Working capital absorbed NZ$132.2m, flipping OCF to a NZ$124.7m outflow

That build flipped operating cash flow from a NZ$117.3m inflow to a NZ$124.7m outflow and swung cash conversion (OCF/EBITDA) from +171.4% to -242.1%. Inventory rose 39.4% to NZ$467.7m, taking inventory days to 110.6 against a historical mean of 91.2.

Revenue fell 2.6% to NZ$769.8m, EBITDA fell 24.7% to NZ$51.5m, PBT fell 80.4% to NZ$6.1m, and NPAT fell 82.8% to NZ$4.8m. Gross borrowings rose 23.1% to NZ$529.3m, lifting net debt/EBITDA to 10.04x from 5.69x at HY22.

Pre-lease free cash flow of NZ$-158.1m sits at the lower edge of the company's historical range (mean NZ$-78.7m), and FCF/NPAT conversion of n/m means the NZ$4.8m of reported profit is a poor proxy for cash earnings. Synlait is funding the inventory build and Advanced Nutrition demand softness with debt rather than internal cash flow.

Leverage has stepped up materially. Net debt/EBITDA at 10.04x is up from 5.69x at HY22, with both the numerator and denominator moving the wrong way: gross borrowings rose NZ$99.3m while EBITDA fell 24.7%. This compresses covenant headroom heading into H2.

FY23 guidance now sits at break-even. Management has updated full-year NPAT guidance to a range of a NZ$5m loss to a NZ$5m profit, citing further Advanced Nutrition demand reductions mostly from one customer. Against FY22 NPAT of NZ$38.5m, this is a sharp downshift, and it frames the HY23 NPAT of NZ$4.8m as essentially the whole year's earnings under the midpoint.

With FY23 NPAT guidance now at NZ$(5)m–NZ$5m and HY23 already at NZ$4.8m, the implied H2 outcome is roughly break-even to slightly loss-making, materially weaker than the NZ$10.6m H2 NPAT implied by repeating the FY22 shape.

The release attributes the downgrade to further Advanced Nutrition demand reductions, mostly from one customer, but does not quantify the share of revenue at risk. The durability of the guidance range therefore depends on customer-specific resolution that this release does not detail.

The current effective tax rate of 21.2% (versus 10.2% prior) is within the supplied historical range, and the 2.4pp gap between PBT growth (-80.4%) and NPAT growth (-82.8%) is small, so tax is not distorting the picture. PBT growth of -80.4% is the cleaner operating read and confirms an earnings decline driven by trading conditions.

Cash quality is the larger concern. Cash conversion at -242.1% is classified as within the supplied historical range (mean -202.8%, meaning Synlait's first-half conversion has structurally been weak), but the dollar absorption – NZ$132.2m of working capital and a NZ$158.1m pre-lease FCF deficit – is among the weak end of recent experience. Inventory days at 110.6 against a historical mean of 91.2 indicate product is building faster than it is moving, which raises write-down and stranded-cost risk if Advanced Nutrition demand does not recover in H2. Capex/revenue of 4.3% is down from 5.8%, so the cash drain is being absorbed by working capital, not investment.

This briefing cannot assess the recoverability of the elevated inventory balance or the contractual terms underpinning the Advanced Nutrition customer relationships that drove the FY23 guidance cut.