profit and loss, and it is not subsequently reversed.

Brands
Purchased brands have been assessed as indefinite life intangible assets, after considering factors such as the
expected use of the assets, the period of legal control, the typical product life cycle of these assets, the industry in
which the assets are operating, and the level of maintenance expenditure required. Purchased brands are initially
recognised at fair value if acquired as part of a business combination, and are tested for impairment annually,
or more frequently if there are any indicators of impairment, on the same basis as goodwill.

Patents, trademarks and other rights
Separately acquired patents and trademarks are shown at historical cost. 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.

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.

New Zealand Units (NZU)
New Zealand Units are purchased to offset carbon emissions under the New Zealand Emissions Trading Scheme.
The units are measured at cost.

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 CGU exceeds its recoverable amount.
A CGU 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 CGU’s are allocated first to reduce the carrying amount of any goodwill
allocated to the units and then to reduce the carrying amount of any other assets in the unit (or group of units) on a
pro rata basis.

The recoverable amount of an asset or CGU 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 recognised in profit or loss.

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 has been recognised. An impairment loss in relation to
goodwill is not reversed.

ANNUAL REPORT 2020PAGE 86 & 87

08. INTANGIBLE ASSETS (CONTINUED)

Goodwill

Brands

$’000

Patents,
Trademarks
and Other
Intangibles
$’000

Computer
Software

Intangibles
in Progress

Total

New
Zealand
Units

$’000

Year ended 31 July 2019
Opening net book amount (restated)
Additions
Development costs recognised as an asset
Amortisation charge (note 2)
Asset disposals/surrendered

Closing net book value (restated)

Year ended 31 July 2019
Current
Non-current

Closing net book value (restated)

Year ended 31 July 2020
Opening net book value
Additions
Acquisition through business combination (note 18)
Development costs recognised as an asset
Impairment (note 2)
Amortisation charge (note 2)
Asset disposals/surrendered

Closing net book value

Year ended 31 July 2020
Current
Non-current

Closing net book value

6,026
-
-
-
-

6,026

-
6,026

6,026

6,026
-
59,519
-
-
-
-

-
-
-
-
-

-
-

-
-
17,545
-
-
-
-

65,545

17,545

-
65,545

-
17,545

65,545

17,545

352
497
-
(131)
-

718

-
718

718

718
908
107
25
-
(344)
-

1,414

-
1,414

1,414

4,532
3,170
-
(1,809)
-

5,893

-
5,893

5,893

5,893
5,234
263
15
-
(2,813)
-

8,592

-
8,592

8,592

3,200
7,117
(3,667)
-
(123)

6,527

-
6,527

6,527

6,527
11,328
160
(6,183)
(1,561)
-
-

10,271

-
10,271

10,271

2,967
5,765
-
-
(1,756)

6,976

17,077
16,549
(3,667)
(1,940)
(1,879)

26,140

3,686
3,290

6,976

3,686
22,454

26,140

6,976
4,138
-
-
-
-
(2,203)

26,140
21,608
77,594
(6,143)
(1,561)
(3,157)
(2,203)

8,911

112,278

4,230
4,681

8,911

4,230
108,048

112,278

Intangibles in progress of $10.3m at balance date is predominantly constituted of project to date spend on systems and
process development.

The opening goodwill balance for the year ended 31 July 2019 has been restated to correct an immaterial prior period error
which was identified during the current year. Please refer to Note 18 for further detail.

(a) Impairment tests for indefinite life intangibles
As at 31 July 2020 management has determined that there is no impairment of any CGU containing goodwill.

For the purposes of goodwill impairment testing, goodwill has been allocated to two CGU groups; the Auckland
blending and canning CGU and consumer foods CGU. The recoverable amounts of the CGU’s have been determined
based on value in use.

The value-in-use calculation uses five year future cash flows based on Board approved business plans, due diligence
performed as part of the acquisition, and managements past experience. Based on projected future cash flows,
management has determined that the recoverable amount of the CGU’s exceeds the combined carrying values and
therefore goodwill is not impaired. The business plans were modelled using the following key assumptions:

Annual revenue growth rates
Allowance for increase in expenses
Pre-tax discount rate
Terminal growth rate

2020

(0.6%) - 7.9%
1.9% - 4.0%
10.7% - 15.2%
0.0% - 2.0%

2019

0.0%
2.5%
11.8%
0.0%

Indefinite life intangibles, which is comprised entirely of brands, has been calculated using the relief from royalty method.
The impairment testing was modelled using the following key assumptions:

Annual revenue growth rates
Allowance for increase in expenses
Royalty rate
Post-tax discount rate
Terminal growth rate

2020

(30.0%)* - 7.9%
1.9% - 4.0%
25.0%
8.5% - 11.2%
0.0% - 2.0%

2019

0.0%
2.5%
0.0%
8.5%
0.0%

*This range includes a 30% decrease in Talbot Forest branded FY21 sales, reflecting a conservative downside resulting from the recent
voluntary recall of Talbot Forest branded cheese from customers throughout New Zealand. Refer to Note 18 for further information on
the brand assets acquired.

Management has carried out a sensitivity analysis and believe that any reasonably possible change in the key assumptions
would not cause the book value of any of the CGU’s, or groups of CGU’s, to exceed their recoverable amount.

ANNUAL REPORT 2020PAGE 88 & 89

09. LEASES

The Group’s leased assets include buildings and plant and equipment. Effective 1 August 2019, the Group adopted
NZ IFRS 16 as outlined in the significant accounting policies section, recognising ROU assets and lease obligations of
$7.2m. The following table reconciles the Group’s lease commitments disclosed in the consolidated financial statements
as at 1 August 2019, to the lease obligations recognised on initial application of NZ IFRS 16:

Lease commitments, 31 July 2019
Recognition exemptions for short-term and low-value leases
Discounted using the incremental borrowing rate at 1 August 2019
Lease remeasurements

Lease obligations recognised at 1 August 2019

8,902
(2,444)
(683)
1,417

7,192

Lease obligations were measured at the present value of remaining lease payments at the transition date, discounted at
the Group’s incremental borrowing rate. The Group’s weighted average rate applied at 1 August 2019 was 3.49%.

RIGHT-OF-USE ASSETS
Cost
Balance as at 1 August 2019
Additions and acquisitions
Acquisitions through business combinations (note 18)
Foreign exchange differences

Balance as at 31 July 2020

Depreciation
Balance as at 1 August 2019
Depreciation
Foreign exchange differences

Balance as at 31 July 2020

Carrying amounts
Balance as at 1 August 2019
Balance as at 31 July 2020

Buildings

$’000

Plant and
Equipment
$’000

6,726
6,497
8,992
(9)

22,206

-
4,702
(5)

4,697

6,726

17,510

466
60
708
-

1,234

-
246
-

246

466

987

LEASE OBLIGATIONS
Contractual, undiscounted cash flows associated with the Group’s lease obligations are as follows:
Within one year
Between one and five years
Beyond five years

Total undiscounted lease obligations

Discounted lease obligations recognised on the Company’s consolidated balance sheet are as follows:
Current
Non-current

Total discounted lease obligations

Total

$’000

7,192
6,557
9,700
(9)

23,440

-
4,948
(5)

4,943

7,192

18,497

Total

$’000

5,061
15,015
2,443

22,519

4,422
14,838

19,260

Interest expense on lease obligations for the year ended 31 July 2020 was $0.45m and is included in finance expense. Operating lease
expenses relating to short-term and low-value leases not included in the measurement of lease obligations for the year ended 31 July
2020 were $1.4m.

ANNUAL REPORT 2020PAGE 90 & 91

DEBT AND EQUITY

The debt and equity section gives information about the Group’s capital
structure and financing costs related to this structure. This section includes the
following notes:

10. FINANCE INCOME AND EXPENSES

10 Finance income and expenses

11 Loans and borrowings

12 Share capital

13 Share based payments

14 Reserves and retained earnings

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.

Interest expense on borrowings, bank and facility fees and transaction costs are recognised in the income
statement over the period of the borrowings, using the effective interest rate method, unless such costs relate
to funding capital work in progress. Interest expense on lease obligations are also recognised in the income
statement in accordance with NZ IFRS 16, which was adopted by the Group during the period. Refer to Note 9 and
Changes in accounting policies for further detail.

Interest income on loans and deposits

Total finance income

Interest and facility fees
Capitalised borrowing cost
Interest on leases

Total finance costs
Loss on derecognition of financial assets

Net finance costs

2020

$’000

134

(21,414)
2,089
(452)

(19,777)
(1,747)

(21,390)

2019

$’000

1,232

(16,345)
7,526
-

(8,819)
(1,842)

(9,429)

ANNUAL REPORT 2020PAGE 92 & 93

11. LOANS AND BORROWINGS

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 statement of comprehensive income over the
period of the borrowings using the effective interest method.

Working capital facility NZD
Working capital facility USD

Current liabilities

Retail bonds
Revolving credit facility

Non-current liabilities

Drawn Facility
Amount
$’000

Transaction
Costs
$’000

68,910
33,927

102,837

180,000
250,000

430,000

-
-

(2,987)
(259)

(3,246)

2020
Carrying
Amount
$’000

68,910
33,927

102,837

177,013
249,741

426,754

Drawn Facility
Amount
$’000

Transaction
Costs
$’000

47,240
52,386

99,626

-
250,000

250,000

-
-

-
(518)

(518)

2019
Carrying
Amount
$’000

47,240
52,386

99,626

-
249,482

249,482

(a) Terms of loans and borrowings
The revolving credit facility and working capital facility within the Group 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 (Facility A) of $150m maturing on 1 August 2021.

A secured revolving credit facility (Facility B) of $50m maturing 1 August 2023.

A secured revolving credit facility (Facility C) of $50m maturing 1 August 2023.

A secured working capital facility of NZD $320m maturing on 30 September 2020.

The Group recently finalised an additional revolving credit facility of $100m commencing 1 October 2020, stepping down
to $70m on 1 January 2021 and maturing 1 May 2021. It also reduced the working capital facility of $320m to $250m and
extended it for a period of twelve months and extended revolving credit facility A to 1 October 2021.

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 2020
and 31 July 2019.

Retail Bonds
Borrowings under the retail bond programme are supported by a Master Trust Deed and supplemented by the Series
Supplement entered into between the Group and the New Zealand Guardian Trust Company Limited. The retail bonds are
unsecured and unsubordinated. At 31 July 2020, the retail bonds had a fair value of $187.7m, based on NZDX valuation.

Nominal Interest
Rate %

Financial Year of
Maturity

Carrying
Amount 2020

Carrying Amount
2019

Secured revolving credit facility (Facility A, B & C) - ANZ/BNZ
Secured working capital facility - ANZ/BNZ - USD
Secured working capital facility - ANZ/BNZ - NZD
Subordinated retail bonds

1.48 %
1.26 %
1.50 %
3.83 %

2021, 2023
2020
2020
2025

250,000
33,927
68,910
180,000

250,000
52,386
47,240
-

The nominal interest rate is calculated by adding the BKBM rate for NZD facilities, US LIBOR rate for USD facilities and
the applicable margin rate. It excludes line fees and swap costs. Nominal interest rate for the subordinated retail bonds
excludes transaction costs.

ANNUAL REPORT 2020PAGE 94 & 95

12. 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.

During the reporting period, 83,880 new ordinary shares were granted to participants of the Group’s Long Term Incentive
scheme as a result of share options that were granted under the scheme vesting and being converted to ordinary shares
(2019: nil). These shares were issued to the participants at no cost. Refer to Note 13 for further information.

(a) Share capital
Ordinary shares
On issue at beginning of period
Issue of share capital under employee share plans

On issue at end of period

None of the above shares are held by the Group or its subsidiaries.

2020 Shares

2019 Shares

2020
$’000

2019
$’000

179,223,028
83,880

179,223,028
-

179,306,908

179,223,028

268,074
470

268,544

268,074
-

268,074

(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
Synlait Milk Limited. All ordinary shares rank equally with regard to Synlait Milk Limited’s residual assets.

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 recognises 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 is 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.

(d) 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.

Basic EPS for the 2020 financial period was 41.95 cents (2019: 45.89). Diluted EPS for the 2020 financial period was 41.85 cents
(2019: 45.77).

13. SHARE BASED PAYMENTS

(a) LTI share scheme
Under the LTI share scheme, participants receive Performance Share Rights (“PSRs”) which can be converted into
Ordinary Shares in Synlait Milk Limited in three financial years’ time provided performance hurdles have been
met during the assessment period (the date of award of the PSRs plus three financial years). The number of PSRs
granted to participants is set at one quarter of their base salary divided by Synlait Milk Limited’s share price on the
date of the award of the PSRs.

The PSRs consist of 50% Total Shareholder Return Rights (“TSR Rights”) and 50% Earnings Per Share Rights (“EPS
Rights”). The vesting for both TSR Rights and EPS Rights is determined in accordance with progressive vesting scales.

Synlait Milk Limited’s TSR must be greater than or equal to the 50th percentile of the constituents of the TSR Peer
Group over the assessment period for 50% of the TSR Rights to vest, scaled so that 100% of the TSR Rights vest
if Synlait Milk Limited’s TSR equals or exceeds the 75th percentile of the TSR Peer Group over the assessment
period. The TSR Peer Group is determined as at the date of award of the PSRs.

If Synlait Milk Limited’s EPS over the assessment period equals a Board approved EPS target, 50% of the EPS
Rights vest, scaled so that 100% of the EPS Rights vest if Synlait Milk Limited’s EPS over the assessment period
equals the Board approved EPS target plus 10%.

For either performance hurdle to be met, Synlait Milk Limited’s TSR must be positive over the assessment period.
No exercise price is payable upon exercise of a PSR, Synlait Milk Limited’s ordinary shares being delivered to a
participant for nil consideration. The LTI share scheme is an annual scheme with PSRs granted to Board approved
participants each year, noting however that the annual award is assessed over a three year period.

ANNUAL REPORT 2020PAGE 96 & 97

The table below sets out the movement in LTI share scheme PSR’s during the year:

14. RESERVES AND RETAINED EARNINGS

Outstanding 1 August
Granted during the year
Forfeited during the year
Exercised during the year

Total

2020

472,934
148,005
(202,079)
(83,880)

334,980

2019

506,839
134,582
(168,487)
-

472,934

During the period, 83,880 new ordinary shares were granted to participants of the LTI scheme. See Note 12 for further detail.

The fair value of the PSRs awarded at grant date has been determined by an independent third party valuer, using a Monte
Carlo simulation to model the total share return for Synlait and the TSR peer group. The fair value of the PSRs awarded,
along with key assumptions, are listed below:

Risk free rate
Volatility
Share price at entitlement date
Share price at grant date
Total value of options granted at grant date ($000’s)

2020 PSRs

2019 PSRs

0.83 %
37.70 %
9.79
9.18
783

1.97 %
35.84 %
10.81
8.66
559

The estimated value of the PSRs is amortised over the vesting period from grant date.

(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

2020

$’000

523

2019

$’000

644

(a) Retained earnings
Movements in retained earnings were as follows:

Balance 1 August
Net profit for the year
Balance 31 July

2020

$’000

248,775
75,208
323,983

Group

2019

$’000

166,536
82,239
248,775

(b) Nature and purpose of reserves
(i) Cash flow hedge reserve
The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value hedging
instruments and the cost of cash flow hedging instruments. Cash flow hedging instruments relate transactions that have
not yet occurred.

(ii) Employee benefits reserve
The current year movement in the employee benefits reserve of ($0.3m) is comprised of the cumulative share based
payment expense for share options not yet vested of $0.5m (2019: $0.6m), vesting of rights during the period of ($0.5m)
(2019: $nil) and the related movement in deferred tax asset of ($0.3m) (2019: $0.1m)

ANNUAL REPORT 2020PAGE 98 & 99

FINANCIAL RISK
MANAGEMENT

The financial risk management section presents information about the Group’s
financial risk exposures and the financial instruments used to mitigate this. This
section includes the following notes:

15 Financial risk management

16 Financial instruments

106

15. FINANCIAL RISK MANAGEMENT

The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate risk,
foreign exchange rate risk, and commodity price risk including forward exchange contracts, interest rate swaps
and commodity derivative contracts.

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk
and commodity price 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.

On 1 April 2020, the Group completed the acquisition of 100% of the shares of Dairyworks Limited (“Dairyworks”). See
Note 18 for further details. The acquisition has introduced additional financial risks similar to the financial risks of the
Group. Dairyworks currently has its own separate treasury policy from the Group’s policy with the need for its own risk
management parameters to reflect the business and markets that it operates in. Any deviation in Dairyworks’ policy
from the Group is made explicit in the notes below.

Market risk
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.

In relation to 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 2020, the Group has hedged 62% of its exposure to foreign exchange risk on sales, and 23% of its
exposure to foreign exchange risk on payables, over the following 2 years.

In addition to the above exposure, Dairyworks had entered USD $2.8m of foreign exchange contracts for confirmed
purchase of raw materials for production payable within several months of reporting date.

ANNUAL REPORT 2020PAGE 100 & 101

15. FINANCIAL RISK MANAGEMENT (CONTINUED)

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 in relation to the benchmark interest rate element. 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.

Commodity Price Risk
Dairy commodity price risk is the risk of volatility in profit and loss from the movement in dairy commodity prices to
which the Group may be exposed. Volatility in global dairy commodity prices can have an adverse impact on the
Groups earnings and milk price by eroding selling prices and increasing input costs.

The Group primarily manages its dairy commodity price risk by:

• Determining the most appropriate mix of products to manufacture based on the milk supply curve and global

demand for dairy products;

• Governing the length and terms of sales contracts so that sales revenue is reflective of current market prices

and is, where appropriate, linked to Global Dairy Trade (GDT) prices; and

• Using commodity derivative contracts to manage sales price volatility caused by fluctuations in GDT prices.

The Group has a Board approved treasury policy that sets the parameters under which commodity cover is to be
taken, including permitted derivative types and volume limits.

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 entered into with reputable financial banks.

The carrying amount of financial assets represents the Group’s maximum credit exposure. The Group also retains
all the late payment risk in the derecognition of financial assets, as described in note 4.

Synlait Milk Limited guarantees all facilities held by Synlait Milk Finance Limited.

Liquidity risk
Liquidity risk represents the Group’s ability to meet its contractual obligations as they fall due. 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.

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.

Market risk
(i) Foreign exchange risk
The Group’s exposure to foreign currency risk at the reporting date was as follows:

USD

$’000

23,039
(7,142)
(22,487)

AUD

$’000

3,479
(605)
-

EUR

$’000

-
(243)
-

2020

RMB

$’000

-
-
-

USD

$’000

34,462
(363)
(34,300)

AUD

$’000

36
-
-

EUR

$’000

-
(11)
-

2019

RMB

$’000

18
-
-

Trade receivables
Trade payables
Working capital facility

ANNUAL REPORT 2020PAGE 102 & 103

15. FINANCIAL RISK MANAGEMENT (CONTINUED)

The Group’s exposure to foreign currency in the period ended 31 July 2020 is limited to its sales of dairy products,
purchases of raw materials for production, capital equipment purchases and USD working capital facility. As at the
reporting date, the Group had the following foreign exchange derivative instruments outstanding in respect of future
sales and purchases transactions:

Exports
Less than 1 year
1 to 2 years

Imports
Less than 1 year

Weighted Average
Exchange Rate

2020

Nominal
Balance
USD$’000

Weighted Average
Exchange Rate

2019

Nominal
Balance
USD$’000

0.6478
0.6318

379,500
192,050

0.6895
0.6765

353,150
160,600

0.6368

(46,021)

0.6752

(42,467)

(ii) Interest rate risk
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

Weighted Average
Interest Rate
%

4.26 %
4.36 %
4.36 %
4.20 %
3.54 %
3.56 %
-%

2020

Nominal
Balance
$’000

57,250
40,000
40,000
30,000
15,000
10,000
-

Weighted Average
Interest Rate
%

4.23 %
4.26 %
4.36 %
4.36 %
4.20 %
3.54 %
3.56 %

2019

Nominal
Balance
$’000

79,500
57,250
40,000
40,000
30,000
15,000
10,000

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.

Interest rates
100 basis point increase in interest rate
100 basis point decrease in interest rate
Foreign exchange rates
5% increase in exchange rate
5% decrease in exchange rate

Post-tax impact on the
income statement

Post-tax impact on cash
flow hedge reserve (equity)

2020
$’000

(2,879)
2,879

-
-

2019
$’000

(2,185)
2,185

2020
$’000

1,252
(1,303)

2019
$’000

1,764
(1,843)

-
-

27,127
(29,966)

23,985
(26,504)

(iv) Commodity derivatives
During the reporting period the Group entered into a small number of commodity derivative contracts to further support
the Group’s existing financial risk management strategy. The movement in the fair value of the commodity derivatives is
included within the cash flow hedge reserve.

Liquidity risk
The total repayments and associated maturity of financial liabilities as at balance date is reported below.

At 31 July 2020
Working capital facility
Trade and other payables
Loans and borrowings
Derivative financial instruments
Lease liabilities
Total

At 31 July 2019
Working capital facility
Trade and other payables
Loans and borrowings
Derivative financial instruments
Total

Less than
12 months
$’000

Between
1 and 2 years
$’000

Between
2 and 5 years
$’000

102,837
238,770
-
14,148
4,422
360,177

99,626
216,020
-
27,960
343,606

-
-
149,790
835
3,206
153,831

-
-
149,580
6,569
156,149

-
-
276,964
2,782
8,106
287,852

-
-
99,902
3,201
103,103

Over
5 years
$’000

-
-
-
1,188
3,525
4,713

-
-
-
916
916

Total

$’000

102,837
238,770
426,754
18,953
19,260
806,574

99,626
216,020
249,482
38,647
603,775

ANNUAL REPORT 2020PAGE 104 & 105

15. FINANCIAL RISK MANAGEMENT (CONTINUED)

Cash flow hedges
The Group enters into cash flow hedges of highly probable forecast transactions and firm commitments, as described in
accounting policy section of this note.

Hedging instruments used
in cash flow hedges

Nominal
Amount

Carrying Amount

Assets

Liabilities

Hedge Accounted
Amounts in Cash
Flow Reserve
Intrinsic Value

Total Cash Flow
Hedge Reserve

$’000

NZD$’000

NZD’000

528,337

36,419

12,078

24,341

57,250

12,016

6,777

(6,777)

195
36,614

-
18,855

-
17,564

31 July 2020

Foreign exchange risk
Foreign exchange contracts (USD)

Interest rate risk
Interest rate swaps

Commodity price risk
Dairy commodity futures (NZD)

Total

At 31 July 2019

Foreign exchange risk
Foreign exchange contracts (USD)

Interest rate risk
Interest rate swaps

Commodity price risk
Dairy commodity futures (NZD)

Total

Effects of Cash Flow
Hedges on Statement of
Comprehensive Income

Hedging Gains/(losses)
Recognised in Other
Comprehensive Income
$’000

Hedge Ineffectiveness
Recognised in Profit
or Loss
$’000

Hedging Gains/(losses)
Recognised in Other
Comprehensive Income
$’000

Hedge Ineffectiveness
Recognised in Profit
or Loss
$’000

2020

2019

Foreign exchange risk
Forward exchange contracts
Foreign currency collars

Interest rate risk
Interest rate swaps

Commodity price risk
Dairy commodity futures (NZD)

Total

53,551
-

339

(8)

53,882

-
-

(299)

(19,703)
154

(1,578)

(196)

(21,323)

-
-

Impact to reserves in equity
The impact of the Group’s hedge accounting policies on the reserves in equity is presented in the table below:

471,283

2,320

31,531

(29,211)

Hedge Reserves
Opening balance

79,500

7,116

(7,116)

5,307

2,403

38,647

(36,327)

(36,319)

Movements attributable to cashflow hedges:
Change in value of effective derivative hedging instruments
Reclassifications to the income statement as hedged transactions occurred
Tax (credit)/expense

Total movement
Closing balance

The above table does not include USD $2.8m foreign exchange contracts held by Dairyworks as it has not elected to cash flow hedge.

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.

2020

$’000

(26,148)

16,841
37,041
(15,087)

38,795
12,647

2019

$’000

(10,796)

(29,589)
8,266
5,971

(15,352)
(26,148)

ANNUAL REPORT 2020PAGE 106 & 107

16. 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 on specified dates to cash flows that are solely
payments of principal and interest.

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.

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.

Where financial assets are subsequently measured at FVPL, all gains and losses are recognised in profit or loss.

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.

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, with the exception of retail bonds, are not traded in active markets their fair value
is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based
on market conditions existing at each balance date.

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.

All financial instruments held at fair value are included in level 2 of the valuation hierarchy as defined in NZ IFRS 13, with
the exception of the retail bonds, which are included in level 1. The retail bonds are listed instruments on the NZDX and
the Group is satisfied there is sufficient trading in these instruments to qualify as an active market.

ANNUAL REPORT 2020PAGE 108 & 109

16. FINANCIAL INSTRUMENTS (CONTINUED)

The fair value of foreign currency forward contracts is determined using forward exchange rates at balance date.
The fair value of foreign exchange option agreements is determined using forward exchange rates at balance date.
The fair value of interest rate swaps is determined using forward interest rates as at reporting date. The fair value of
commodity derivatives is determined using NZX settlement prices.

(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.

Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the 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 statement of financial position as they
do not currently meet the criteria for offset.

Impairment of financial assets
The Group has adopted the expected credit loss (“ECL”) model. For further detail please refer to Note 4.
The Group assesses whether there is 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 can be impaired and the impairment losses are recognised in accordance with IFRS 9. The Group continues
to assess if historical and future objective evidence of impairment exists after the initial recognition of the asset.

Derivative financial instruments - hedge accounting
The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate risk,
foreign exchange rate risk, and commodity price risk including forward exchange contracts, interest rate swaps, and
commodity derivative contracts.

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 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, with the
exception for Dairyworks.

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.

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 and reclassification adjustments are
recognised immediately in profit or loss, included in revenue for foreign exchange instruments and commodity
price derivatives, 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 income statement.

ANNUAL REPORT 2020PAGE 110 & 111

16. FINANCIAL INSTRUMENTS (CONTINUED)

OTHER

This section contains additional information regarding the performance of the
group during the financial year. This section includes the following notes:

Income tax

18 Business combinations

19 Other investments

20 Related party transactions

21 Contingencies

22 Commitments

23 Events occurring after the reporting period

24 Other accounting policies

112

116

120

122

125

126

127

(a) Financial instruments by category

Financial assets

At 31 July 2020
Cash and cash equivalents
Derivative financial instruments
Trade and other receivables
Instruments in equity

Total

At 31 July 2019
Cash and cash equivalents
Derivative financial instruments
Trade and other receivables
Instruments in equity

Total

Financial liabilities

At 31 July 2020
Derivative financial instruments
Working capital facility
Trade and other payables
Borrowings

Total

At 31 July 2019
Derivative financial instruments
Working capital facility
Trade and other payables
Borrowings

Total

At Amortised Cost At Fair Value Through
Other Comprehensive
Income
$’000

$’000

5,887
-
63,057
-

68,944

16,007
-
61,933
-

77,940

-
-
-
143

143

-
-
-
110

110

At Fair Value Through
Profit or Loss

$’000

-
36,614
-
-

36,614

-
2,403
-
-

2,403

At Amortised Cost At Fair Value Through
Profit or Loss
$’000

$’000

-
102,837
238,770
426,754

768,361

-
99,626
216,020
249,482

565,128

18,953
-
-
-

18,953

38,647
-
-
-

38,647

Total

$’000

5,887
36,614
63,057
143

105,701

16,007
2,403
61,933
110

80,453

Total

$’000

18,953
102,837
238,770
426,754

787,314

38,647
99,626
216,020
249,482

603,775

All derivative financial instruments are designated in effective hedge relationships, with exception for derivative financial
instruments held by Dairyworks.

For instruments held at amortised cost, carrying amount is considered a reasonable approximation for fair value, with exception to
the Retail Bond.

ANNUAL REPORT 2020PAGE 112 & 113

17.

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 either other comprehensive income or directly in equity. In these cases, 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 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.

New Zealand tax consolidated group
Synlait Milk Limited and its wholly-owned New Zealand controlled entity, Synlait Milk Finance Limited, form a tax
consolidated group. The New Zealand Dairy Company Limited, Eighty Nine Richard Pearse Drive Limited, Synlait
Foods (Talbot Forest) Limited and Dairyworks Limited are not members of the tax consolidated group.

(a) Income tax expense

Current tax expense
Current tax on profits for the year
Current tax on prior period adjustments

Total

Deferred tax expense
Temporary differences
Changes in tax rates and laws
Prior year adjustments
Tax losses to carry forward

Total deferred tax
Income tax expense

(b) Reconciliation of effective tax rate

Profit before income tax
Income tax using the Group’s domestic tax rate - 28%
Non-deductible costs

Total

Prior year adjustments
Deferred tax credit relating to changes in tax rates and laws
Research and development tax credit
Other tax effects for reconciliation between accounting profit and tax expense

Total
Income tax expense

2020

$’000

2019

$’000

(21,614)
4,212

(17,402)

(7,070)
2,229
(4,473)
23

(9,291)
(26,693)

101,901
(28,532)
(889)

(29,421)

(261)
2,229
779
(19)

2,728
(26,693)

(29,220)
721

(28,499)

(3,433)
-
(925)
17

(4,341)
(32,840)

115,079
(32,222)
(533)

(32,755)

(85)
-
-
-

(85)
(32,840)

As part of the New Zealand Government’s COVID-19: Economic Response Package, depreciation deductions will be
reintroduced for new and existing industrial and commercial buildings from the 2020/21 tax year. The Group have determined
that, as a result of this legislative change, the tax base of certain assets has increased, reducing a taxable temporary
difference (deferred tax liability) previously recognised. The impact of these changes has resulted in a reduction in deferred
tax liabilities and a reduction in tax expense of $2.2m.

Imputation credits available directly and indirectly to the shareholders of the Group

98,009

83,219

2020

$’000

2019

$’000

ANNUAL REPORT 2020PAGE 114 & 115

17.

INCOME TAX (CONTINUED)

(d) Income tax recognised in other comprehensive income
The tax (charge)/credit relating to components of other comprehensive income is as follows:

31 July 2020
Cash flow hedges
Other comprehensive income subject to tax

31 July 2019
Cash flow hedges
Other comprehensive income subject to tax

(e) Deferred taxation
The balance comprises temporary differences attributable to:

Before Tax Tax (Expense)/Benefit
$’000

$’000

53,882
53,882

(21,323)
(21,323)

(15,087)
(15,087)

5,971
5,971

Assets
Derivatives
Tax losses carried forward
Other items

Total deferred tax assets

Liabilities
Property, plant and equipment
Derivatives
Intangible assets

Total deferred tax liabilities
Total deferred tax

2020

$’000

-
23
2,793

2,816

(47,632)
(4,918)
(4,913)

(57,463)
(54,647)

After Tax
$’000

38,795
38,795

(15,352)

2019

$’000
(restated)

10,170
112
2,128

12,410

(37,444)
-
-

(37,444)
(25,034)

Balance
1 Aug 2018

Recognised
in Profit or
Loss

$’000
(restated)

(32,528)
4,199
1,287
295

(26,747)

$’000

(4,165)
-
603
(178)

(3,740)

Recognised
in Other
Comprehensive
Income
$’000

Recognised
Directly in
Equity

$’000

Recognised
from a
Business
Combination
$’000

-
5,971
-
-

5,971

-
-
84
-

-
-
-
-

Prior Year
Adjustment

Balance 31
July 2019

$’000

(751)
-
155
(5)

(602)

(37,444)
10,170
2,128
112

(25,034)

Movements - Group

Property, plant and equipment
Derivatives
Other items
Tax losses carried forward

Total

Balance
1 Aug 2019

Recognised
in Profit or
Loss

$’000

Recognised
in Other
Comprehensive
Income
$’000

(37,444)
10,170
2,128
112
-

(25,034)

(5,921)
-
1,080
23
-

(4,818)

-
(15,087)
-
-
-

(15,087)

Recognised
Directly in
Equity

$’000

-
-
(389)
-
-

(389)

Recognised
from a
Business
Combination
$’000

227
-
(160)
-
(4,912)

(4,845)

Prior Year
Adjustment

Balance 31
July 2020

$’000

(4,495)
-
134
(112)
-

(4,473)

(47,633)
(4,918)
2,793
23
(4,912)

(54,647)

Movements - Group

Property, plant and equipment
Derivatives
Other items
Tax losses carried forward
Intangible assets

Total

The opening deferred tax balance relating to Plant, Property and Equipment for the year ended 31 July 2019 has been restated to
correct an immaterial prior period error which was identified during the current year. Please refer to Note 18 for further detail.

ANNUAL REPORT 2020

PAGE 116 & 117

18. BUSINESS COMBINATIONS

Acquisitions of businesses are accounted for using the acquisition method. The cost of the acquisition is
measured at fair value, which is calculated as the sum of the assets given, liabilities incurred or assumed, and
equity instruments issued by the Group, at acquisition date, in exchange for control of the acquiree. Acquisition
related costs are recognised in profit or loss as incurred. The results of subsidiaries acquired or disposed of
during the year are included in the Consolidated Income Statement from the date of acquisition or up to the date
of disposal as appropriate.

(a) Talbot Forest Cheese Limited
On 1 August 2019, the Group completed the acquisition of selected assets and liabilities of Talbot Forest Cheese Ltd (“TFC”)
for total consideration of $38.3m, including inventory. The acquirer was a newly incorporated company, Synlait Foods (Talbot
Forest) Limited. On the acquisition date, the Group paid $18.8m. Of the remaining consideration payable, $18.1m was applied
against an intercompany loan owed by the vendor to the Group and the remaining $1.4m was paid over the course of FY20
upon completion of pre-completion works and plant acceptance tests. The acquisition has been accounted for in accordance
with IFRS 3, Business Combinations.

The acquisition of TFC includes a cheese manufacturing plant located in Temuka, New Zealand, capable of
manufacturing a variety of cheese products with an annual production capacity of 12,000MT, along with a consumer
cheese brand. The acquisition excludes the Talbot Forest Cheese artisan factory in Geraldine, New Zealand.

The following summarises the consideration paid for TFC and amounts of assets acquired and liabilities assumed
recognised at the acquisition date:

Current Assets
Inventory

Non-current Assets
Property, plant and equipment
Land and buildings
Brand

Non-current Liabilities
Deferred Tax

Total identifiable net assets at fair value
Goodwill arising on acquisition

Total consideration
Less: Debt and accrued interest payable owed to the Group extinguished upon acquisition

Net cash outflow on acquisition

August 1, 2019

$’000

2,520

12,745
5,960
1,700

(708)

22,217
16,132

38,349
(18,077)

20,272

The land, buildings, plant and equipment, inventory, and brand have been recognised at acquisition date fair values
based on third party valuations. Goodwill arose in the acquisition of the business operations of TFC because the cost of
acquisition reflected the benefit of future cash flows above the current fair market value of the assets acquired, and the
synergies and future market benefits expected to be obtained from the cheese manufacturing plant and related brand.

Acquisition costs of $0.1m and $0.3m have been recognised in the income statements for the years ended 31 July 2020
and 31 July 2019, respectively.

Impact of the acquisition on the results of the Group
From the date of acquisition, TFC has contributed $11.5m to revenue and a loss of ($4.7m) to net profit after tax. Had the
combination not taken place, revenue of the Group from continuing operations would have been $1,290.5m, and the net
profit from continuing operations for the Group would have been $79.9m.

(b) Dairyworks Limited
On 1 April 2020, the Group completed the acquisition of 100% of the shares of Dairyworks Ltd. (“Dairyworks”). The
purchase price of Dairyworks was $112 million on the basis of a debt and cash-free business. The acquisition was priced
using a locked box mechanism whereby the equity price of Dairyworks was determined or “locked-in” based on an
effective date balance sheet of 30 September 2019.

Debt, working capital, and other purchase price adjustments, based on the 30 September 2019 locked box adjustments
resulted in final consideration of $63.6m being transferred to the vendors of Dairyworks. Immediately following
acquisition, the Group repaid $43.0m of outstanding debt and accrued interest which was assumed as part of the
acquisition, utilising existing banking facilities.

Dairyworks’ operations are located in Christchurch, New Zealand. It specialises in the processing, packaging, and
marketing of dairy products including cheese, butter, ice cream, and milk powder through it’s four brands Alpine, Rolling
Meadow, Dairyworks, and Deep South. Dairyworks is one of the largest sellers of everyday dairy products in the New
Zealand consumer market.

The acquisition has been accounted for in accordance with IFRS 3, Business Combinations. The following summarises
the consideration paid for Dairyworks and fair values of assets acquired and liabilities assumed recognised at the
acquisition date.

ANNUAL REPORT 2020PAGE 118 & 119

18. BUSINESS COMBINATIONS (CONTINUED)

Current Assets
Cash and cash equivalents
Trade receivables
Inventory
Other current assets

Non-current Assets
Intangible assets
Deferred tax assets
Capital work in progress
Property, plant and equipment
Right-of-use assets
Brands

Current Liabilities
Trade and other payables
Current tax liabilities
Loans and borrowings
Lease liability - current

Non-current Liabilities
Deferred tax liabilities attributable to fair value differentials
Lease liability - non-current

Total identifiable net assets at fair value
Goodwill arising on acquisition

Total consideration

Purchase price
Less: Effective date adjustment for working capital and net debt
Less: Interim period and other adjustments

Total consideration transferred
Less: Cash and cash equivalents acquired

Net cash outflow on acquisition

August 1, 2020

$’000

10,932
26,508
31,474
413

530
472
233
15,336
9,700
15,845

(29,137)
(4,573)
(43,224)
(1,399)

(4,609)
(8,301)

20,200
43,387

63,587

112,000
(40,441)
(7,972)

63,587
(10,932)

52,655

The land, buildings, plant and equipment, inventory, and brands have been recognised at acquisition date fair values
based on third party valuations. Right of use assets have been recognised at acquisition date present values of
remaining lease payments.

The acquisition gave rise to brand assets for the Rolling Meadow, Alpine, Dairyworks, and Deep South brands. The
brands were valued using the relief from royalty method. Key assumptions used in the valuation of the brand assets
were: notional royalty rate (25.0%), annual revenue growth rate (2.0% to 5.2%), post-tax discount rate (13.5%), and
terminal growth rate (2.0%).

Goodwill arose in the acquisition of the business operations of Dairyworks because the cost of acquisition reflected the
benefit of future cash flows above the current fair market value of the assets acquired, and the synergies and future
market benefits expected to be obtained from Dairyworks’ operations and related brands.

Acquisition costs of $0.8m and $0.1m have been recognised in the income statements for the years ended 31 July 2020
and 31 July 2019, respectively.

Impact of the acquisition on the results of the Group
From the date of acquisition, Dairyworks has contributed $81.5m to revenue and $2.5m to net profit after tax. Had the
combination not taken place, revenue of the Group from continuing operations would have been $1,220.5m, and the net profit
from continuing operations for the Group would have been $72.7m. Had the acquisition occurred on 1 August 2019, revenue of
the Group would have been $1,465.8m and net profit would have been $79.0m.

During FY20 the Group began to leverage synergies between Synlait Foods (Talbot Forest) Limited and Dairyworks by
establishing an integrated cheese value chain. For the purposes of goodwill impairment testing, the Group has treated Synlait
Foods (Talbot Forest) Limited and Dairyworks as a single consumer food service cash generating unit. See Note 8 for further
detail on goodwill and impairment testing.

(c) Prior Period Error
During the year, an immaterial prior period error was identified in relation to the recognition of the acquisition of Eighty-
Nine Richard Pearse Drive Limited (see Note 17 in the Group financial statements for the year ended 31 July 2017 for further
information on the acquisition).

As part of the acquisition, a building was acquired which was non-depreciable for tax purposes as it had an estimated useful
life of 50 years or greater (building cost of $8.5m). A deferred tax liability was not recognised on the building in accordance
with NZ IAS 12 Income Taxes and NZ IFRS 3 Business Combinations as the initial recognition exemption was incorrectly
applied. Had a deferred tax liability been recognised, goodwill recognised on the acquisition would have increased by $2.4m.

The Group has elected to correct the error in the current period to ensure accuracy of these balances going forward. Each of
the affected financial statement line items for the prior periods have been restated as follows

Balance sheet (extract)

Goodwill
Deferred tax liabilities

Increase/(decrease) to net assets

2017

$’000

2,383
(2,383)
-

2018

$’000

2,383
(2,383)
-

2019

$’000

2,383
(2,383)
-

2020

$’000

2,383
(2,383)
-

This error has had no impact on either the earnings per share or diluted earning per share of the Group in any of the reporting
periods affected.

ANNUAL REPORT 2020PAGE 120 & 121

19. OTHER INVESTMENTS

Investments in associates
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 is included in the carrying amount of the investment. Dividends reduce the carrying
value of the investment.

Associates
In January 2015, the Group acquired 25% of the shares of Sichuan New Hope Nutritionals, an infant formula company
registered in China. This company owns and markets the “Akara” and “E-Akara” 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:

Equity securities
Investment in associates

Total other investments

2020

$’000

110
33

143

2019

$’000

110
-

110

Gain/(loss) from continuing operations

Total

The carrying value of the investment in New Hope Nutritionals at balance date:

Synlait Milk Limited held, either directly or indirectly, interests in the following entities at the end of the reporting period:

Name of entity

Synlait Milk Finance Limited (Subsidiary)
The New Zealand Dairy Company Limited (Subsidiary)
Eighty Nine Richard Pearse Drive Limited (Subsidiary)
Sichuan New Hope Nutritional Foods Co. Ltd (Associate)
Synlait Business Consulting (Shanghai) Limited (Subsidiary)
Synlait Foods (Talbot Forest) Limited (Subsidiary)
Dairyworks Limited (Subsidiary)
Dairyworks (Australia) Pty Limited (Subsidiary)

Country of
Incorporation

New Zealand
New Zealand
New Zealand
China
China
New Zealand
New Zealand
Australia

Class of
Shares

Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary

Equity Holding

2019
%

100
100
100
25
100
-
-
-

2020
%

100
100
100
25
100
100
100
100

Opening balance
Share of gains/(losses)

Total

2020

$’000

2020

$’000

-
33

2019

$’000

(580)

2019

$’000

580
(580)

ANNUAL REPORT 2020
PAGE 122 & 123

20. RELATED PARTY TRANSACTIONS

Parent entity
Bright Dairy Holding Limited hold 39.02% of the shares issued by Synlait Milk Limited (2019: 39.04%). Bright Dairy Holding
Limited is a subsidiary of Bright Food (Group) Co. Limited, a State Owned Enterprise domiciled in the Peoples’ Republic of China.

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 Sichuan New Hope Nutritionals, an infant formula company
registered in China. This company owns and markets the “Akara” and “E-Akara” infant formula brands in the Chinese
market, which are exclusively manufactured by Synlait Milk Limited. New Hope Innovation (Hong Kong) Trading
Company Limited is a related entity of Sichuan New Hope Nutritionals and is engaged in the import and export of dairy
foods. Main products include whole milk powder, skim milk powder and whey powder. The company is the Hong Kong
operations of the Chinese New Hope Dairy group, New Hope Dairy.

In May 2017 Synlait Milk Limited acquired 100% of the share capital of The New Zealand Dairy Company Limited and
Eighty Nine Richard Pearse Drive Limited. The New Zealand Dairy Company Limited was constructing a blending and
canning plant in Auckland, which was subsequently sold to Synlait Milk Limited. The New Zealand Dairy Company
Limited is now a non-trading entity. Eighty Nine Richard Pearse Drive Limited owns the land and buildings at which the
Auckland blending and canning plant was constructed. Eighty Nine Richard Pearse Drive Limited leased its land and
buildings to The New Zealand Dairy Company Limited, and now leases them to Synlait Milk Limited.

In May 2019, Synlait Business Consulting (Shanghai) Limited was incorporated. The wholly owned foreign entity started
operations from 1 August 2019 and the principal activity of the entity is to provide services to assist Synlait to market
products in China.

In August 2019, the Group acquired selected assets and liabilities of Talbot Forest Cheese Limited. The acquirer was a
newly incorporated company, Synlait Foods (Talbot Forest) Limited. Synlait Foods (Talbot Forest) Limited manufactures a
variety of cheese products. Synlait Milk Limited supplies various dairy products to Synlait Foods (Talbot Forest) Limited,
most notably raw milk.

In April 2020, Synlait Milk Limited acquired 100% of the share capital in Dairyworks Limited. Dairyworks Limited
specialises in the processing, packaging, and marketing of dairy products, including cheese, butter, ice cream and milk
powder. Synlait Foods (Talbot Forest) Limited supplies manufactured cheese products to Dairyworks Limited. Dairyworks
Limited owns an Australian subsidiary, Dairyworks (Australia) Pty Limited.

Refer to Note 18 for further information on the acquisitions of both Synlait Foods (Talbot Forest) Limited and Dairyworks
Limited which occurred in the year ended 31 July 2020

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 2020. The total short-term benefits paid to the key management and personnel is set out below.

Short term benefits
Share based payments expenses (note 13)

2020

$’000

6,398
523

2019

$’000

5,773
644

ANNUAL REPORT 2020PAGE 124 & 125

20. RELATED PARTY TRANSACTIONS (CONTINUED)

21. CONTINGENCIES

The Group is currently involved in a dispute regarding restrictive covenants attached to land it purchased in Pokeno.

In February 2018, the Group announced the conditional purchase of 28 hectares of land in Pokeno to establish its
second nutritional powder manufacturing site. The land was subject to restrictive covenants limiting the development
of the land that the vendor was required to remove. The vendor applied to the High Court to have the restrictive
covenants removed.

In November 2018, the High Court removed the restrictive covenants. The High Court also declined to award
compensation to the covenant holder on the basis that they would not suffer any loss due to the extinguishment of the
covenants as they were of little practical value. The Group took legal title to the land following the High Court’s decision.
The covenant holder appealed to the Court of Appeal which in May 2019 overturned the High Court’s decision.

In June 2019, the Group filed an application for leave to appeal to the Supreme Court to have the Court of Appeal’s
decision overturned. The Supreme Court held an oral hearing on 21 October 2019 where leave to appeal was granted.
The appeal was heard by the Supreme Court on 3 and 4 June 2020 and the Group is yet to receive the Court’s ruling.

There are a range of possible outcomes for the Group including a negotiated settlement between the parties. Given the
range of possible outcomes the Group is not able to reliably estimate any potential liability.

No other significant contingent liabilities are outstanding at balance date (2019: $nil).

(a) 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 2020 (2019: $nil).

(ii) Other transactions and balances
Directors of Synlait Milk Limited control 3.0% of the voting shares of the company at balance date (2019: 3.0%)

(b) Transactions with other related parties

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
New Hope Innovation (Hong Kong) Trading Company Limited - Sale of milk powder products

2020

$’000

259

4,074
-
1,773

2019

$’000

196

6,464
(91)
-

(c) 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
Sichuan New Hope Nutritionals Ltd - Other costs

2020

$’000

-
(492)
(71)
292

2019

$’000

1
(233)
(72)
296

ANNUAL REPORT 2020PAGE 126 & 127

22. COMMITMENTS

23. EVENTS OCCURRING AFTER THE REPORTING PERIOD

On 3 August 2020, Synlait Milk Limited incorporated a new subsidiary, Synlait Milk (Dunsandel Farms) Limited. The newly
incorporated entity acquired two farms adjacent to the Group’s Dunsandel facility for $25.7m on the same day. The Group
received Overseas Investment Office approval to acquire the land on 24 February 2020.

There were no further events occurring subsequent to balance date which require adjustment to or disclosure in the
financial statements.

24. OTHER ACCOUNTING POLICIES

Cash and cash equivalents
Cash and cash equivalents comprise cash balances, call deposits and cash held on trust by Tax Management New
Zealand Ltd.

Goods and Services Tax (GST)
The profit and loss components of the statement 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.

(a) Capital commitments
Capital expenditure contracted for at the end of the reporting period but not yet incurred is as follows:

Pokeno processing plant
Liquid dairy packaging facility
Separator capacity upgrade
Dry Store 4
Pokeno Waste Water Initiative
Dunsandel farms (note 23)

Total

2020

$’000

10,264
1,188
419
14,100
571
25,700

52,242

2019

$’000

49,455
16,916
5,820
2,523
-
-

74,714

The above balances have been committed in relation to future expenditure on capital projects. Amounts already spent
have been included as work in progress. There are no commitments to note for Synlait Foods (Talbot Forest) Limited and
Dairyworks Limited.

(b) Operating lease commitments – group as lessee

Leases
The Group leases certain buildings, plant and equipment. Operating leases are where the lessor, rather than the
Group, has effectively retained the substantial risk and benefit of ownership of a leased item. Operating lease
payments are included in the determination of profit or loss in equal instalments over the period of the lease.
Lease incentives received are recognised on a straight line basis over the lease period. From 1 August 2019, this
policy only applies to short term and low value leases.

Less than one year
Between one and five years
Greater than five years

Total

2020

$’000

167
142
-

309

2019

$’000

3,468
4,897
537

8,902

The operating leases relate to the leasing of warehouse and office space, vehicles and printers. All terms are reviewed on a regular
basis. All leases are subject to potential renewal.

ANNUAL REPORT 2020PAGE 128 & 129

INDEPENDENT AUDITOR’S REPORT TO THE
SHAREHOLDERS OF SYNLAIT MILK LIMITED

Opinion
We have audited the consolidated financial statements of Synlait Milk Limited and its subsidiaries (the ‘Group’), which
comprise the consolidated statement of financial position as at 31 July 2020, 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 notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements, on pages 57 to 127, present fairly, in all material
respects, the consolidated financial position of the Group as at 31 July 2020, and its consolidated financial performance
and cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting
Standards (‘NZ IFRS’) and International Financial Reporting Standards (‘IFRS’).

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (‘ISAs’) and International Standards on
Auditing (New Zealand) (‘ISAs (NZ)’). Our responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

We are independent of the Company in accordance with Professional and Ethical Standard 1 International Code of Ethics
for Assurance Practitioners (including International Independence Standards) (New Zealand) issued by the New Zealand
Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ International
Code of Ethics for Professional Accountants (including International Independence Standards), and we have fulfilled our
other ethical responsibilities in accordance with these requirements.

Other than in our capacity as auditor and the provision of other assurance and taxation compliance services, we
have no relationship with or interests in the Company or any of its subsidiaries. These services have not impaired our
independence as auditor of the Company and Group.

Audit materiality
We consider materiality primarily in terms of the magnitude of misstatement in the financial statements of the Group that
in our judgement would make it probable that the economic decisions of a reasonably knowledgeable person would be
changed or influenced (the ‘quantitative’ materiality). In addition, we also assess whether other matters that come to our
attention during the audit would in our judgement change or influence the decisions of such a person (the ‘qualitative’
materiality). We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

We determined materiality for the Group financial statements as a whole to be $5,150,000.

Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
consolidated financial statements of the current period. These matters were addressed in the context of our audit of
the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.

KEY AUDIT MATTER

Pōkeno Land Legal Dispute

HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER

In February 2018 the Group announced the conditional
purchase of 28 hectares of land in Pōkeno to establish
its second nutritional powder manufacturing site.

In November 2018, the High Court removed the
covenants which would have hindered development of
the land. The Group took legal title to the land following
the High Court’s decision.

In May 2019 the Court of Appeal overturned the High
Court decision to remove the covenants.

In June 2019 leave was filed to appeal to the Supreme
Court with an oral hearing occurring in October and the
hearing taking place in June 2020.

The Group continues to be involved in legal
proceedings and as at the date of this report there has
been no ruling made by the Supreme Court.

The disclosure about and explanations of the legal
dispute are contained in note 21 of the notes to the
consolidated financial statements.

We have included the Pōkeno legal dispute as a
key audit matter due to the level of judgement and
uncertainty in relation to the legal dispute and the range
of possible outcomes.

We have evaluated the appropriateness of the
accounting treatment, the assessment of the potential
outcomes of the proceedings and the accounting
presentation of the legal dispute by performing the
following procedures:

•

Reading the High Court and Court of Appeal
judgements relating to the legal dispute;

• Discussing the matters with the Group’s senior
management including internal legal counsel;

• Obtaining and assessing the contents of a legal

confirmation letter from the external counsel who
are advising the Group on this matter; and

•

Challenging management’s assessment of
the potential outcomes of proceedings and
the appropriateness of treating the legal dispute
as a contingent liability in accordance with NZ
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.

We have found that the legal dispute has been
appropriately disclosed as a contingent liability
within note 21 to the notes to the consolidated
financial statements.

ANNUAL REPORT 2020PAGE 130 & 131

KEY AUDIT MATTER

Acquisition Accounting

HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER

As detailed in note 18(b), Synlait Milk Limited acquired
100% of Dairyworks Limited (“Dairyworks”) for a total
consideration of NZD $112m on 1 April 2020. The
acquisition resulted in the recognition of indefinite life
intangible assets comprising brands of $15.8m and
$43.4m of goodwill.

New Zealand accounting standards require the
purchaser to identify the assets and liabilities acquired
in a business combination, including identifiable
intangible assets, and to measure them at fair value at
the date of acquisition.

The Dairyworks brands has been valued using the relief
from royalty method. The key assumptions applied in
the model were:

•

revenue growth rates;

post-tax discount rate;

royalty rate; and

terminal growth rate.

We included the identification and valuation of
intangible assets arising from the Dairyworks acquisition
as a key audit matter because the Group’s acquisitions
are considered a key area of interest for investors and
because of the size of this acquisition and the level of
intangible assets. There is also significant judgement
involved in identifying the intangible assets acquired
and determining the appropriate methodology and key
assumptions to calculate their fair value.

We have evaluated the appropriateness of the
accounting treatment for the intangible assets arising
from the acquisition of Dairyworks, by performing the
following procedures:

• Obtaining the sale and purchase agreement and
related documents to corroborate the assets and
liabilities acquired, focusing on the identification
and measurement of intangible assets;

•

utilising our knowledge to assess the Group’s
identification of intangible assets and consider what
is represented by residual goodwill;

comparing the forecast sales used in the valuation of
the Dairyworks brands to approved forecasts; and

challenging the reliability of the revenue growth
rates by comparing the forecasts underlying the
growth rates to historical forecasts and actual
results of the underlying business.

We used our internal valuation specialists to assess the
appropriateness of the nature and valuation of the intangible
assets identified by the Group. This assessment included:

•

evaluating the appropriateness of the valuation
methodology and testing the mechanics of the model;

evaluating the post-tax discount rate applied in the
model through comparison to the cost of capital for
the business and to external market data;

and comparing the Group’s assumed royalty rate to
market data for similar intangible assets.

We have found that the identification and valuation
of intangible assets arising from the Dairyworks
acquisition have been appropriately accounted for in
the consolidated financial statements.

Other information
The directors are responsible on behalf of the Group for the other information. The other information comprises the
information in the Annual Report that accompanies the consolidated financial statements and the audit report. The Annual
Report is expected to be made available to us after the date of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form
of assurance conclusion thereon.

Our responsibility is to read the other information identified above when it becomes available and consider whether the other
information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.

Directors’ responsibilities for the consolidated financial statements
The directors are responsible on behalf of the Group for the preparation and fair presentation of the consolidated financial
statements in accordance with NZ IFRS and IFRS, and for such internal control as the directors determine is necessary to enable
the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible on behalf of the Group for assessing
the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or
have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
ISAs and ISAs (NZ) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.

A further description of our responsibilities for the audit of the consolidated financial statements is located on the
External Reporting Board’s website at: https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-
responsibilities/audit-report-1

This description forms part of our auditor’s report.

Restriction on use
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.

Andrew Dick, Partner
for Deloitte Limited
Auckland, New Zealand
25 September 2020

ANNUAL REPORT 2020PAGE 132 & 133

CORPORATE
GOVERNANCE

Good corporate governance is top of mind for Synlait’s Directors. It is a critical step in protecting the interests
of our shareholders, customers, suppliers and other stakeholders. We strive to keep up to date with new
developments, as appropriate for our business.

Synlait’s shares are quoted on the NZX Main Board, and on the ASX. In December 2019 Synlait issued $180 million
of subordinated bonds listed on the NZX Debt Market.

In this section, we report on the extent to which we followed the recommendations in the NZX Corporate Governance
Code in the year to 31 July 2020. This section is current as at 31 July 2020 and has been approved by the Board.

Synlait acquired two operating subsidiaries in the year to 31 July 2020. A review will be undertaken in FY21 of
their governance policies and procedures, including those addressed in the Corporate Governance Code.
Where appropriate, Synlait’s policies and procedures will be extended to those subsidiaries.

Synlait Dunsandel

ANNUAL REPORT 2020PAGE 134 & 135

PRINCIPLE 1: CODE OF ETHICAL BEHAVIOUR

PRINCIPLE 2: BOARD COMPOSITION AND PERFORMANCE

‘Directors should set high standards of ethical behaviour, model this behaviour and hold management accountable
for these standards being followed throughout the organisation.’

‘To ensure an effective Board, there should be a balance of independence, skills, knowledge, experience
and perspectives.’

Standards of Ethical Behaviour
Synlait’s reputation matters to us. Synlait is committed to maintaining the highest standards of honesty, integrity and
ethical conduct. Historically, this commitment has been embodied in our Code of Ethics and Synlait Standards Policy.
These are complemented by our Whistleblower Policy, Securities Trading Policy, Continuous Disclosure Policy,
Conflict of Interests Policy and Related Parties Transaction Policy. These policies outline in detail the expectations
of people working with us. They include requirements to comply with all laws, as well as applicable internal rules,
policies and procedures, deal fairly, not engage in bribery and corruption, and be circumspect with gifts, meals and
entertainment. They also record that Synlait will not tolerate discrimination, bullying or harassment.

In July 2020 we consolidated our Code of Ethics and Synlait Standards Policy into one document, the new Synlait
Standards Policy, which will be reviewed annually.

Our Whistleblower Policy supports the Synlait Standards Policy and the other associated policies. It is important that
everyone at Synlait feels able to raise concerns about conduct. This policy gives those concerned about behaviour a
process for raising those concerns, and assurance that their confidence will be protected where possible.

Breaches of the Synlait Standards Policy are treated seriously.

Securities Trading Policy
Synlait’s Securities Trading Policy and Guidelines summarises the law on insider trading and Synlait’s restrictions on
Directors and employees dealing in Synlait’s shares. The policy introduces a trading prohibition for Directors and certain
employees at defined times (“blackout periods”). Outside the blackout periods, Directors and those employees are
required to obtain consent before dealing in Synlait shares.

New Directors and employees receive information about this Policy when they commence with Synlait. Employees are
also reminded about the Policy from time to time, including around the time of blackout periods.

Board Charter
Synlait’s Board of Directors’ Charter sets out the roles and responsibilities of the Board and its office holders, as well as
other key information about the operation of the Board, including a requirement that the Board meets formally at least
six times per year.

The Board delegates responsibility for implementing Synlait’s strategic direction and managing Synlait’s day-to-day
operations to the Chief Executive Officer. This delegation is enacted in our Delegated Authorities Policy which
all employees have access to. Management provides regular reports to the Board to assist the Board in meeting
its responsibilities.

Nominations and appointment of Directors
Our Constitution, as approved by shareholders on 27 November 2019, includes our specific governance arrangements,
including those relating to the makeup of our Board, and the Director appointment process. The Constitution relies on
waivers from NZX Regulation granted on 27 November 2019 (in replacement for waivers granted before Synlait was listed).
The full waivers are on our website and they are summarised from page 165.

The minimum number of Directors required to comprise Synlait’s Board is three. The maximum number is eight.
At least two Directors must be ordinarily resident in New Zealand. Currently, Synlait is required to have three
independent Directors and a Managing Director of a Board Appointed Director. It currently has a Board Appointed
Director, Dr John Penno. While it meets agreed shareholding thresholds, one of Synlait’s shareholders, Bright Dairy
Holding Limited (Bright Dairy), is entitled to appoint four directors, one of whom must be ordinarily resident in New
Zealand and a Director of such standing and with such commercial and governance experience in New Zealand as
is appropriate for a Director of an NZX listed company. That Director is the Hon. Ruth Richardson.

In preparation for Bill Roest’s retirement at the Annual Meeting in 2020, and Graeme Milne’s retirement in 2021, the
People, Environment and Governance Committee has established a Nominations Sub-Committee. The Charter of the
People, Environment and Governance Committee has been updated to include more detail around the Committee’s
roles and responsibilities in relation to nomination and appointment of Directors, and to outline the roles and
responsibilities of the Sub-Committee.

The People, Environment and Governance Committee is responsible for making candidate recommendations to the
Board. They use an external search company to assist them with this. In selecting candidates, they consider factors
such as experience, qualifications, character, criminal record, bankruptcy history, judgment, the ability to work with other
Directors, current Board composition and skill set, ability to fit with culture and independence. The principles of our
Diversity and Inclusion Policy are also considered. Before any candidate is finally selected, appropriate fit and proper

ANNUAL REPORT 2020PAGE 136 & 137

checks are undertaken. Important information about candidates will be provided to shareholders in the notice of the
meeting at which they will vote on the appointment of a new Director.

Written agreements with Directors
It is important that all newly appointed Directors understand Synlait’s expectations of them, and the entitlements that
they will receive as a Director of Synlait. Synlait requires that all newly appointed Directors enter into agreements with
Synlait outlining their terms of appointment. This agreement addresses matters such as time commitment required,
standards to be met, remuneration arrangements, indemnity by Synlait, and insurance.

Disclosure of Information about Directors
Our current Board is shown on page 36 of this report and profiled on our website (https://www.synlait.com/people/).
Other information about our Directors, including their remuneration, participation in Synlait securities and other interests is
disclosed in the Statutory Information Section of this report starting on page 153.

Attendance at Board and Committee meetings in the year to 31 July 2020 was as follows:

Director

Board meetings attended

Audit and Risk Committee

People, Environment and
Governance Committee

Bill Roest
Graeme Milne ONZM
Dr. John Penno
Min Ben
Qikai Lu
Hon. Ruth Richardson
Sam Knowles
Sihang Yang

10/10
10/10
10/10
7/10
10/10
10/10
9/10
10/10

4/4
4/4

2/4

4/4
4/4

2/4

4/4
4/4

Diversity and Inclusion Policy
Synlait’s Diversity and Inclusion Policy requires the Board to promote a culture of diversity and inclusiveness. It does by
putting in place appropriate strategies and measurable objectives. Management must report to the Board on diversity
initiatives and progress against the strategies and measurable objectives. The Board conducts an annual assessment of our
Diversity and Inclusion Policy, our objectives set under that Policy, and the progress made towards achieving them.

We aim to achieve three main goals:

• Workforce Diversity – employ, develop and retain more women and Maori.

• Diversity through Leadership – empower and equip our people leaders to recruit, develop and retain a diverse and

competent workforce.

• Workforce inclusion – foster a culture that encourages flexibility and fairness, to enable all employees to realise

their potential, and thereby increase employee retention.

Our success will be measured against the following as at the end of 2023:

•

Reduction of the gender pay gap to ≤ 5%;

40-50% of leadership positions (People Leaders, Supervisors, Specialist roles and Senior Leadership)
held by women;

• No regretted losses of high potential female employees.

Mātua (our Parental Leave Policy) and Tāwariwari, (our Flexible Working Policy) assist us in meeting these goals. Since the
introduction of these policies all our staff who have taken maternity leave have returned to work when expected.

We also offer un-conscious bias training and require regular reporting to the Board on candidate diversity.

In the year to 31 July 2020, our representation of women in leadership (People Leaders, Supervisors, Specialist roles and
Senior Leadership) increased from 37% to 38% and the gender pay gap remained at 13%. We had no regretted losses of high
potential female employees and continue to focus on attracting to Synlait the diverse talent pool we are looking to achieve.

Information collected in relation to the diversity of our Senior Leadership Team (comprising the Chief Executive Officer,
his direct reports, and three additional managers who do not report to the Chief Executive Officer) as at 31 July 2020 is
as follows (corresponding information for FY19 is in brackets):

Gender

Domicile

(based on current residence)

Language spoken

Senior Leadership Team

Female

3 (2)

Male

9 (11)

Total

12 (13)

New Zealand

12 (13)

% Female

25 (18)

Other

0 (0)

English only

Two languages

Three or more

7 (9)

3 (1)

2 (3)

Director training
It is important that our Board stays up to date with market developments and has a good understanding of both Synlait’s
business and industry, and governance related matters. Each year our Board is involved in two strategy workshops with
management to agree Synlait’s vision and strategy. In addition, they spend a week together learning about various aspects
of Synlait’s business. In September 2019 the Board travelled to China to learn more about trading with China, and the
infant, dairy and food service industries in China. They attended meetings with Bright Dairy, undertook market visits and
participated in discussions focused on these areas.

ANNUAL REPORT 2020PAGE 138 & 139

New Directors will also participate in an induction programme, designed to educate them about Synlait, its business and
its governance arrangements, so that they are well prepared for their role.

‘The board should use committees where this will enhance its effectiveness in key areas, while
still retaining board responsibility.’

PRINCIPLE 3: BOARD COMMITTEES

Assessment of Director, Board and Committee performance
Our Board Chair conducts an annual review of the Board and each Director, as required by our Board’s Charter.
The People, Environment and Governance Committee puts in place processes to assist with the review of the
performance of the Board, and the performance of individual Directors, including that of the Chair and Committee
Chairs, and the Board Appointed/Managing Director. An external review is conducted every three years.

Independent Directors
Three of our eight Directors are Independent. This meets the requirement in our Constitution for the number of
independent directors (as permitted by waivers issued by NZX Regulation), but does not satisfy Recommendation 2.8 in
the Corporate Governance Code which suggests that majority of our Board should be Independent. More information
about the the makeup of our Board and the waivers issued by NZX Regulation can be found from page 165.

Synlait’s Board Charter was updated this year and now includes more prescriptive requirements regarding Director
independence. These include considerations such as previous employment by Synlait or its subsidiaries, provision of
professional services to Synlait or its subsidiaries, business relationships with Synlait or its subsidiaries, relationship with
substantial security holders, close personal ties, length of tenure and other interests.

Synlait has considered whether its Independent Directors are independent against the definition in the NZX Listing
Rules, the commentary to Recommendation 2.4 in the Code, and its Board Charter and is satisfied that its Independent
Directors are Independent. Their interests in shares in Synlait, and other relevant information is disclosed in the
Statutory Information section of this report starting on page 153.

Chair of the Board
Synlait’s Chair, Graeme Milne, is an Independent Director as required by our Constitution.

Synlait has two Board Committees: the Audit and Risk Committee and the People, Environment and Governance Committee
(which now has the Nominations Sub-committee). These Committees undertake the operations described in their respective
Charters. The Chair of each Committee reports back to the Board at each Board meeting, and makes recommendations,
to the Board, when necessary. Synlait considers it has an adequate range of Committees for its size.

Audit and Risk Committee
Committee members: Bill Roest (Chair), Graeme Milne, Qikai Lu
The members of the Audit and Risk Committee are nominated by the Board, and most of their number, and the Chair,
must be Independent Directors. At least one member of the Risk and Audit Committee must have accounting or related
financial experience. The makeup of the Committee meets these requirements.

The 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). Bill will step down from our
Board, and therefore the Audit and Risk Committee, at this year’s Annual Meeting. Qikai Lu has considerable financial
and business experience and has previously been a public accountant with one of the ‘big four’ chartered accounting
firms in China.

This Committee ensures that the Board is aware of matters that may significantly affect the financial condition or affairs
of Synlait’s business, and it prepares any reports required by law, regulation or the NZX Listing Rules or requested
by the Board. It reviews the interim financial statements, annual financial statements and preliminary announcements
before their release. It oversees risk management at Synlait, legislative and other compliance (including with internal
policies), tax management, treasury management and sales management. Its role with respect to Synlait’s auditors,
both external and internal, is discussed on page 149.

As required by its Charter, the Committee reviews its performance against its Charter, and the Charter itself, at least
once per year.

The Chief Executive Officer, Chief Financial Officer, Director Legal, Risk and Governance and Company Secretary have a
standing invitation to attend meetings of this Committee. Other members of Synlait’s management team may attend on
specific invitation only.

ANNUAL REPORT 2020PAGE 140 & 141

People, Environment and Governance Committee
Committee Members: Sam Knowles (Chair), Graeme Milne, the Hon. Ruth Richardson, Bill Roest and Min Ben
The People, Environment and Governance Committee performs key human resources (including remuneration),
governance and sustainability tasks for the Board. The majority of the Committee’s members must be Independent,
and the Board appoints the Chair of the Committee. At least one of the Committee’s members must have experience
with a listed company. The composition of the Committee meets these requirements.

In 2020, the People, Environment and Governance Committee established its Nominations Sub-committee to assist
with preparations for the nomination and/or appointment of new Directors. The role of the Sub-committee is described
in more detail in the Charter of the People, Environment and Governance Committee. Independent Directors Graeme
Milne and Sam Knowles are the members of the Sub-committee.

The Chief Executive Officer, Director, People, Culture and Performance, Director, Legal, Risk and Governance, Director,
Sustainability and Brand and Company Secretary have a standing invitation to attend meetings of this Committee.
Other members of Synlait’s management team may attend on specific invitation only.

Takeover Protocols
Synlait has a Takeovers Policy setting out the procedure to be followed if there is a takeover offer for Synlait. That Policy
records that the Board may establish an Independent Takeover Committee, including Synlait’s Independent Directors,
to manage the process.

PRINCIPLE 4: REPORTING AND DISCLOSURE

‘The Board should demand integrity in financial and non-financial reporting, and in the timeliness and balance of
corporate disclosures.’

As a result of its listings on the NZX and the ASX, Synlait is required to comply with strict reporting and disclosure
requirements to keep its shareholders, customers and other stakeholders informed as to its activities.

Continuous Disclosure
Our Continuous Disclosure Policy assists staff to comply with the strict reporting and disclosure requirements imposed
on Synlait as a listed company. All staff are required to be familiar with Continuous Disclosure Policy and associated
procedures so that they can identify a potential need for disclosure. All Directors and members of Synlait’s Senior
Leadership Team are primarily responsible for compliance with the disclosure obligations and implementing the
Policy effectively.

Documents available on Synlait’s website
Synlait publishes its key Charters, Policies and Standards, including those referred to in this report and other key
documents, on its website.

Financial reporting
At each Board meeting our full Board is presented with a detailed Business Performance Report (BPR), which considers
our financial performance. It identifies any risks, issues and opportunities, and attempts to quantify the upsides and
downsides should any of these eventuate. The BPR also measures forecasts against actual performance and explains
the reasons for any variances – including whether these are timing differences or permanent variances.

Synlait is committed to ensuring the integrity and timeliness in its financial reporting, and to providing information
to shareholders in a timely manner. The Board has a rigorous process to ensure the quality and integrity of our
financial statements.

ANNUAL REPORT 2020PAGE 142 & 143

The Audit and Risk Committee oversees external financial reporting, including the accuracy and timeliness of financial
statements. It is charged with reviewing in significant detail the financial statements and accompanying materials.
After approval by the Audit and Risk Committee, the complete set of financial statements and related report is submitted
to the full Board for approval.

Management makes detailed representations to the Board to assist them in their consideration of the draft financial
statements. Each Director is obliged to form a view on the quality, accuracy and integrity of the financial statements and annual
report and give their approval (or not) in accordance with the Financial Markets Conduct Act 2013 and Companies Act 1993.

Care is taken to ensure that all reporting to investors is accurate, balanced and clear. Synlait’s full and half year financial
statements were prepared in accordance with relevant financial standards. The full year financial statements are set out
on pages 57 - 127 of this report.

On our website, we have our previous years’ financial statements, investor presentations and analyst briefings available
for our shareholders.

Non-financial disclosure
Our annual report has traditionally been focused on reporting against financial measures. In FY19, we established our
sustainability framework and related Sustainable Innovation Platforms (SIPs) which align to our purpose and strategy.
We also established baseline information in relation to some of our goals. We intend to publish a separate sustainability
report in November 2020.

PRINCIPLE 5 - REMUNERATION

‘The remuneration of directors and executives should be transparent, fair and reasonable.’

Director remuneration
The People, Environment and Governance Committee is responsible for reviewing the structure of Directors’ remuneration.
It obtains independent advice on appropriate remuneration and recommends to the Board the remuneration to be
proposed for shareholder approval at the annual meeting. The independent advice considers the remuneration paid to
Directors of similar companies to Synlait.

Current Directors’ remuneration is set out in the statutory information section of this report on pages 159 - 160, and
was approved by shareholders on 27 November 2019. The Director remuneration report prepared by Ernst & Young in
September 2019 for shareholder consideration is on our website.

Remuneration Policy
The principles applying to remuneration of our Directors and employees are set out in our Strategic Remuneration
Policy. They are designed to ensure that Synlait meets the strategic policy objective of attracting, rewarding and
retaining staff with the requisite skills and capabilities to ensure our successful business outcomes.

The People, Environment and Governance Committee oversees the implementation of our Strategic Remuneration
Policy, including recommending to the Board remuneration for the CEO and other business leaders, and budget
parameters for the annual pay review.

Director remuneration is paid by way of Director Fees. Employee fixed remuneration comprises a base salary, employer
KiwiSaver contributions (for participating employees), and medical insurance. Remuneration is reviewed yearly for
eligible employees, with any changes based on market movement, position in the salary range, and performance.

Synlait does not offer bonuses or other short-term incentives. It operates a Long-Term Incentive Scheme (LTI Scheme)
which a small group of selected senior employees are invited to join each year. Any benefits from the LTI Scheme are in
addition to the salary and other benefits agreed with the participating employee.

The LTI scheme is an annual scheme with Performance Share Rights (PSRs) granted to Board-approved participants
in July in each year it operates. PSRs are non-transferable and have no voting or other share rights and are otherwise
subject to the rules of the LTI Scheme and individual award agreements.

ANNUAL REPORT 2020PAGE 144 & 145

Each PSR will be converted into one ordinary share in Synlait after the Board determines that specified performance
hurdles have been met during the assessment period of three financial years following the date of the grant. This is
provided however that the employee remains employed by Synlait at the end of the assessment period. No cash
consideration is payable by the employee on the grant of PSRs, or on the issue of fully paid ordinary shares following
vesting of PSRs.

The LTI Scheme requires two performance hurdles to be met, relating to total shareholder return (TSR) and earnings per
share (EPS). Vesting of half of the total award is dependent on the TSR target being met, and the remaining half, the EPS
target being met. The degree of vesting in each case is determined by a progressive vesting scale. If our TSR is greater
than or equal to the 75th percentile of a peer group over the assessment period, a minimum of 50% of the PSRs will vest.
The peer group comprises the S&P/NZX 50 index companies on the first day of the assessment period. If our EPS over
the assessment period equals the Board approved EPS target plus 10%, then a minimum of 50% of the PSR will vest.
For either performance hurdle to be met, our TSR must be positive over the assessment period.

In 2019, Synlait issued 83,880 shares to senior employees under the 2017 LTI Scheme. Vesting of annual awards is
monitored to ensure that the value vested in any one year does not exceed 5% of market capitalisation, as required by
NZX Listing Rules.

There are currently 334,880 PSRs on issue. The PSRs have been issued under the 2018, 2019 and 2020 LTI Schemes,
and may vest as contemplated by the terms of the LTI Scheme, in each case based on Synlait’s performance over the
previous three financial years.

Chief Executive Officer Remuneration
In the year to 31 July 2020, Leon Clement’s remuneration comprised of a base salary of $915,236, a 3% employer
KiwiSaver contribution, and medical insurance. Leon was also awarded 23,372 PSRs as a part of Synlait’s FY20 LTI
Scheme. Those PSRs had a value as at 31 July 2020 of $162,903, on the assumption that all PSRs convert to shares
after 31 July 2022.

PRINCIPLE 6 - RISK MANAGEMENT

‘Directors should have a sound understanding of the material risks faced by the issuer and how to manage them.
The Board should regularly verify that the issuer has appropriate processes that identify and manage potential and
material risks.’

Synlait’s risk management framework and risks
Synlait’s risk management framework is aligned to ISO31000:2018 guidelines. Synlait operates under a Risk
Management Policy, with supporting standards and procedures to achieve a consistent approach. The Board has
approved the Policy, which documents Synlait’s healthy strategic risk appetite. Four principles are recognised in the
Policy as guiding all risk-related activities and decision making:

• Nothing we do is worth getting hurt for;

• We do not accept activities, behaviour or decisions which create uncontrolled risk to the consumers of our products;

• We do not accept activities, behaviour or decisions which knowingly constitute a legal or regulatory breach;

• We do not accept uncontrolled risks that could result in a significant loss of revenue, profitability and/or earnings.

Several other policies and procedures are in place to support active management of key operational risks.
These include a Delegated Authorities Policy, Tax Risk Management Policy, Health Safety and Wellbeing Policy
and Food Safety and Quality Policy.

The Audit and Risk Committee is responsible for ensuring management:

• Has processes for identifying, assessing and responding to strategic and operational risks;

•

Is promoting an appropriate “control culture” throughout the business, with supporting processes and
systems in place.

Is regularly reviewing and evaluating the effectiveness of these processes, and implementing
improvements identified.

The Committee reviews Synlait’s risk profile at each meeting, along with progress on mitigations and material
changes. A summary of the profile and changes is provided to the Board at each meeting.

At Synlait, risk is everyone’s responsibility. This principle is supported by an integration of risk management
processes within key business functions and activities including:

•

Integrated Business Planning (IBP), with formal risk review processes built-in throughout each cycle.

Project Management Office (PMO), with detailed risk assessment and management processes embedded
at all levels.

• Health, Safety and Wellbeing, including a thorough permit to work process and critical risk programme.

ANNUAL REPORT 2020PAGE 146 & 147

Synlait’s enterprise risk management framework is applied across all sites and operations, including those of subsidiaries.
Existing risk management processes with new subsidiaries, Dairyworks Limited and Synlait Foods (Talbot Forest) Limited,
are being aligned to the Synlait framework, with material risks affecting those businesses forming part of management
reporting to the Audit and Risk Committee and Board.

To ensure consistency and appropriate focus, Synlait assesses risks as either:

•

Strategic – that is, risks faced by Synlait because of the strategic objectives and/or decisions taken; or

• Operational – that is, risks faced in in the pursuit of delivering on the objectives.

This table below summarises material risks currently being monitored by the Board and management.

Risk type

Short description

Mitigation

Strategic

Market access

Our Regulatory and Corporate Affairs teams proactively manage this risk through:

•

Regular scanning of the regulatory environment for trends, changes and areas of
potential risk for Synlait.

Maintaining strong relationships with local and international networks to calibrate or
strengthen our understanding of potential changes and their impact;

Regular engagement with key New Zealand international industry groups - including
Dairy Companies Association of New Zealand, DairyNZ and the Infant Nutrition
Council - to promote the interests of Synlait and New Zealand dairy; and

Regular and meaningful engagement with relevant

Ministers, officials and advisors to build understanding of Synlait’s business, our
interests and shared commitments.

Synlait is committed to enhancing its sustainability reporting. As part of our
Sustainability Framework, eleven Sustainable Innovation Platforms (SIPs) have
been identified.

•

• Within each of these, detailed targets and implementation plans are developed and
closely tracked by management, with regular reporting to the Board via the People,
Environment and Governance Committee.
Active monitoring of changes in the global nutrition market across multiple
functions including category management, research and development, technical
and regulatory.
Regular engagement in market research and analysis to understand consumer and/
or market preferences.
Synlait Way of Working has been developed to support agile and flexible culture.
This was operationalised prior to COVID-19 and has been further refined as part of
the COVID review process.
Regular employee engagement surveys and planning processes to ensure teams
make tangible progress on key drivers of engagement.

•

Delivering on sustainability

Consumer substitution

Maintaining agile culture

Risk type

Short description

Mitigation

Operational Major site or supply chain
disruption
Major health and safety event As described on page 148.
Major food safety / quality
event

•
•

Business continuity plans in place at all operational sites.
Service level agreements in place with key providers and partners.

Technology compromise

Major compliance breach

Talent management

Comprehensive quality management system in place which includes:
•
•

Strict operational controls throughout the value chain;
Thorough testing programmes, including raw milk, ingredients, finished product
and across processing environment;
Training for all staff commensurate to their position; and
Regular internal and external audits to verify controls and drive a focus on
continuous improvement.
Cyber security programme of work commenced in FY20 to lift capability to prevent,
prepare for and respond to disruptive events.
Contingencies and disaster recovery plans in place to mitigate impacts of
disruption.

•
•

•

Compliance programme in place, currently under refresh (to be completed early FY21).
Monitoring and regular reporting of compliance obligations and performance against these.
•

Continued development of the Future Leaders programme, which aims to attract
and develop leaders in line with purpose, ambition and strategy;
Investment in best-in-class systems to support a highly effective talent acquisition
process;
Comprehensive workforce planning and talent review processes embedded in
regular management reviews; and
Continued refinement of the Perform and Grow framework, ensuring every
employee is engaged in regular development activities.

•

System and process maturity

Investment in an enterprise resource planning (ERP) system to enhance core
operational systems.

ANNUAL REPORT 2020PAGE 148 & 149

PRINCIPLE 7 – AUDITORS

Health and Safety Risks
Synlait measures proactive and reactive measures of health, safety and wellness (HSW). These include our Total
Recordable Injury Frequency Rate (TRIFR), Near Miss and New Hazard frequency rates, and Injury Severity frequency rate.

Over the course of FY20, Synlait’s TRIFR decreased from 13.7 to 7.6. The target was 9.0.1

Synlait has identified five critical health and safety risks in its business. They are hazardous gases, working at heights,
material handling equipment, working in confined spaces and State Highway One (traffic). We have projects actively
seeking to reduce the likelihood and consequence of an event linked to those critical risks being fatal or seriously harming
any person (employee or contractors).

‘The board should ensure the quality and independence of the external audit process’.

External Auditors
The Audit and Risk Committee plays a key role in Synlait’s audit process. It is responsible for recommending the
appointment of the external auditors to the Board, overseeing the independence and the work of the external auditors;
as well as reviewing policies for the provision of non-audit services by the external auditor (including the framework for
pre-approval of any such services).

Currently, Deloitte is the Synlait group’s external auditor. A representative from Deloitte attends our Annual Meeting
of Shareholders where the lead audit partner is available to answer questions from shareholders.

As part of our strategy to reduce the likelihood of an ammonia leak, and the impact of any leak, we have recently
completed an external ammonia safety assessment. The ammonia safety assessment provided us with assurance our
current system is of a high standard.

The Audit and Risk Committee meets regularly with Deloitte, (including meeting without management present).
Annually, the Audit and Risk Committee reviews and assesses Deloitte’s performance through an internal
questionnaire. The results, key themes and recommendations are reported to the Board.

In FY20 we implemented 45 engineering controls to reduce the risk of falls. This was a shortfall of 19 against our FY20
target, as a result of the COVID-19 restrictions. We intend to complete a further 105 in FY21.

The business has strengthened its focus on quality real time health and safety training that is specific to the needs of
individual employees. We have selected two core providers to deliver tailored health and safety training that, at minimum,
meets the New Zealand unit standards. One of the key factors of the success of this training is that it is delivered on site
with our people.

Deloitte confirms their independence from the Company to the Audit and Risk Committee in March and September
each year. Non-audit services performed by Deloitte are closely examined by management and the Chair of the Audit
and Risk Committee prior to engaging Deloitte for these additional services, to ensure that they do not compromise
Deloitte’s independence.

In the year to 31 July 2020, our total payments to Deloitte were as follows:

We have deployed a permit to work system at Synlait Pokeno, to assess and control the risk of work undertaken on our
sites, ranging from simple painting jobs to high risk activities involving confined spaces, heights and cranes. We had
intended to have the same system in place at Synlait Dunsandel by the end of FY20, however COVID-19 restrictions
delayed the implementation of this.

Audit and Assurance Work
Taxation Compliance and accounting advice1
Percentage non-audit
Percentage audit

$463,115
$52,917
10%
90%

In FY20, an internal audit was completed on the occupational health and safety management systems at Synlait, based
on ISO45001, an international standard that provides a framework to support organisation in the identification of health
and safety risks. The internal audit has provided the business with the ability to identify some process and procedures
improvements to ensure that our health and safety framework is robust, yet flexible enough to adapt with the business.

More information on Synlait’s health and safety initiatives will be included in our Sustainability Report published later this year.

1Health and Safety is managed separately at operating subsidiaries.

1 Various engagements for members of the Group including income tax return review, GST review, FBT reviews, high-level review of
tax governance processes, subsidiary onboarding, and ad hoc review work. These services are compliance in nature and are not

inconsistent with Deloitte’s role as auditor. Deloitte’s ongoing role as provider of tax compliance services was approved by the Audit

and Risk Committee.

Internal audit
Synlait has a Senior Internal Auditor who performs key risk and business process focused internal audit reviews across
Synlait’s operations. These are undertaken as part of an annual programme of work agreed with the Audit and Risk
Committee. The Audit and Risk Committee is responsible for reviewing the activities, resources and organisational
structure of the internal audit function. In due course, internal audits will extend to Synlait’s operating subsidiaries,
as determined appropriate by the Audit and Risk Committee.

ANNUAL REPORT 2020PAGE 150 & 151

PRINCIPLE 8 - SHAREHOLDER RIGHTS AND RELATIONS

‘The Board should respect the rights of shareholders and foster relationships with shareholders that encourage
them to engage with the issuer.’

It is important that we communicate with our shareholders to keep them informed. It is equally important that they
can communicate with us and exercise their shareholder voice.

Website
We aim to ensure investors understand all our activities by communicating regularly with them, using clear and
balanced information. Our website is just one of our key information channels, which include NZX and ASX websites
(announcements), and:

• Our website, including its investor and news sections: synlait.com;

• Our social media channels (LinkedIn and Facebook);

• Our annual report;

• Our interim update; and

• Our annual meeting.

The investor section of Synlait’s website contains the below information:

•

A live share price feed (from the NZX and ASX), historical pricing and trading data;

Announcements and news releases, copies of previous annual and interim reports and investor presentations;

Recordings and transcripts from results calls;

Key corporate governance documents such as Charters and Policies, including Synlait’s constitution;

• Notices of Meeting, results of meetings and other relevant meeting materials;

•

Key dates in the investor schedule, such as annual meeting, full and interim reporting dates; and

Share registry information.

Communicating with Synlait
Instructions on how to reach the investor relations team and company secretary are available on our website. We aim to
respond to all shareholder communications in a timely manner.

Shareholders can elect to receive Synlait communications in the manner which suits them best – either electronically or via
mail. Through our share registry, Computershare, shareholders can amend their communication preferences at any time.

Right to vote
Synlait’s constitution and the NZX Listing Rules afford shareholders the right to vote on certain matters affecting Synlait.
Our shareholders can vote at any meeting of shareholders in person or by using a representative. On a vote by show of hands,
each shareholder attending in person or by their representative has one vote. If a poll is taken, each shareholder attending in
person or by their representative has one vote per fully paid up share they hold. Postal votes are not permitted unless the Board
notifies shareholders otherwise. More information on voting is in our constitution on our website.

Notice of annual meeting
Synlait’s last annual meeting was held on Wednesday 27 November 2019. The Notice of Meeting was released to the market
on 29 October 2018. An audio recording of the meeting is available in the investor centre on the company’s website.

Our 2020 meeting will be held on Wednesday 25 November. A Notice of Meeting will be issued in October. A webcast
of the meeting will be made available to shareholders after the meeting.

ANNUAL REPORT 2020PAGE 152 & 153

STATUTORY
INFORMATION

01. BUSINESS OPERATIONS

Synlait is a milk nutrition company. We combine expert farming with state-of-the-art processing to produce a range of
nutritional milk products. A full summary of our business model and how we create value is on pages 22 - 23.

In the year to 31 July 2020, we completed two acquisitions in delivering on our diversification strategy:

•

The purchase of the business and selected assets of Talbot Forest Cheese on 1 August 2019. This is owned and
operated by our subsidiary, Synlait Foods (Talbot Forest) Limited; and

The purchase of the shares in Dairyworks Limited on 1 April 2020. Dairyworks Limited specialises in the processing,
packaging and marketing of cheese, butter, milk powder and ice cream.

Commissioning of our infant capable powder manufacturing facility at Synlait Pokeno was completed during the year.
Synlait Pokeno enables us to grow and reduce our risk profile, through the diversification of processing facilities and
milk pools beyond Synlait Dunsandel.

On 3 August 2020, we acquired farmland adjacent to our Dunsandel facility. This acquisition enables us to pursue several
strategic supply chain and sustainability initiatives that will support Synlait Dunsandel’s long-term operation and expansion.

Synlait Dunsandel, Canterbury

ANNUAL REPORT 2020PAGE 154 & 155

02. DIRECTORS

03. DIRECTOR INTERESTS

Synlait’s Directors are profiled on our website, https://www.synlait.com/people/. This table sets out the directors of the Synlait
group companies as at 31 July 2020, with changes following the balance date also noted:

The following declarations of interest were made by Directors of Synlait and its subsidiaries under section 140(2) of the
Companies Act 1993 during the year to 31 July 2020:

Company

Directors

Appointment

Appointed

Synlait Milk Limited
Synlait Milk Finance Limited

Graeme Milne ONZM (Chair)
Bill Roest
Dr John Penno
Min Ben
Qikai Lu
Hon. Ruth Richardson
Sam Knowles
Sihang Yang

Independent
Independent
Board Appointed
Bright Dairy Appointed
Bright Dairy Appointed
Bright Dairy Appointed
Independent
Bright Dairy Appointed

23 March 2006
8 May 2013
21 July 20131
29 November 2016
8 December 2015
16 November 20092
4 July 2013
11 November 2010

Company

Directors

The New Zealand Dairy
Company Limited
Eighty Nine Richard Pearse
Drive Limited
Synlait Business Consulting
(Shanghai) Co., Limited

Synlait Foods (Talbot Forest) Limited

Dairyworks Limited3

Dairyworks Australia (Pty) Limited

Graeme Milne ONZM (Chair)
Nigel Greenwood until 24 June 2020
Graeme Milne
Nigel Greenwood until 24 June 2020
Deborah Marris
Martijn Jager
Nigel Greenwood until 10 June 2020
Boyd Williams from 10 June 2020
Leon Clement
Nigel Greenwood until 24 June 2020
Dr John Penno (Chair) from 1 April 2020
Graeme Milne from 1 April 2020
Leon Clement from 1 April 2020
Sam Knowles from 1 April 2020
Paul Brown until 1 April 2020
Margaret Cross until 1 April 2020
Peter Cross until 1 April 2020
Stuart Gray until 1 April 2020
Craig Stevens
Peter Cross until 1 April 2020

1 Prior to this, John had been a Director of Synlait Limited, which has since been removed from the Register of Companies. When first
appointed to the Board of Synlait Milk Limited, John was CEO and Managing Director. In November 2018, following stepping down as
CEO, he became the Board Appointed Director.

2 When first appointed to Synlait Milk Limited, Ruth was an Independent Director. In 2013, she became a Bright Dairy appointed Director.

3 The Board of Dairyworks Limited changed on the purchase by Synlait of all of the shares in Dairyworks Limited on 1 April 2020.

Graeme Roderick Milne

Chairman Synlait Milk Limited
Chairman Pro-Form Limited Advisory Board until 28 February 2020
Director Synlait Milk Finance Limited
Director Eighty Nine Richard Pearse Drive
Director The New Zealand Dairy Company Limited
Director of Dairyworks Limited from 1 April 2020
Chairman Terracare Fertilisers Limited
Director Alliance Group Limited
Director Elviti Holdings Limited
Director NZP Holdings Limited
Director New Zealand Pharmaceuticals Limited
Director of Elviti Finance Limited
Director of Nyriad Limited
Director of Nyriad Nominee Limited
Chairman of PF Olsen Limited
Director PF Olsen Group Ltd
Chairman of Advisory Board Rimanui Farms Limited
Council member Waikato University
Member of Zespri Director Remuneration Committee from 1 October 2019
Trustee Rockhaven Trust
Partner GR & JA Milne
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

Ruth Margaret Richardson

Chair Kula Fund Advisory Committee until 31 December 2019
Chair SYFT Technologies Limited until 20 August 2019
Director Synlait Milk Limited
Director Synlait Milk Finance Limited
Director Ruth Richardson (NZ) Limited
Chair New Zealand Merino Company Limited
Director Bank of China (NZ) 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

ANNUAL REPORT 2020PAGE 156 & 157

Willem Jan (Bill) Roest

John William Penno

Director Synlait Milk Limited
Director Synlait Milk Finance Limited
Director Housing Foundation Limited
Director Metro Performance Glass Limited until 30 June 2020
Independent Chair of Fisher & Paykel Appliances Limited Audit Committee until 31 March 2020
Trustee New Zealand Housing Foundation
Trustee WJ & IJ Family Trust
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

Qikai Lu

Director Synlait Milk Limited
Director Synlait Milk Finance Limited
Director Ba'emek Advanced Technologies Limited until 24 February 2020
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

Min Ben

Director Synlait Milk Limited
Director 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

Sihang Yang

Board Appointed Director Synlait Milk Limited
Director Synlait Milk Finance Limited
Chairman Dairyworks Limited from 1 April 2020
Director Sichuan New Hope Nutritional Foods Co., Limited (awaiting confirmation of registration of resignation)
Director Okuora Holdings Limited
Director The Pure Food Co Limited
Director Leaft Foods Limited
Director Thorndale Dairies Limited
Trustee John Penno Trust
Shareholder in Okuora Holdings Limited (and through Okuora Holdings Limited, Pastoral Robotics Limited, Signum Holdings Limited
and The Pure Food Co Limited)
Shareholder Leaft Foods Limited
Shareholder in Thorndale Dairies Limited
Shareholder in Synlait Milk Limited
Shareholder in The Pure Food Co Limited
Chair of Fresh Water Leaders Group reporting to Ministers Parker and O’Connor
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

Ian Samuel (Sam) Knowles

Director Synlait Milk Limited
Director Synlait Milk Finance Limited
Director of Dairyworks Limited from 1 April 2020
Director Trustpower Limited until 24 July 2020
Director Rangatira Limited
Director Fire Security Services 2016 Limited
Director Umajin Limited
Chairman OnBrand Limited
Chairman Adminis Limited
Director Magritek Limited
Director Com Investments Limited
Director Growthcom Limited
Director Habourside Rentals Limited
Director of Montoux Limited
Trustee Te Omanga Hospice Foundation
Trustee Ruby Family Trust
Trustee WWF NZ
Trustee Com Trust
Trustee Ian Samuel Knowles Children’s Trust
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

ANNUAL REPORT 2020PAGE 158 & 159

Leon Clement

Director Synlait Foods (Talbot Forest) Limited
Director of Dairyworks Limited from 1 April 2020
Director POD Farming Limited
Shareholder POD Farming Limited
Insurance cover arranged by Synlait Milk Limited

Nigel Greenwood (Appointment as CFO ended in June 2020)

Director Eighty Nine Richard Pearse Drive until 24 June
Director The New Zealand Dairy Company Limited until 24 June 2020
Director Synlait Foods (Talbot Forest) Limited until 24 June 2020
Director Synlait Business Consulting (Shanghai) Co; Limited until 10 June 2020
Insurance cover arranged by Synlait Milk Limited

Paul Brown (previously a Director of Dairyworks Limited untl 1 April 2020)

Director P.G. Brown Holdings Limited
Director Moortool Limited
Director ICE Interiors Limited
Director Walbro Limited
Director Kawerau Dairy General Partner Limited
Independent Chair H.G. Leach and Company Limited
Independent Director Leach and Co Limited
Shareholder P.G. Brown Holdings Limited
Shareholder Moortool Limited
Shareholder ICE Interiors Limited
Shareholder Walbro Limited

Stuart Gray (previously a Director of Dairyworks Limited untl 1 April 2020)

Director Isfahan Limited
Shareholder Isfahan Limited
Shareholder Okaihau Pastoral Holdings Limited, indirectly through Isfahan Limited

Margaret Cross (previously a Director of Dairyworks Limited untl 1 April 2020)

Director Iron Holdings Limited
Director Opulence Hair Limited
Shareholder Iron Holdings Limited
Shareholder Opulence Hair Limited

Peter Cross (previously a Director of Dairyworks Limited untl 1 April 2020)

Shareholder Iron Holdings Limited

No Director requested to disclose or use information in their possession as a Director of Synlait or its subsidiaries that
would not otherwise have been available to him or her.

As permitted by section 162 of the Companies Act 1993 and our Constitution, Synlait indemnifies and insures Directors
and Officers against liability to other parties that may arise in the course of their activities as a Director or Officer. Details
of the indemnities and insurance are kept in Synlait’s Interests Register. This cover does not apply to any liabilities
arising from criminal or reckless acts by our Directors or Officers.

04. DIRECTOR REMUNERATION

The annual fees paid to Directors of Synlait, as approved by shareholders on 27 November 2019 and effective 1
April 2020, are:

Directors, excluding the Chair and Committee Chairs
Board Chair
Audit and Risk Committee Chair
People Environment and Governance Committee Chair

$88,900
$178,000
$104,150
$100,900

ANNUAL REPORT 2020PAGE 160 & 161

This table sets out total remuneration and the value of other benefits received by Synlait Directors during the year
ended 31 July 2020, being a combination of fees approved by shareholders at the last two annual meetings.

During the year ended 31 July 2020, 316 employees (including former employees) of Synlait and its subsidiaries (not being
Directors) received remuneration and other benefits, in their capacity as employees, of $100,000 or more, as set out below:

06. EMPLOYEE REMUNERATION

Directors

Graeme Milne ONZM
Bill Roest

Dr John Penno
Min Ben
Qikai Lu
Hon. Ruth Richardson
Sam Knowles

Sihang Yang
Total

Role

Director, Board Chair
Director
Audit and Risk Committee Chair
Director
Director
Director
Director
Director
People, Environment and Governance
Committee Chair
Director

Remuneration

$172,000
$99,383

$86,300
$86,300
$86,300
$86,300
$98,300

$86,300
$801,183

Fees are not paid to Directors or employees of Synlait for acting as a Director of any Synlait subsidiaries.

Prior to the purchase by Synlait of the shares in Dairyworks Limited, fees and other benefits were paid to the
directors of Dairyworks Limited in the year to 31 July 2020 as follows:

Directors

Paul Brown
Stuart Gray
Margaret Cross

05. DIRECTOR HOLDINGS

Remuneration

$40,000
$22,666
$26,066

Salary bracket ($)

100,000 - 109,999
110,000 - 119,999
120,000 - 129,999
130,000 - 139,999
140,000 - 149,999
150,000 - 159,999
160,000 - 169,999
170,000 - 179,999
180,000 - 189,999
190,000 - 199,999
200,000 - 209,999
210,000 - 219,999
220,000 - 229,999
230,000 - 239,999
240,000 - 249,999
250,000 - 259,999
260,000 - 279,999
290,000 - 299,999
320,000 - 329,999
330,000 - 339,999
340,000 - 349,999
360,000 - 369,999
380,000 - 389,999
400,000 - 409,999
420,000 - 429,999
450,000 - 459,999
490,000 - 499,999
510,000 - 519,999
640,000 - 649,999
910,000 - 919,999
Total

Number of employees

58
71
46
20
27
16
7
12
11
8
9
8
1
2
1
2
1
1
1
1
1
1
2
1
1
1
1
2
2
1
316

This table sets out the relevant interests held by Synlait Directors in securities issued by Synlait:

Directors

Securities held (legally or beneficially) as at 31 July 2020 Securities held (legally or beneficially) as at 31 July 2019

Graeme Milne ONZM 72,753 ordinary shares
27,750 ordinary shares
Bill Roest
5,100,000 ordinary shares
Dr John Penno
0
Min Ben
Qikai Lu
0
Hon. Ruth Richardson 56,222 ordinary shares
55,000 ordinary shares
Sam Knowles
0
Sihang Yang

72,753 ordinary shares
27,750 ordinary shares
5,100,000 ordinary shares
0
0
56,222 ordinary shares
55,000 ordinary shares
0

These figures also include the value of shares issued to employees under the 2017 LTI Scheme during the year to 31 July 2020.

Synlait’s Strategic Remuneration Policy is approved by Synlait’s People, Environment and Governance Committee.
That Committee also reviews and recommends to the Board the remuneration of the Chief Executive Officer and the
Executive Leadership Team.

07. DONATIONS

Synlait made no donations in the year to 31 July 2020. Dairyworks Limited, a subsidiary of Synlait from 1 April 2020,
made cheese donations to a value of $5,900 in the year ended 31 July 2020.

ANNUAL REPORT 2020PAGE 162 & 163

08. AUDITORS

Information about Synlait’s auditor and its audit process, including audit and other fees paid to the auditor, is on pages 149.

09. STOCK EXCHANGE LISTINGS

Synlait’s ordinary shares have been listed on the NZX Main Board since 23 July 2013 (ticker code: SML).

On 24 November 2016 Synlait completed a compliance listing on the ASX as a foreign exempt issuer (ticker code:
SM1). As an ASX foreign exempt issuer, Synlait must comply with the NZX Listing Rules (other than as waived by NZX
Regulation) and is exempt from complying with most of the ASX Listing Rules, as set out in ASX Listing Rule 1.15.

In December 2019, Synlait issued $180 million of unsecured, subordinated, fixed rate bonds with an interest rate of
3.83% per annum. These securities are quoted and trade on the NZX Debt Market (ticker code: SML010).

10. TOP 20 SECURITY HOLDERS AND SUBSTANTIAL SECURITY HOLDERS

Synlait had the following securities on issue as at 31 July 2020:

•

179,306,908 ordinary shares

180,000,000 subordinated bonds.

Set out below are Synlait’s 20 largest shareholders as at 31 July 2020:

Number of shares held Percentage of ordinary shares

01. Bright Dairy Holding Limited
02. The a2 Milk Company (NZ) Limited
03. FIL Group Limited1
04. John Penno
05. ECP Asset Management Pty Ltd
06. Pendal Group Limited
07. The Vanguard Group, Inc.
08. Vanguard Investments Australia Ltd.
09. Accident Compensation Corporation
10. Salt Funds Management Limited
11. First NZ Capital Custodians Limited
12. Norges Bank Invesment Management
13. First Sentier Investors Realindex Pty Ltd.
14. BlackRock Institutional Trust Company, N.A.
15. Paul & Bronwyn Lancaster
16. Smartshares Limited
17. Abu Dhabi Investment Authority
18. Therese Roche
19. Guardians of New Zealand Superannuation
20. ANZ New Zealand Investments Limited
Total

69,968,944
35,574,646
9,592,598
5,100,000
3,027,486
2,801,726
2,638,027
2,576,764
2,468,565
2,407,877
1,580,271
1,570,360
1,202,153
1,130,798
1,058,123
957,743
915,436
900,000
807,381
806,403
147, 085, 301

39.0%
19.8%
5.3%
2.8%
1.7%
1.6%
1.5%
1.4%
1.4%
1.3%
0.9%
0.9%
0.7%
0.6%
0.6%
0.5%
0.5%
0.5%
0.5%
0.4%
81.9%

1 Note this is FIL Limited Group’s total holding. FIL Investment Management (Australia) Limited holds 4.2% or 7,491,149 shares, FIL Investment
Management (Hong Kong) Limited holds 1.0% or 1,818,323 and FIL Investment Management (Singapore) Ltd. Holds 0.2% or 283,126 shares.

According to notices given under section 280(1)(b) of the Financial Markets Conduct 2013, the following are Synlait’s
substantial product holders as at 31 July 2020. The number of shares owned is as advised by the shareholder in
their last Substantial Security Holder Notice.

Substantial Product Holder

Bright Dairy Holding Limited
The a2 Milk Company Limited
FIL Group Limited
Total

Number of ordinary shares in
which relevant interest is held

Percentage of Ordinary Shares
owned as at 31 July 2020

69,968,944
35,574,646
9,592,598

39.0
19.8
5.3
64.1%

Set out below are Synlait’s 20 largest bondholders as at 31 July 2020:

Number of bonds held

Percentage of total bonds

Investment Custodial Services Limited

01. TEA Custodians Limited Client Property Trust Account
02. FNZ Custodians Limited
03.
04. Custodial Services Limited
05. Forsyth Barr Custodians Limited
06. Custodial Services Limited
07. National Nominees Limited
08. Custodial Services Limited
09. Citibank Nominees (New Zealand) Limited
10. Custodial Services Limited
11. Custodial Services Limited
12. RGTKMT Investments Limited
13. JBWare (Nz) Nominees Limited
14. Custodial Services Limited
15. FNZ Custodians Limited
16. Hugh McCracken Ensor
17.
18. Francis Horton Tuck
19.
20. FNZ Custodians Limited

Investment Custodial Services Limited

Total

21,400,000
20,780,000
15,297,000
13,059,000
10,965,000
8,269,000
6,597,000
6,417,000
4,400,000
4,216,000
3,702,000
3,275,000
2,855,000
1,174,000
1,038,000
1,000,000
1,000,000
800,000
800,000
718,000

127,762,000

11.89%
11.54%
8.50%
7.26%
6.09%
4.59%
3.67%
3.57%
2.44%
2.34%
2.06%
1.82%
1.59%
0.65%
0.58%
0.56%
0.56%
0.44%
0.44%
0.40%

70.98%

ANNUAL REPORT 2020PAGE 164 & 165

11. SPREAD OF PRODUCT HOLDERS

13. NZX WAIVERS

The spread of Synlait’s ordinary shareholders as at 31 July 2020 is as follows:

Size of holding

Number of investors Percentage of investors

Total number of shares

Percentage issued

1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 50,000
50,001 – 100,000
100,001 and over

Rounding
Total

2,412
2,480
547
368
29
50

5,886

40.98%
42.13%
9.29%
6.25%
0.49%
0.85%

0.01%
100%

840,900
5,399,824
3,662,484
6,418,611
1,936,921
161,048,168

179,306,908

0.47%
3.01%
2.04%
3.58%
1.08%
89.82%

100%

The spread of Synlait’s bondholders as at 31 July 2020 is as follows:

Size of holding

1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 50,000
50,001 – 100,000
100,001 and over

Rounding
Total

Number of holders

Percentage of holders

Total number of bonds

Percentage issued

0
54
160
671
138
99

1,122

0%
4.81%
14.26%
59.80%
12.30%
8.82%

0.01%
100%

0
268,000
1,573,000
19,392,000
11,637,000
147,130,000

180,000,000

0%
0.15%
0.87%
10.77%
6.47%
81.74%

100%

12. CREDIT RATING

Synlait does not have a credit rating.

Synlait obtained two sets of waivers from the NZX Listing Rules this year, relating to a transaction with The a2 Milk
Company Limited and Synlait’s governance arrangements.

Waiver related to variation of Nutritional Powders Manufacturing and Supply Agreement

In 2019, a wholly owned subsidiary of Synlait entered into a variation of its existing Nutritional Powders Manufacturing
and Supply Agreement with a wholly owned subsidiary of The a2 Milk Company Limited. As the variation may have
been worth more than 50% of Synlait’s average market capitalisation, and The a2 Milk Company Limited is a related
party of Synlait, the NZX Listing Rules require that the variation is approved by shareholders and that an appraisal
report on the variation is obtained. On 15 November 2019, Synlait was granted waivers from the relevant NZX Listing
Rules so that shareholder approval to, and the appraisal report on, the entry into that variation were not required. To the
extent that the waiver applied to the requirement to get shareholder approval of a related party transaction, the waiver
was conditional on the Directors of Synlait certifying that:

•

the terms of the variation were negotiated and entered into on an arm’s length commercial basis;

Synlait was not unduly influenced by The a2 Milk Company Limited to enter into the variation; and

entry into the variation was in the best interests of all of Synlait’s shareholders.

The Directors of Synlait provided a certificate to this effect to NZX.

Waiver relating to Governance Arrangements

On 27 November 2019, Synlait was granted new governance waivers, designed to be consistent with the new
NZX Listing Rules introduced by NZX on 1 January 2019. These allow our Constitution and Board composition to reflect
our non-standard governance arrangements, as described below, and replace our previous governance waivers granted
on 24 June 2013 and amended on 30 October 2018.

Synlait listed on the NZX on the basis that Bright Dairy and Food Co Limited would be able to continue to consolidate Synlait
into its group financial statements (that are prepared under China GAAP). At the time, Bright Dairy agreed with Synlait that
for so long as Bright Dairy continued to hold between the Initial Percentage (being 39.119%) and 50% (inclusive) of the shares
in Synlait in each case calculated in accordance with clause 22.5 of the Constitution (so as to exclude shares issued under
employee share schemes or director remuneration), the following governance arrangements will apply to Synlait:

The Board will comprise eight directors, made up of the following:

•

Four directors appointed by Bright Dairy (the Bright Dairy Directors):

•

none of whom (i) would be required to retire from rotation under the NZX Listing Rules, or (ii) are subject to
removal by ordinary resolution of shareholders;

ANNUAL REPORT 2020PAGE 166 & 167

•

one of whom must be ordinarily resident in New Zealand and be a director of such standing and with such
commercial and governance experience in New Zealand as is appropriate for a director of a NZX listed
company – the Hon. Ruth Richardson is the current Bright Dairy Director meeting this requirement; and

all of whom are required to have appropriate skills and experience to ensure that Synlait has a suitable mix of
skills and experience on the Board;

•

Three directors who are not appointed by Bright Dairy and who must be Independent Directors; and

• One Managing Director, or, if a Managing Director is not appointed, a Board Appointed Director, who will be appointed

by the Board. The current Managing Director or Board Appointed Director, and any Director proposed to fill that role,
cannot vote on the appointment or replacement of the Managing Director or Board Appointed Director (as applicable).
Consequently, Bright Dairy controls the composition of the majority of the Board as it would have four out of seven votes
on this appointment. Synlait does not currently have a Managing Director, but does have a Board Appointed Director,
being Dr. John Penno,

(together, these are the Governance Arrangements).

A summary of the waivers permitting these Governance Arrangements is set out below:

•

The NZX Listing Rules allow Bright Dairy to appoint representatives to the Board so long as the proportion of the Board
made up by their representatives is not greater than the proportion of the total shares in Synlait that they own. A waiver
was required to permit Bright Dairy to appoint four Directors, or 50% of the Board, as Bright Dairy owns less than 50% of
the shares in Synlait.

The NZX Listing Rules prevent Directors from appointing alternates to act for in their place if they cannot attend Board
meetings, unless a majority of their co-Directors agree. A waiver has been granted to permit Synlait’s Constitution to:

•

allow a Bright Dairy Director to appoint another Bright Dairy Director to exercise their voting rights at a Board
meeting they are unable to attend; and

prohibit the non-Bright Dairy Directors from appointing alternate Directors. Synlait considers that it is important
that Directors are encouraged to attend all meetings.

The NZX Listing Rules require that Synlait’s constitution permit a Director to vote on a decision in which they are
interested, where that matter is one in respect of which Directors are required by the Companies Act 1993 to sign a
certificate, or relates to an indemnity contemplated by section 162 of the Companies Act. A waiver has been granted to
allow Synlait’s Constitution to prohibit the Managing Director (if it has one, which it doesn’t currently) from voting or being
part of the quorum on matters relating to his/her remuneration under any circumstances.

The NZX Listing Rules prevent the imposing of conditions on who may be appointed as a Director, except as specifically
contemplated by the Rules. A waiver has been granted so that Synlait is permitted to required that persons who may be
appointed to the three non-Bright Dairy Director positions must be independent.

These waivers are subject to the conditions that:

•

Bright Dairy continues to hold no less than 39.119% of Synlait’s shares, calculated in accordance with Synlait’s Constitution.

the Governance Arrangements are contained in Synlait’s Constitution and will cease to apply when Bright Dairy ceases
to own between 39.119% and 50% (inclusive) of the shares in Synlait, calculated in accordance with Synlait’s Constitution.

Full and accurate disclosure of all material aspects of the Governance Arrangements and Synlait’s reliance on these
waivers is made in any offer document, and in every annual report while these waivers are being relied on.

Synlait continues to bear a non-standard designation to notify the market of its unique governance arrangements.

The quorum for a Board meeting must include two Independent Directors, and Synlait must have three Independent
Directors (compared to the two Independent Directors required by the NZX Listing Rules).

Immediately on Bright Dairy ceasing to hold 39.119% of the shares in Synlait, Synlait complies with the provisions in its
Constitution requiring that some of the Bright Dairy Directors must resign to keep the proportion of Bright Dairy Directors
on the Board consistent with the proportion of the total shares in Synlait owned by Bright Dairy. Also, all remaining
Bright Dairy Directors must retire by rotation at the next annual meeting following the drop in shareholding below that
threshold, irrespective of whether they have been the longest in office.

As noted above, on 1 January 2019, NZX updated the NZX Listing Rules. In order to assist with transition to the new
NZX Listing Rules, NZX granted the class waiver called “Class waivers and rulings for NZX Main Board and Debt Market
Transition”, dated 19 November 2018, which had effect until 30 June 2020 (Class Waiver). The class waiver allowed Synlait
to continue relying on its governance waivers under the old NZX Listing Rules, from its transition date to the new NZX Listing
Rules on 8 March 2019, until the governance waivers were updated on 27 November 2019. As required by the class waiver,
Synlait sets out below a summary of the governance waivers under the old NZX Listing Rules, as issued on 24 June 2013 and
amended on 30 October 2018 (Original Governance Waiver).

The Governance Arrangements as described above were also permitted under the Original Governance Waiver, together
with the following additional governance arrangements:

•

The Board Chair, who must be an Independent Director, will have a casting vote. The Chair of the Audit and Risk
Committee must also be an Independent Director.

• No Director will have the right to appoint an alternate Director to act in his or her absence or unavailability, but any Bright

Dairy Director may appoint another Bright Dairy Director to exercise his or her voting rights at a meeting.

•

A quorum of the Board must include at least two Independent Directors.

(together with the Governance Arrangements, these are the Original Governance Arrangements).

ANNUAL REPORT 202014. GENDER COMPOSITION

This table sets out the gender recomposition of Synlait’s Directors and Officers (CEO and direct reports to
CEO) as at 31 July 2020. The prior year’s comparison is in brackets.

Group

Board
Officer

Total

Female

2 (2)
3 (2)

5 (4)

Male

6 (6)
61 (9)2

12 (15)

Total

8 (8)
9 (11)

17 (19)

1 Includes one officer employed by a subsidiary but reporting to the CEO

2 The 2019 figure includes two male General Managers who temporarily reported to the CEO pending the appointment of new Director
Operations in December 2019

PAGE 168 & 169

The summary of waivers described above in the context of the current Governance Waiver is also applicable to the
Original Governance Waiver (given Synlait’s reliance on the Class Waiver in respect of the corresponding rule under the
old Listing Rules). The Original Governance Waiver also comprised the following additional waivers:

•

The then current NZX Listing Rules required one third of Synlait’s Directors to retire by rotation at each annual meeting.
Waivers were granted so that:

•

the rotation requirement only applied to Independent Directors, and not to Bright Dairy Directors and
Managing Director or Board Appointed Director;

one out of the three Independent Directors was required to retire each year;

at the first annual meeting following the Bright Dairy shareholding falling below 39.119% (calculated as provided by
the Constitution, excluding employee and director share issues made pursuant to the NZX Listing Rules), all Bright
Dairy Directors would be required to retire by rotation, even though they may not have been longest in office.

•

The then current NZX Listing Rules prevented Synlait from imposing restrictions in its constitution on the right of
shareholders to transfer shares held in Synlait, or any restrictions upon registration of a properly completed transfer
of such shares. A waiver was granted so that Synlait’s constitution may contain certain restrictions on the right of
shareholders to transfer Synlait shares, as applied under Schedule 2 of Synlait’s constitution which was removed on
27 November 2019.

These waivers were subject to the conditions that:

•

Bright Dairy held no less than 37% of Synlait’s shares at the date Synlait was listed.

the Original Governance Arrangements were contained in Synlait’s Constitution and would cease to apply when
Bright Dairy ceases to own between 39.119% and 50% (inclusive) of the shares in Synlait (calculated as provided by the
Constitution, excluding employee and director share issues made pursuant to the NZX Listing Rules).

Full and accurate disclosure of all material aspects of the Governance Arrangements and Synlait’s reliance on these
waivers is made in the offer document issued at the time of Synlait’s listing, and in every annual report while these
waivers are being relied on.

Synlait continues to bear a non-standard designation to notify the market of its unique Governance Arrangements.

Synlait appoint an additional Independent Director as soon as possible, but in any event within 3 months of listing.

That for so long as Bright Dairy holds between 39.119% and 50% (inclusive) of the shares in Synlait (calculated as
provided by the Constitution, excluding employee and director share issues made pursuant to the NZX Listing Rules),
Synlait complies with the following clauses of its Constitution: 25.7, 6-11 (inclusive) and 13 of Part A of Schedule 1.

Copies of these waivers, and other waivers Synlait has obtained, or relied on before 1 August 2019 can be found in the
investor centre of Synlait’s website.

ANNUAL REPORT 2020PAGE 170 & 171