Fonterra Australian business plays key role in profit turnaround

Fonterra Australia managing director René Dedoncker said the turnaround in Australia was driven by big calls made 12 months ago such as the closure of the Dennington, Vic, factory.

A new strategy aimed at optimising the value of milk intake was also paying dividends.

Fonterra was no longer pursuing milk supply growth for the sake of it and was happy with its intake of 1.4 billion litres in the previous 12 months, despite a 12 per cent fall in that time.

The Australian business was now profitable.

"We have earned the milk price that we've paid and we've provided a shareholder return, albeit a modest return, back to NZ," Mr Dedoncker said.

"But we need to do both - to have a competitive farmgate milk price that we earn and we need to pay a shareholder return."

Fonterra chief executive officer Miles Hurrell backed the assessment of the Australian business.

"Our Australian consumer business performed strongly with sales continuing to increase thanks to its popular beverage, spreads and cheese products," he said.

"We have reset our strategy in Australia and have a target and we are very comfortable with the milk intake."

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Fonterra's annual report revealed the Australian consumer business had improved its gross margin due to revenue growth in all categories, particularly in chilled spreads.

Gross profit in the Oceania consumer business, of which Australia is a part, increased $NZ23 million to $NZ298 million, due to Australia's increased volume and improved pricing effectiveness.

The Australian ingredients business reduced its Earning Before Interest and Tax loss by $NZ27 million, reporting a full year normalised loss of $NZ25 million.

Mr Dedoncker said the Australian business had stabilised but wasn't "setting off firecrackers".

The business was now looking to repeat the performance by locking in long-term contracts for high-value products.

"I need stable volume, stable returns and a multi-year view, decades long," Mr Dedoncker said.

"We are going to make choices to do things and to not do a whole lot of things."

The business would no longer take on one-off short-run contracts, even with an attractive margin.

"(Not if) I need to go and find the milk to service that or even worse I've got the milk for it and that volume moves away and I've still got the milk and I am forced to make something with less value," he said.

This meant Fonterra was using considerably less third-party milk.

"It is just not worth us running 100s of millions of litres through our facilities on behalf of a third party and we're really at the beck and call of that third party," he said.

He cited the turnaround at the Darnum, Vic, paediatric nutritionals factory as an example of the strategy of fewer, bigger customers.

Pulling out of a joint venture with Beingmate at that plant meant Fonterra had to cover all the overhead costs.

It was now putting 50 per cent more volume through it with big, global customers on multi-year contractors.

The company had forecast it would take 2-3 years to get the plant back to break-even, but had achieved that in the past 12 months.

"That's the trajectory we are on; we are steady as it goes," he said.

Mr Dedoncker assured Fonterra's Australian suppliers that although it was not chasing milk supply, it could take extra production from them.

"We are optimising to really clear choices," he said

"We don't want to chase growth milk - we just want enough milk that matches up to those choices.

"It is a shift and it is an intentional shift and our role is to ensure the choices we make create value.

"If farmers grow on farm - we want to be in a position to take that, but I also want to be in a position to create value from that."

The proposed acquisition of Dairy Country, announced last week, fitted with that strategy.

"It is supporting our consumer and foodservice innovation; we can innovate around consumer pack sizes, it will allow food and consumer (businesses) to do more in cheese and butter."

Mr Dedoncker said the flexibility to move between products had helped Fonterra weather the COVID-19 crisis in Australia.

The company had been able to switch from packaging products destined for restaurants to packaging products for the home market, as people had started baking and eating more at home.

On the operational side, it had started crisis management around the COVID-19 crisis in January, so it had protocols in place right from the farm through to the shelf, which had allowed it to continue operating safely.

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