Biggest isn’t necessarily best, says MG head

23 Aug, 2017 02:14 PM
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Murray Goulburn had experienced “a difficult year” as a result of a significant reduction in milk intake and adverse seasonal conditions
I wouldn’t go so far as to say we have stemmed the flow.
Murray Goulburn had experienced “a difficult year” as a result of a significant reduction in milk intake and adverse seasonal conditions".

Murray Goulburn chief executive Ari Mervis has downplayed claims the co-operative might lose its mantle as the country’s biggest dairy processor, as Fonterra increases its milk intake.

MG has announced its milk volumes have dropped by more than a fifth, while revenue has fallen by more than 10 per cent.

MG told the Australian Securities Exchange (ASX) it had received 2.7 billion litres of milk, last year, down from 3.5 billion litres, or 21.8 per cent.

Forgiving the controversial MSSP, the closure of plants and writing down of assets resulted in a full-year loss of $371 million.

But Mr Mervis said being Australia’s biggest processor was not an end in itself.

“That is something I realised quite early on: You could say 'scale is vanity, profit is sanity’,” Mr Mervis said.

“In reality there are numerous small processors which are very profitable,” Mr Mervis said.

“It’s not around bragging rights about how much milk you process, it’s about how efficient and viable you are.”

Mr Mervis said a strategic review of the business was still being undertaken.

“We haven’t made any decisions, or come to any conclusions, regarding any of our factories,” Mr Mervis said.

“I can’t say anything about any specific manufacturing facility.

“I hope to be in a position at our October AGM to be clearer about the outcomes of our strategic review.”

MG also confirmed Deutsche Bank had "received a number of confidential unsolicited indicative proposals from third parties".

"The board has requested Deutsche Bank to seek more detailed proposals from these and other relevant parties, so as to enable MG to assess the merits of any proposals," the company said in its statement to the ASX.

MG would only consider proposals that included paying a higher milk price and increasing access to capital.

Mr Mervis said he recognised MG was still behind its competitors and an enormous amount of work needed to be done.

“We have immediately taken some steps on eliminating some discretionary spending,” he said.

Mr Mervis said the co-operative had experienced “a difficult year” as a result of a significant reduction in milk intake and adverse seasonal conditions.

MG was put “very much on the back foot” before the last financial year, with the events which lead up to the implementation of the MSSP, a new chief executive officer and board elections.

“We had a wet September, everything went against the industry and specifically a lot of things went against MG,” Mr Mervis said.

“There was a lot of milk leaving, a lot of suppliers opted to go elsewhere, on the back of the stepdown.

“When I came in, in February, some decisive moves needed to be taken.”

He admitted meeting with suppliers, getting rid of the MSSP, closing factories and putting out an early opening price didn’t initially turn MG’s fortunes around.

“Unfortunately those initiatives didn’t stem the flow of milk, we still saw significant movements of milk and we are anticipating collecting two billion litres during this financial year," he said.

“I wouldn’t go so far as to say we have stemmed the flow.

“But we have been honest, open and transparent, we have been decisive and everything we are doing is aimed at delivering a competitive farm gate milk price.”

As a result of the reduction in milk intake, it was vitally important it was channelled into the most high-value processing streams.

“We are fortunate we can move milk into those different streams and we are attuned to that.”

He said he was confident MG could maintain its planned farmgate milk price of $5.20 kilogram/milk solids (kg/MS).

He said the final price would depend on the price of the Australian dollar, commodity prices and intake.

Consultant Grant Samuel had advised keeping the price between $5.20 and $5.40kg/MS was possible.

“We have access of up to $100 million from the balance sheet to maintain that – it hasn’t been acquired yet but it has been made available," Mr Mervis said.

“Our supplier base wants a competitive milk price, that’s our job.

“They want to see transparency, open and honest dialogue.”

Dairy foods sales dropped by 8 per cent, to $1,221 million, largely due to lower adult milk powder (AMP) sales.

They dropped by $93 million, compared with the previous year, when cross-border sales grew significantly.

“Lower AMP sales also resulted in MG recording lower Devondale branded sales, which were down 14 per cent to $502 million," Mr Mervis said.

Mr Mervis said on the upside, the co-operatives ingredients business benefitted from improved commodity prices last financial year.

Average sales per tonne were up 10.5 per cent, net of the impact from a higher average exchange rate.

“Total ingredient and nutritional sales were $958 million, down 12 per cent,” he said.

MG’s ingredients sales fell 7 per cent and nutritionals sales contracted by 34.5 per cent as a key international customer became increasingly self-sufficient.

Mr Mervis said despite difficult trading conditions, at year end MG had reduced net debt, after cash, by $35 million to $445 million.

“The FY17 year has tested the strength and resolve of MG and its suppliers," he said.

“The coming months will be pivotal for the future of the business as the board and management finalise substantial business improvement programs and third parties are given an opportunity to submit formal proposals to the company."

Mr Mervis said MG’s milk intake remained firmly in the hands of its suppliers, and with their support MG looked forward to a constructive year.

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