nz farming systems Uruguay

[Snoopy]

From www.olamgroup.com

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New Zealand Farming Systems Uruguay To Invest US$80.0M In New Dairy Processing Facility -

Olam International Limited (“Olam’’), a leading agri-business operating across the value chain in 65 countries, announced today that its wholly owned dairy farming subsidiary New Zealand Farming Systems Uruguay (“NZFSU”) will be investing US$80.0 million to establish a new dairy processing facility in the central region of Uruguay, accessible to its farms.

The project enables Olam to fully integrate its dairy supply chain and realise the full potential of NZFSU’s dairy farming operation by leveraging its global trading and distribution network. The greenfield dairy processing facility will initially have a capacity to process 600,000 litres per day, going up to one million litres of milk per day – the level of milk production that NZFSU dairy farms are expected to reach at steady state.

Olam’s Managing Director and Global Head for Dairy, Coffee and Commodity Financial Services, Vivek Verma said: “The proposed dairy processing investment is part of our strategy for NZFSU to realise the full value of dairy farming. The processing plant will be uniquely positioned and differentiated with the control on milk supply through captive milk production and well-placed to meet our customers’ call for high quality dairy products with complete traceability and stringent food safety standards.”

The facility will produce a combination of dairy products, including whole milk powder, skim milk powder and butter, which will be exported to key markets where Olam currently supplies to, including China, Russia, Middle East, Eastern Europe and Africa, as well as neighbouring countries, such as Brazil, Paraguay and Venezuela.

Olam’s Executive Director of Finance and Business Development A. Shekhar said: “Our Dairy business had restructured its supply chain operations as well as optimised its balance sheet, freeing up resources to focus on margin accretive projects. In time to come, if we execute this well, the expansion of NZFSU into midstream processing will be a prized integrated farming and processing model that will truly leverage Uruguay’s comparative advantages and unlock the full intrinsic value of the assets we have built in this business.”

Approximately US$5.0 million of the investment will be allocated for the purchase of a 94.0% stake in BG Industria Láctea S.A., a company based in Uruguay, in order to acquire the land, licences and permits required for the construction of the plant. The dairy processing plant is expected to commence operations in 2017.

From June 2015 Quarterly Report:

Given the continued underperformance of the Dairy farming operations in Uruguay, Olam has decided to further restructure this business and defer its planned processing investment there. These actions are likely to result in a one-time restructuring cost in H2 2015 (July - December 2015)

SNOOPY

PS More detail from the press conference on the June 2015 quarter:

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(Previous quarter prelude: The upstream business in Uruguay is the one that is dragging the segment down
and that we see will have continuing profitability issues for the remainder of this financial year, I'm talking about the new financial year going until December. Various measures are being taken to arrest the decline and recover the operation and that you will start seeing the results only from the following year. So we've submitted and got approval for a two year revival plan for the Uruguay dairy farming operation that will include 2015 and 2016 which would be the turnaround year for us as far as Uruguay dairy farming operations are concerned)

Coming to dairy, I think there we have two issues. One is the operating performance of Uruguay that we have talked about in the past. We've been talking about that over the last few quarters. We had made various changes in terms of the operating structure, which again I highlighted in my last quarterly briefing, and we have seen improvements in May and June in our operating performance and in yield and productivity.

But in the last two months, as most of you would be aware, dairy prices have taken a hammering. They were bearish for the last over nine months, but in the last two months they have taken a further steep fall. And current dairy prices and the outlook of dairy prices remains very, very weak, so much so that even in a place like New Zealand, which is the most cost-effective producer of milk, there is large scale culling being contemplated. So clearly we have moved up the changes we are making in Uruguay beyond the operating aspects that we were focused on. We are now taking some far deeper cuts in terms of restructuring the number of farms, bringing down the number of farms, rationalizing our herd again, both by a mix of culling as well as moving herds into more centralized farms, and also cutting out due to that some parts of the infrastructure and overhead costs that we have. This is all happening as we speak. We believe and we want to call this out right upfront that in Q3 and Q4 there will be some one-off restructuring costs that we will have to take. It is still not something that -- we are working on it and hopefully by the next time we meet for the next quarterly briefing we'll have a better sense.

But what we want to do -- we don't see the current bearishness in milk prices. It's cyclical in some ways because of excess supply and the fall-off in demand, but we don't think this will correct in the next six to nine months. And we want to take some actions ahead of the curve, both to address the operating bleed in Uruguay as well as rationalize and position ourselves when the prices do pick up in the early part of next year. So that's potentially had, has had, a big impact for the first half as well as a continuing impact for Q3 and Q4, which we are really focused on. And I want to just assure you that the plan that we are drawing out right now, which we'll be in a better position to announce when we meet next quarter will hopefully address both the bleed as well as the long-term business model in our participation in Uruguay.
I'd also like to point out that we have in light of this current situation deferred the processing investment that we had announced previously and we have put that on hold. We have just taken; we have not spent too much and therefore it won't be a major impairment. But we have put that on hold until we resolve the basic farming structure.

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