Westland Milk Products sets up formula JV with Ausnutria and settles on 2015/16 payout

28-Sep-2016 - Last updated on 29-Sep-2016 at 11:58 GMT

Westland Milk Products will be creating a JV with Ausnutria at its Rolleston site. The new venture, called Pure Nutrition Limited, will be an infant formula blending and canning operation.

New Zealand’s second biggest dairy cooperative, Westland Milk Products, has signed a joint venture agreement with paediatric milk formula company Ausnutria to create a new standalone infant formula blending and canning company to be called Pure Nutrition Limited.

The coop has also announced its final net average cash payout to suppliers for 2015-16 will be NZ$3.87 ($2.81) per kilo of milk solids (kgMS).

New JV established

Chairman Matt O’Regan said Pure Nutrition will be established through an initial investment by Ausnutria of NZ$4.5m ($3.3m) cash, and the transfer to Pure Nutrition of land owned by Westland at its Rolleston site, which has a value of NZ$3m ($2.2m).

Ownership will be 60% Ausnutria and 40% Westland Milk Products.

20m cans of formula

Ausnutria, based in The Netherlands and China, will loan Pure Nutrition NZ$32m ($23.2m) to build and run the blending and canning plant at Rolleston.

The plant’s initial capacity is expected to be around 20m cans of milk formula per year.

Construction is expected to commence soon and be completed by late 2017. Approximately 30 new jobs will be created.

Dividends for both partners

Westland chief executive Toni Brendish said Pure Nutrition will, effectively, be a substantial new customer for Westland Milk Products.

“In addition to the direct sales to Ausnutria in China, which will continue, Westland will be the JV’s sole New Zealand supplier of dairy based powders,” Brendish said.

“The agreement commits the JV to purchase minimum volumes of 3000mt in its first year of operation, and 5000mt per year thereafter.”

Brendish added that after a five-year establishment phase, during which profits will be re-invested into the business, earnings are expected to provide dividends to both partners.

There is also provision within the agreement for Westland to use the facility to produce canned products for its own customers and markets.

Enhanced capability

In its statement to the Hong Kong stock exchange Ausnutria chairman Yan Weibin said the JV will further develop and diversify its milk source, and enhance its capability to produce infant formula for anticipated growth in demand in China and other countries.

Brendish said Westland was confident that Pure Nutrition’s dividends over the period of investment will contribute significantly to the payout Westland makes to its shareholders.

Payout to suppliers

The JV is good news for Westland suppliers, as the 2015/16 payout will be below the breakeven point for most farmers, with recent cash forecasts in the NZ$3.80 ($2.76) to NZ$3.90 ($2.84) range.

O’Regan said that for dairy companies such as Westland to prosper, a significant portion of their sales and margins need to come from value added products.

“The demand for quality nutritional dairy based products will continue to grow as the burgeoning middle class consumers across Asia look for sources of quality nutrition,” O’Regan said.

“It is within these consumer markets that Westland must find niches for our products and brands.”

Cautious forecast for 2016/17

He added that at the most recent board meeting, the forecast for the 2016-17 season and the advance rates payable was discussed.

Westland is forecasting a cash payout range for 2016-17 of NZ$4.55 ($3.31) to NZ$4.95 ($3.60) per kgMS with an advance payout rate of NZ$3.80 per kgMS from September through to June.

O’Regan said the board recognized that the market was improving, but added that given the analysis around potential pricing volatility, they remained cautious.