Westland Milk reviews capital structure as profit soars on cheap milk, value-add sales

Westland Milk Products, New Zealand's second biggest dairy cooperative, is reviewing its capital structure to ensure it has the "flexibility required to maximise market opportunities" after profit soared on cheaper milk prices and increased sales of its value-add products.

Net profit attributable to members jumped to $19.4 million in the 12 months ended July 31 from $503,000 a year earlier, in what the Hokitika-based milk processor described as a difficult season given the fall in global milk prices. Revenue declined 23% to $639.4 million in the year, while Westland's payments to suppliers dropped 39% to $319.4 million.

In announcing its annual result, chairman Matt O'Regan said the outcome of the capital review, which follows governance changes last season, will be discussed with shareholders when the board has completed the necessary due diligence.

Westland retained 10c from its payout to shareholders of $4.95 per kilogram of milk solids, which equates to a profit of $7 million before tax.

Chief executive Rod Quin said despite the weak global dairy market and the subsequent drop in revenue, the company has assets of more than $538 million and is in a sound position. Still, the 2015/2016 season will be challenging as it has started with continued global oversupply and weak prices weighing on early season forecasts, he said.

The forecast payout for the 2015/16 season was slashed in July to between $4.60 and $5/kgMS, from a previous band of $5.60 to $6/kgMS.

Westland's annual report shows total liabilities, excluding cooperative shares, rose to $215 million following an $82 million jump in loans and borrowings over last year. The board included a tangible net worth calculation in this season's five-year trends that includes the impact of intangibles and foreign currency hedging. The figure, which is sitting at 48% compared to 51% in 2011, forms part of the group's banking covenants.

Westland's total comprehensive income turned to a loss of $25.9 million in the year from a profit of $8.7 million a year earlier, after the exporter recognised a near $70 million movement in the value of its cashflow hedges.

Mr Quin said Westland's investment in added-value plant and technology in the past few years was already reducing its reliance on the highly volatile bulk commodities market. Value-added products contributed 19.6c per kg/MS to the 2014/2015 payout and Quin said this proportion was expected to increase, "which is good news because these markets are growing and are more profitable than commodity ingredients."

The company has built a new $114 million infant nutrition plant in Hokitika and has a $40 million UHT facility under construction in Rolleston.

The significant declines in dairy commodity prices followed the removal of EU milk production quotas, milk growth in the US, the continued impact on producers of Russian sanctions, and softer demand from China. This had reinforced Westland's focus on growing nutritional products, foodservice and retail brands, Mr Quin said.

Westland saw double-digit growth in EasiYo, the DIY yoghurt business, with sales of $53 million and a 4.4c contribution to the payout.

It would appear Mr Quin's remuneration for the 2015 financial year fell to between $760,000 and $770,000 from between $900,000 and $1 million last year. The annual report stated only one employee in that salary band but doesn't name them. The chairman's remuneration rose slightly to $125,000 from $118,337 in 2014.

(BusinessDesk)