Tough year, but a better outlook for Westland

O’Regan acknowledged the final net average cash payout of $3.88/kgMS was disappointing and below break-even point for farmers.

“This payout also failed to reach our goal of being industry competitive,” O’Regan says.

“However, while we closed the 2015-16 season with a less than desired performance by our company, we started the 2016-17 season with more product capability and flexibility than ever before. The capability Westland now has in its manufacturing of value-added products, and the returns they will generate, will allow us to continue our journey up the value chain to ensure Westland remains the preferred processor of our shareholders’ milk.

“The board is very conscious of the need to support our farmers. Previous financial results had built up sufficient resource to allow us to make a contribution of $17.6m (pre-tax) to our payout to shareholders for the past season.”

Westland’s reported net loss after tax (NPAT) was $14.5 million for the financial year ended July 31, 2016, reflecting the use of retained earnings. O’Regan says the poor result was due to a higher cost structure in the business – “necessary to support our value-added strategies” – combined with lower than forecast sales of these products due to a mix of commissioning issues and rapidly changing markets.

Revenue decreased $51 million from $639 million to $588 million mainly due to international dairy market prices remaining weak as a result of continued global over supply.

Total assets for the Westland Group increased $33 million from $538 million to $571 million, with the completion of the construction of the D7 nutritional and UHT plants. Total equity increased by $34 million to $242 million, due to the positive movement in the hedge reserve, which also increased the equity to asset ratio to 42% up from 39%.

A high focus on cash flow management during the year resulted in operating cash flows of $19.8 million in FY16, which allowed Westland to reduce its short term working capital debt to $20 million at 31 July 2016. The company remains compliant with its banking covenants.

O’Regan says the New Zealand dollar remaining stubbornly high was also a factor in the company’s economic performance. The average foreign exchange conversion rate for the 2016 season was USD:NZD 0.7140 compared with an average spot rate of USD:NZD 0.6798.

“Our dollar has abandoned its usual pattern of losing ground against the United States dollar when commodity prices reduce. However, there seems to be some light on the horizon indicating an upward trend in market prices. But we also need to execute our value-added strategy more effectively.

“Westland cannot compete by relying on commodity returns for its milk. We remain confident that the strategy we have in place over the last few years, underpinned by the UHT and nutritional product processing capability Westland built during the last year, will provide higher returns and a degree of cushioning against cyclical extremes.

“The announcement, since the end of the year under review, of a joint venture with our largest nutritional powders customer, Ausnutria, to blend and can nutritional products at Rolleston, will significantly increase our production of value-added powders. This is a good example of implementation of the value-added strategy.”

O’Regan also signalled that changes to the way Westland manages its milk flow are under investigation to enhance the ability of Westland to make more value-added product.

“We need to ensure that growth in supplier milk production is matched by the same growth in value-adding processing capacity,” he says.