Synlait Milk has disputed The a2 Milk Company’s (a2MC) right to cancel the exclusive manufacturing and supply rights contract between the two.
After the markets closed on Friday (15 September), a2MC informed Synlait it was cancelling the exclusive contract for its Stages 1-3 a2 Platinum and China label a2至初 infant milk formula (IMF) products sold in China, Australia, and New Zealand.
The Nutritional Powders Manufacturing and Supply Agreement (NPMSA) will remain in place on a rolling term and can only be terminated by either party on three years’ notice.
A2MC said it cancelled the exclusivity rights because Synlait failed to meet the required delivery in full- and on-time performance (DIFOT) level, but it remained an important supplier.
A2MC owns 19.8 per cent of Synlait. It said Synlait was still contractually bound to supply up to the same IMF volumes per year.
With Synlait disputing the cancellation, NPMSA dispute resolution provisions stipulate good faith negotiations followed by confidential binding arbitration.
Wiping Synlait’s exclusivity means a2MC can use its purpose-built dairy nutritionals facility, Mataura Valley Milk, on New Zealand’s South Island, which currently runs at a loss. Even so, a2MC said it doesn’t expect greater utilisation of MVM to have a material impact in FY24 or FY25, with FY26 still the goal for MVM profitability.
A2MC owns 75 per cent of MVM, with China Animal Husbandry Group owning the remaining 25 per cent.
Synlait updated the market on Monday afternoon and said a2MC’s announcement wouldn’t impact its FY23 results (being released on 25 September) or FY24.
Its FY23 results will be within the net profit after tax guidance range of ($5)-$5 million as released in April.
Synlait holds the Chinese regulatory State Administration for Market Regulation (SAMR) licence, which is attached to its Dunsandel manufacturing facility, for a2MC’s a2至初 IMF (Stages 1-3), and said it expects to keep manufacturing those products for the China market until the licence expires in September 2027.
It also said it had completed its bank refinancing with new banking syndicate members ANZ, Bank of China, China Construction Bank, HSBC, and Rabobank.
With working capital facility of $240 million and revolving credit facilities of $230 million, Synlait will be required to make a prepayment of at least $130 million by no later than 31 March
