Westland Milk Closes the Gap on Dairy’s Big Brother
The Hokitika-based Westland Milk in New Zealand fell behind its far larger competitor, Fonterra, in 2016. Under new chief executive Toni Brendish, the co-op is closing the gap.
Extreme volatility in world dairy markets has taken its toll on companies around the world, and Westland Milk has been no exception. The co-op turned in a $17 million (FJ$25 m) loss over 2016/17 and its payout — at $5.18 (FJ$ 7.63) per kg of milksolids — was the lowest of all the Kiwi dairy companies. A barely break-even payout came as a shock for those who had become used to Westland being in the same ballpark with its far larger competitor, Fonterra. Big changes had to be made to close the gap.
About Toni Brendish
Toni Brendish, with an accomplished career with French food group Danone, was brought in as chief executive in September 2016. At a special shareholders meeting in October, far-reaching changes were introduced including a reduction of the number of directors on the board to eight from 11. Under Ms Brendish, there has been an intense focus on cost-cutting and on growing revenue.
The overall strategy of diversification, which was in place before she arrived, remains intact.
The West Coast is famous for its rain but conditions have been dry in the lead-up to Christmas. Nevertheless, Ms Brendish says farmers have a spring in their step. “Overall, Westland farmers are feeling more positive — certainly because we have indicated that we are in the money for the milk price. “We have given them some information about some of the things that we have done to close the gap — so they have a lot more confidence around that,” she said. Westland has a forecast payout range of $6.40 (FJ$ 9.43) to $6.80 (FJ$10) per kg for 2017/18. While the company has signalled it will probably be at the lower end of that range, the payout is looking considerably better than last year’s — which was well over a dollar short of Fonterra’s.
Westland’s current forecast is within striking distance of Fonterra’s, which is for a milk price of $6.40 (FJ$9.43) /kg, with a likely dividend of around 28c/share on top.
“It’s really about managing people’s expectations because Westland had a history of being a bit up and down, so the whole goal is to pick a range that we can absolutely deliver to, but also make sure that we are managing those expectations all the way through the whole season, with no surprises.” Ms Brendish said she didn’t have a problem with the company’s direction when she stepped into the hot seat.
For her, it was more about focus on execution, or the lack of it.
Westland caught
Like many others, Westland found itself caught up in all the hoopla surrounding a very high milk price of around $7 or $8 (FJ$11.79) a kg in 2013/14.
Emboldened, management made some big investments in Westland’s capacity to make infant formula and UHT.
“Both were great decisions but, fundamentally, how we executed them was the issue.
“Unfortunately, as we got into the execution, it was the same time the milk price came down for a couple of years at $4.00/kg.”
“Really for me, the focus has been on how to execute those growth strategies effectively and build a level of accountability in the business to make sure that they are executed the way they should be,” she said. Another key lesson from Westland’s fall from grace was to make sure there were customers on board before undertaking any major capital expenditure.
“One of the things that we do now is, before we make any decisions regarding capex, or investments, is to find out what market is there and get customers on board before we commit to large sums,” she said. She says that aspect of how the company runs has fundamentally changed.
The company’s UHT plant at Rolleston is now running at 50 per cent capacity.
In infant formula, Westland has expanded its customer base and its nutritionals plant is now running at two-thirds capacity, which is adding significant value in terms of payout.
Westland makes infant formula with a joint venture partner — Ausnutria — a Taiwanese company based in China, under the brand name Puredo.
Ms Brendish says skim milk powder — once the mainstay of the business — is less of a “standby” than it once was.
That’s fortunate, as skim milk powder prices dropped by about US$1000 (NZ$1400) (FJ$2,063) a tonne over the last year because of EU stockpiling.
Ms Brendish says skim milk powder — a by-product of the butter making process — has become less important from a commodities point of view, but the co-op can funnel it into its nutritionals product if need be.
Happily for Westland it is big in the butter market, which has attracted record high prices over the last year.
Ms Brendish says the co-op has built greater levels of efficiency. “We have a broad mix of products that we make — clear sales and operations planning process that allows us to maximise whatever is the stream of the day.
“It might be a mix of butter and casein or it might be a mix of butter and whole milk powder and we are able to maximise that mix quite effectively.”
All up, Westland will make around 130,000 tonnes of product this year. About 20 per cent of that will be in nutritionals, or infant formula, and one-third will be in butter and fats. “One of the advantages of Westland is that we have a footprint that allows us to do quite a large range of products,” she said.
These days Westland has more fingers in different pies, often at higher premiums.
Powerhouse
Ms Brendish came in with a course of action called Powerhouse — “for want of a better name” — to get the ball rolling.
The aim was to get people focused on the things that would drive revenue and also take costs out of the business.
That meant focusing on economies such as cutting photocopying costs through to treasury management and transport tendering. The aim of Powerhouse was to provide $78 m (FJ$ 114m) of revenue upside and cost savings. To date, Ms Brendish said $77m (FJ$113m) has been reached, and she says that’s allowing the company to close the gap with its competitors.
Segregation
Much of the talk at Westland is about “segregation” — the ability to isolate product at the factory, as it already does with colostrum. “We want to be able to do that for all the different types of milk — for example, purely grass-fed milk, or say, jersey cow milk, with full traceability.
“We really think that Westland is very well positioned to do that because of its small size.” Ms Brendish wants to turn Westland’s relative isolation into a selling point.
“The West Coast is a sensational place. How do we capture that through what we offer?” About 20 per cent of Westland’s milk comes from Canterbury. While West Coast suppliers can’t vote with their feet, its Canterbury suppliers can.
Despite its troubles, Westland has not lost any suppliers yet.
Environment
“Our Canterbury shareholders have a choice, so we need to be absolutely competitive and offer them a sense of the future,” she said.
Like most other regions, dairy is coming up against environmental limits after a decade or so of explosive growth.
“We do know that there is not going to be any massive growth in dairy farming.
“There are not going to be any more conversions.
“We need to understand that this is our pool in terms of how we maximise the value from our pool and help our shareholders see that we are really adding value to that for them.
“That’s again where our size can come into play,” she said. Ms Brendish is fully aware that dairy is coming up against environmental constraints.
“The whole question around our social licence is being debated very freely and we take that incredibly seriously.”
In a man’s world
Brendish says she has not struck any trouble being a woman in what is arguably a man’s world.
“I always joke with our shareholders hiring a woman was not the issue, it was hiring an Australian,” she said.
The food industry faces big challenges and “disruption” seems to be the theme.
Ms Brendish is relaxed about the possibility of synthetic milk becoming a commercial reality. The company’s statement of purpose: “Nourishment Made Beautifully for Generations” deliberately omits the word “dairy” — recognising that “nourishment” might take different forms in the future. Ms Brendish says Westland’s UHT plant — which is also capable of processing goat’s milk — could become an example of things to come. She says Westland is in a “sweet spot” with its West Coast supply. “We have an opportunity to leverage that in strategic partnerships — best example of that is the joint venture with Ausnutria.”
The over-arching direction of the company is towards greater valueadded activities.
“The difference between us and Fonterra is that they are massive. Roughly 80 per cent of their product is commodity-orientated, because they have to take all the milk and turn it into whole milk powder or whatever it may be.”
As it stands, Westland’s split is 37 per cent of high value and only 63 per cent in commodities.
Westland is aiming for that split to be more like 50/50.
“As of today, that opportunity exists for us to drive more value for every dollar that we put in.
“The future, if we can get segregation and separation at the farm, we think we can get even more than that,” she said.
For now, Ms Brendish says it’s a matter of executing what she said was, and still is, a sound strategy. “Westland shareholders are a good bunch in terms of accepting an Australian woman, but more importantly they have had the resilience to get through some tough years,” she says.
“And they have given us the space to get on and do things.”
It’s really about managing people’s expectations because Westland had a history of being a bit up and down, so the whole goal is to pick a range that we can absolutely deliver to, but also make sure that we are managing those expectations all the way through the whole season, with no surprises. Toni Brendish Westland Milk chief executive officer