Dairy co-op unveils share plan

Rod Quinn CEO Westland Milk Hokitika. Photo / Supplied

New capital structure aims to raise shareholder returns to more competitive level

Westland Milk Products, New Zealand's second biggest dairy co-operative, is proposing a new capital structure that would see its shareholder farmers issued with investment shares annually on top of the existing milk share.

The move follows the Hokitika-based co-operative admitting it didn't deliver an industry competitive result for shareholders in the 2013/2014 season. Westland reported record revenue of $830 million for the season, up 46 per cent on the previous year but the $7.57 per kilogram of milk solids payout was well under Fonterra's $8.40 per kgMS final payout.

Chief executive Rod Quin said the board signalled a year ago that the capital structure of the co-operative was under review. The outcome was a proposal to issue investment shares that reflect the value of retentions to shareholders.

"These shares would be issued at the end of the season in proportion to the milk solids supplied from each shareholder. The investment shares will mimic the value of the retention and will show on the shareholders' balance sheet," he said.

They would be separate to the existing milk share of $1.50 per kgMS and only tradeable when farms were sold. Over time the value of the investment shares would increase, exactly to the level of the retentions, which are currently at 30c per kgMS.

For example, a farmer who produced 100,000 kgMS would likely be issued with 30,000 $1 shares in the first year. If the retentions were kept at the same level, the next year he would be issued with a further 30,000 $1 shares - lifting the total value of his shareholding in the co-operative to $2.10.

Chairman Matt O'Regan said there would need to be a cap on how high that value was lifted to in order not to act as a barrier to entry for new suppliers so the proposal is to have a five-year review on the structure. Westland's constitution also provides for the board to withhold exiting share capital for up to five years to reduce the risk of mass redemption.

"We can't change the $1.50 per kgMS milk share, we'd have to have a shareholder vote to change that, but the company would have the right with this investment share which is fixed at $1 to determine each year how many we issue," O'Regan said.

He stressed the investment shares were still a concept and there would be widespread consultation with the co-operative's 425 farmer suppliers over the next six months and opportunity for them to have input. A special meeting will be held mid next year to vote on the proposal.

In the annual report out this week, O'Regan said the capital structure review was aimed at growing shareholder returns.

The dairy co-operative's substantial investment into increasing its capacity to produce high-value nutritional products was also helping grow returns, he said.

The increase in revenue was driven by higher milk volumes - up 21 per cent at 753 million litres, and the move towards higher value products which now contribute 14 per cent of sales volumes, compared to just 9 per cent four years ago.

The success of the co-operative's first full year of making nutritional products in its new drier at Hokitika had reassured the company it was on the right path towards more competitive and sustainable shareholder returns, O'Regan said. Work is well underway on an even bigger $102 million nutritional drier at Hokitika, the co-op's single biggest investment, which will be commissioned next September. The board has also approved a $40 million UHT plant to be operational at Rolleston in January 2016.