A tale of two milk companies – one of them is being suckled by taxpayers

The contrasting fortunes of Synlait Milk and Westland Milk Products were thrown into sharp relief last week. On the one hand Synlait won applause at its annual meeting from shareholders, impressed by its performance in virtually doubling profit ($74.6m against $39.4m) in its tenth year of operations. On the other hand Westland had the begging bowl out for a Provincial Growth Fund loan of $9.9m which will help the co-op in funding a $22m manufacturing plant aimed at converting milk to higher-value products.

The Westland dairy exporter, discussing a capital restructure in its 2018 annual report, said it had relatively high debt and limited financial flexibility.

Commenting on the PGF loan, chief financial officer Dorian Devers is reported as saying the co-op could have financed the project in other ways “but the terms we have been given from the PGF are more favourable. It’s a longer-term loan than we can get from a bank which is nice”.

The NZ Herald quoted economic consultant and former ANZ Bank chief economist Cameron Bagrie as saying the loan sets a “dangerous precedent”. He reckons it appears to be corporate welfare.

Regional Economic Development Minister Shane Jones announced the Westland loan last week as part of a $140m PGF support package for the West Coast.  He described the loan as “classic economic development” for a neglected region.

Asked if he was aware of Westland Milk’s financial performance, Jones said he did not want to comment specifically on the company.

But I would say it is an enterprise based in a part of NZ that is going through a challenging transition—GDP is substantially reduced, legacy industries are being closed down. I’m part of a government trying to introduce capital to help them in the transition”.

Westland Milk suppliers might be happy to say “Good on you, Shane” but taxpayers who are putting up the “capital” (as the minister describes it) would see it in another light.

Westland Milk, which employs 430 people and has 429 milk suppliers, had revenue in its latest year of $693m. Its total equity stood at $232m, and its total long-term borrowings were $232m.

Synlait, in contrast, reported its $450m of growth capital expenditure under construction is to be funded through cash flow and existing debt facilities.

While it has no need to raise capital, it is also not paying a dividend while it is on a strong growth trajectory.

Synlait’s chairman, Graeme Milne, said an increase in finished infant formula sales helped to drive the FY18 profit.

This was enabled by a number of investments in the blending and consumer packaging space including the company’s second Dunsandel wetmix kitchen and its Auckland blending and consumer packaging facility. Both projects have allowed Synlait to increase its finished infant formula capacity,

” … which has helped us to deepen and strengthen the relationships we have with our existing infant formula customers” .

Notable events for Synlait include:

– Pokeno site to be commissioned for 2019/2020 milk season;
– Advanced Liquid Dairy Facility on track for March 2019 commissioning;
– Lactoferrin expansion commissioned in November 2018;
– Talbot Forest Cheese conditional acquisition to be completed August 2019.

Synlait’s guidance for FY19 remains an increase in profit, but not as substantial as this year’s increase.

Total gross profit per MT was up $502 to $1,294, primarily due to consumer-packaged infant formula volumes as a percentage of total product sales growing from 13% in FY17 to 28% in FY18.

The company also achieved an improved gross margin performance on ingredients products.

Consumer packaged gross profit per MT improved by $44m, on a combination of higher utilisation of the Dunsandel canning facility that was largely offset by the costs of commissioning the Auckland canning facility.  Lactoferrin sales increased by 44% over FY17 to 16 MT, while margin per MT increased to $285,757, contributing $4.4m to gross profit.

So, in looking at the contrasting fortunes of these two dairy companies, the question has to be asked:  is it a good enough reason to pump taxpayer money into one simply because the region in which it is based is suffering from the demise of legacy industries? (Not to put too fine a point on it, those industries include a coal industry killed off by the government which now is pumping taxpayer money into the region).

Or is it the co-op structure which is no longer fit for purpose in a fast-changing industry?

3 thoughts on “A tale of two milk companies – one of them is being suckled by taxpayers

  1. This is a disgrace Westland Milk was more than likely going to be sold, in fact may still be. The loan represents a huge subsidy or bailout to the co-op members. Not that anybody remembers history anymore the track record of politicians and bureaucrats picking winners is abysmal.


  2. Pretty much summarizes the difference between a co-op structure and a proper structured company with private or public ownership. The weakness in the co-op is there are no real equity holders for last recourse and the supplier directors can’t get out of their own way regardless of the fact they are competent and well intentioned. So focus always leans towards farmer payout which is fundamentally just an internal transfer price on the way to the real customer. So combine a poor capital structure with sub optimal governance, regardless of how good the management is, and you have what you have described in the article. Spent 10 years in agribusiness related project finance in some funny places and never managed to close a deal with a co-op. Kind of sad that we have to regard the West Coast where I was born as a “developing country”
    Graeme Rothwell


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