Fonterra Australia should be profitable in the next year, says new Oceania managing director

Fonterra Australia should become profitable in the next year, says Judith Swales, who runs the Australian operations of the New Zealand dairy giant and is the new boss for the cooperative's Oceania consumer brands division.

Ms Swales took up her new role as managing director Oceania at the beginning of the month, leading a new unit that adds New Zealand consumer brands including Tip Top to Fonterra's Australian segment. She has been the cooperative's managing director Australia since 2013, after having senior executive roles at Heinz Australasia and Goodyear Dunlop Australia.

Ms Swales is remaining Melbourne-based but will travel more often to New Zealand after becoming part of the Fonterra senior management team.

She said it made a lot of sense to bring the consumer brands together with Kiwi brands such as Mainland and now Anchor, already in the market across the Tasman.

"It's all about getting more leverage for some of these brands and increasing returns to farmers," Ms Swales said. "Having this portfolio under one head should allow us to leverage and drive growth and innovation more quickly. The F in FMCG (fast-moving consumer goods) does stand for fast."

When announcing her promotion, Fonterra chief executive Theo Spierings said Ms Swales had made progress in a difficult environment in Australia and the turnaround there had reached a point where she was capable of taking on expanded responsibilities.

The Australian business has under-performed for several years, with a $108 million writedown on its yoghurt and dessert assets in the 2015 financial results for the year ending July, along with a $106 million revenue drop to $1.56 billion over the previous year. Fonterra doesn't provide any further breakdown on the country's financial results.

Australia remains a tough market with fierce competition for milk supply and over-capacity in dairy production.

Ms Swales said the loss of Danone as a customer following the WPC80 incident, a fire at the Stanhope factory during the year which affected speciality cheese production, and the yoghurt and desserts businesses facing a tough time with a lot of new entrants into that market, were all factors as to why Australia continues to bleed red ink.

On the positive side, costs have been reduced and relationships with suppliers improved, including a 10-year deal with Woolworths to supply up to 100 million litres of milk annually for its Select own-brand fresh milk, which is being processed in Cobden at its recently-opened A$31 million fresh milk plant. Australia's food services volumes also lifted 11 percent in the last financial year after five years of being flat.

"We're getting to the pointy end of that turnaround this year as some of the pieces start to come together. We've laid a lot of groundwork in transforming the business to profitability and are about half way there and have line of sight to the end game," she said.

Ms Swales said there were some announcements due in the next couple of weeks that she couldn't yet reveal that tied back to Australia's shift to align better with the cooperative's multi-hub strategy of having different milk supply pools meet different demand. Australia is Fonterra's second-largest milk pool after New Zealand.

The plan for Australia is to shift from low-priced skim milk powder and whole milk powder, which will be produced out of New Zealand, and to focus on nutritional milk powders such as infant formula, whey, and specialty cheeses such as mozzarella.

The product mix change has been held up by the fire at its Stanhope specialty cheeses factory in Victoria. Ms Swales says a decision on rebuilding the factory is imminent. "It's my Christmas wish," she said.

Australia currently has 10 manufacturing sites processing 1.6 billion litres of milk sourced locally each year or 20% of total Australian production.

Ms Swales said the business had just picked up another infant formula contract for the loss-making Darnum plant in eastern Victoria, which is being bought in a 49:51 joint venture under Fonterra's partnership with Chinese food manufacturer Beingmate, in which it has an 18.8% stake.

Most of Fonterra's 1200 Australia suppliers are members of the Bonlac Supply Company, a collective which negotiates prices with the cooperative and acts as an agent for milk supply. Under a 2005 supply agreement, later extended to 2019 before Swales joined, Fonterra has to buy all milk from BSC shareholders that meets its standards and match or better the price paid by the dominant processor – Murray Goulburn. It doesn't, however, lock in farmers to supply Fonterra.

Mr Spierings caused a stir in August when he said Australian dairy farmers were being paid too much for their milk and that the price didn't reflect the collapse of global prices for key dairy commodities.

Australian suppliers were paid $A6 per kilogram of milk solids in the 2014/2105 season compared to $NZ4.65kg/MS for New Zealand farmer shareholders. Fonterra has forecast a payout of $A5.60 to its Australian suppliers for this season but warned there could be the "possibility of a step-down" in milk price, given global market volatility. The New Zealand payout is currently forecast to be $4.60kg/MS, plus a dividend of 40-50c.

Two years ago she said Fonterra Australia wanted to boost milk volumes by 100 million litres a week over the next five years. Now she says it is seeking a small uplift in volume but is no longer chasing "growth for growth's sake." Rather, it's trying to shift its brands towards the premium end of the market and achieve profitable growth.

(BusinessDesk)