Open Country Dairy, New Zealand's second-largest milk processor, posted a record profit last year as it sold more high-value products and strengthened its balance sheet.
Profit soared to $62 million in the year ended Sept. 30, 2016, from $34.4 million a year earlier, according to the Auckland-based company's annual report. Revenue and cost of sales both rose at a 17 percent rate to $818.8 million and $723 million respectively.
Open Country, 76 percent owned by diversified agribusiness Talley's Group, pulled back its investment in property, plant and equipment by 44 percent to $31.5 million. It shored up its balance sheet by repaying $35 million of loans, ahead of the $14 million it paid the previous year and reducing its bank debt to $80 million. While the company paid just 5.8 percent more for milk, it received an extra 15 percent from its customers as it sold more higher-value products.
"We have got bigger," said chairman Laurie Margrain. "We processed more last year than we did the previous year, and we therefore got more operating leverage out of our stainless steel investment and the results should reflect that and did last year. We think it's a robust, satisfactory result.
"Our level of investment was relatively low for the year so our balance sheet has become even more conservative, our debt/equity ratios have improved, and our debt levels have fallen again."
Open Country has yet to pay a dividend, eschewing payouts in favour of investment for future growth. Margrain said it was looking to invest in more plant in the Waikato but that wasn't on the cards for this financial year.
"You could expect to see measured investment forward in the future," he said.
The company paid $507.9 million for milk in the latest financial year, up from $480.2 million a year earlier. Receipts from customers rose to $811.2 million from $707.4 million.
Founded in 2001 as a rival to dairy giant Fonterra Cooperative Group, Open Country's first Waharoa cheese factory started production in 2004 and the company has since expanded throughout the country, building factories in Southland and Wanganui to enable it to source milk from the country's largest dairying regions. In its early stages, the company's focus was on producing commodity products such as whole milk powder, however in recent times it has ramped up production of higher value products.
"We continued our push into higher value food ingredients," Margrain said. "We make considerably less baseline whole milk powders than we used to, we are now more about supplying our major customers around the world with high quality higher value food ingredients, not branded products per se but food ingredients. That's been an aspiration of ours for some years, we continue to fulfill it and we will keep doing it."
He declined to detail the percentage of milk powder the company now produced, compared with past years.
Open Country expects to pay its farmer suppliers around $6 per kilogram of milk solids for the current 2016/17 season. That's above the level most farmers require to produce a profit, following two years below breakeven level, and Margrain said the payout is also likely to be profitable for next year as global demand and supply come into balance. The company hasn't yet forecast a payout for next season.
"At the moment we think they are not too badly matched in terms of the growth in demand and the growth in supply, and so you would expect logically that there is a much higher degree of stability likely in the next 12 months than has been in the last two years," Margrain said. "Our view is that we are in a relatively stable market period at this point in time, and we see no logical reason why that should dramatically change."
Still, he said global competition is "very severe".
"It's hard work, it's a volatile industry, it's an industry in which you should operate conservative balance sheets and one should never ever be complacent."
This article is tagged with the following keywords. Find out more about MyNBR Tags
Most listened to
- Disrupting the heavy machinery industry with crowd-sourcing, with EquipmentShare NZ's Michael White
- KlickEx founder Robert Bell and IBM's Shahid Saiyad on the benefits of the blockchain for cross-border payments
- Having a "really interesting life" requires "stepping out of your comfort zone – frequently," says FAB Group's Jackie Smith
- Nevil Gibson sums up the action at the world financial summit and reveals New Zealand's contribution
- NBR Radio: The best interviews, with Grant Walker — updated daily