Westland would remain a co-operative but other options for funding growth would be needed to minimise the effect on shareholders, chairman Matt O’Regan said.
A structure was being sought to provide flexibility required to maximise market opportunities.
“Where do you want to put the onus of financial viability? With the difficult state of farming at the moment it would be too hard for our farmers to be financing a lot of other things.”
Directors had not set a timeline for the review of the co-operative’s capital structure, which would be discussed with shareholders when the board and management competed due diligence.
O’Regan expected to have something for shareholders at the 2016 annual meeting, later next year.
Westland shareholder-farmers appeared to be entering the toughest period faced by the industry in the last 30 years, he said in the annual report.
“A culture of change will become the new normal for a co-operative company to survive in the 21st century.”
Capital reviews to ensure businesses were set up for the future were likely to be on the agenda for all companies, co-operative and corporate, he said.
Westland Milk had invested a lot of its own capital and a large level of borrowing in major construction projects over the last few years to increase its value-added and nutritionals business and reduce reliance on commodity products.
A new dryer at the Hokitika home-base would be in operation this season for infant nutrition production and a UHT milk plant at Rolleston was expected to be commissioned later in the financial year.
To fund the work, Westland has increased bank borrowing to $227.6 million at the July 31 balance date, funding total assets of $538.1m. The ratio of borrowing to total assets was at 42% and the level of total liabilities to total debt plus equity was 62%.
A year earlier, borrowing was $149m with total assets of $478.3m. The respective ratios were 31% (for borrowing) and 52% (all liabilities).
Finance costs of $7.9m were still covered about 4.4 times by earnings before interest and tax of about $35m and operating cashflow was still a relatively strong $21m after interest costs were paid.
“We’re reasonably well geared for a company or our size but still extremely sound,” O’Regan said.
When the major projects came on stream the co-op would slowly and progressively “eat away at the debt” under normal payment terms with the banks.
The capital review was designed to provide a good balance of working capital and fixed term debt and allow investment in market opportunities.
Westland had a final payout for shareholder-suppliers of $4.95kg/MS, with 10c of it held back for reinvestment.
The contribution from value-added products (nutritionals and the retail EasiYo brand) was 19.6ckg/MS, up from 12.6c a year earlier and 10.3c in 2012-13.
O’Regan said the board recognised the $4.95 return was below the break-even point for many farmers and why the retention was held at 10c.
“A culture of change will become the new normal for a co-operative company to survive in the 21st century.”
Matt O’Regan
Westland
Despite the level of payout, the figure was industry-competitive, chief executive Rod Quin said in his report.
Dairy-product oversupply in challenging world markets reinforced the need for Westland to continue its strategy of delivering higher returns through nutritional products, food service and retail brands.
The oversupply meant weak pricing was already weighing on early season forecasts.
The new dryer at Hokitika and the UHT plant at Rolleston would deliver crucial competitive future payouts to shareholders.
The EasiYo yoghurt brand achieved double-digit growth during the year to achieve revenues of $53m (of the group total of $639m). The EasiYo brand was growing especially well in Australia, Europe and China.
The Westland group had also set up an office in Shanghai for the group and EasiYo businesses with all but one of the staff being Chinese.
