Open Country Dairy puts brakes on capital investment

Talleys' dairy manufacturer Open Country Dairy is pulling back on capital investment and eschewing a dividend as it hunkers down to cope with low milk prices.

The Auckland-based company's annual accounts show the value of its property, plant and equipment increased by $40.1 million to $304 million in the September year, as it expanded its processing capability, including additional milk powder and cheese processing facilities at its Waharoa factory in Waikato/Bay of Plenty.

However, global dairy prices have slumped the past two seasons and may continue to be weak next season.

Open Country says it's pulling back on investment this year to focus on bolstering its balance sheet to enable it to support payouts to farmers. Profit rose 16% to a record $34.4 million last year, but the company says it is disappointing as the extra capacity didn't lift earnings as expected.

The 2015 profit "was robust but it was a little disappointing and at the very best you could say it was flat in terms of the rate of earnings on capital investment," chairman Laurie Margrain says.

"We had a lot more processing capacity than the previous year and that additional capacity didn't earn at the rate that we might have expected, which is not surprising in what's a very difficult year for the industry.

"We are probably investing the best part of $40 million less this year than we did last year because we don't have any major builds scheduled and are not likely to schedule something in the immediate future."

Open Country targets its investment to ensure a competitive payout to farmers and to make its enterprise more internationally competitive, he says, with investments in the past year aimed at pushing its products up the food ingredient value chain. That isn't on the cards this year, with no major investments scheduled, Mr Margrain says.

The company expects to pay farmers $3.90-to-$4.20 per kilogram of milk solids this season, compared with a $4.15/kgMS payout forecast by its larger rival Fonterra. DairyNZ, which collects industry data to work out the milk payment required for farmers to pay their bills each season, estimates the average farmer needs $5.30/kgMS this season to break even.

"The industry is incredibly volatile, sell prices are suppressed, the supply base is hurting like you wouldn't believe, beyond what's endurable for some of them, and that being the case, it's critical that our investment should be only focused upon what might assist the competitiveness of those farmers," Mr Margrain says.

"We think it is an industry where you have to have a conservative balance sheet if you are going to support the farmers through what are clearly very difficult times, and that's our focus. No dividends to shareholders, a strong balance sheet, return their cash earlier and ensure that we can assist with specific packages as and when required."

Open Country hasn't yet made a forecast for the upcoming 2016/17 season, however Mr Margrain noted bank economists forecasts of around $4.50/kgMS looked optimistic.

"It is difficult on what we see today to think there would be a forecast starting anywhere above that level, and right here and now  if you put a forecast out based upon the exchange rate and sell prices you certainly wouldn't start with a number that high for next season. But we are not there yet, there is a fair bit of water to flow under the bridge before that takes place," he says.

Open Country will probably publish its forecast for next season in late April or early May.

The company has $115 million of bank loans due in September this year, compared with $129 million at the same time a year earlier, according to its accounts.

(BusinessDesk)