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Announcing its results to shareholders for the six months to 31 December 2005, Chief Executive Officer, Mr Rob Gordon, said, “Today’s business update confirms that the underlying FMCG strategy primarily focusing on our premium brands is on track. It also demonstrates the speed with which we’re making changes across our operations that, in turn, is building a stronger and more dynamic business.
“Dairy Farmers boasts some of the strongest consumer brands in the country. Our focus during the past 12 months has been to begin to unlock the underlying strength of our eight champion brands, to deliver real, sustainable value for our shareholders.
“We’re just over a year into the two-to-four year journey which has involved making some big bold moves so that we can reap the benefits as we head towards a listed environment,” said Mr Gordon.
Financial Results
Mr Gordon said, “Changes across the business are expected to deliver cost savings of $42 million per annum flowing progressively through in the second half of this year. Further benefits will be increasingly delivered in the 2007 financial year, and the years thereafter.”
During the period, Dairy Farmers has divested a number of non-core assets, reshaped its product mix, backed its key brands, closed manufacturing facilities, reduced the employee base and cut costs. At the same time, it has stabilised a sustainable future milk supply by entering into two-to-three year contractual agreements with suppliers.
Exiting unprofitable businesses has changed the sales revenue resulting in a decrease from $598.3 million first half fiscal 2005 versus $577.4 million for first half fiscal 2006. However, this was offset by an improved earnings mix derived from higher margin branded products, resulting in a positive contribution of $19.4 million from 1 July 2005 to 31 December 2005 when compared with the corresponding period in fiscal 2005.
An improved business mix during the period saw Dairy Farmers increase investment in milk and cheese by $15.5 million and improve its brand investment by 49 per cent as it invests in the medium to long term future of the business.
As a result, to 31 December 2005, operating Earnings Before Interest, Depreciation and Amortisation (EBITDA) from continuing operations, before significant items, was $34 million compared with $38.7 million in the previous period. The Net Profit After Tax (NPAT) from continuing operations after significant items for the half year ended 31 December 2005 was $4.7 million compared with $3.6 million in half year fiscal 2005.
The Board has declared an interim fully franked ordinary dividend of 2 cents per share on Monday 10 April 2006, to be paid on Friday 12 May 2006.
Dairy Farmers’ underlying business fundamentals are strong, supported by a solid balance sheet. The business continued its low debt position achieved at fiscal 2005 – among the lowest in eight years.
Step Change Strategy
Commenting on progress within the business, Mr Gordon said, “The rationalisation of our network announced in May last year, which was designed to exit unprofitable businesses, divest non core assets, strip out costs and eliminate duplication, is now substantially complete. During this first half of fiscal 2006, our focus has been on taking costs out and improving overall efficiencies.”
Operationally, changes included:
• Shifting production from Toowoomba plant in Queensland to strategic site at Booval resulting in the full closure of Toowoomba by end of April 2006
• Shifting production from Bomaderry facility in NSW, which closes on 12 April, to Lidcombe and Hexham facilities
• Closure of Mt Gambier processing facility in South Australia in December 2005, ahead of schedule
• Closing Deniliquin milk intake facility in NSW by August 2005, ahead of schedule
Part of Step Change has included the divestment of non-core assets to focus on high margin businesses, and progress was made to that end with the divestment, at above book value, of all 14 rural stores across NSW and Queensland.
Our investment in brands is starting to deliver solid results with positive trends in branded whole white and speciality milks across four key consumer markets - NSW, Victoria, Queensland and South Australia, with Dairy Essentials, which includes custards, creams and buttermilks up 20 per cent when comparing sales for the two relevant comparable half year periods.
During the fiscal 2006 first half, in close collaboration with its key retail partners, Dairy Farmers continued to focus on its innovation pipeline to bring a range of new products, including cheeses, yogurts and specialty children’s snacks and milks, to market.
Distribution Channels
“An important part of the business is our route and convenience trade which accounts for approximately one third of sales revenue. Dairy Farmers recently secured new business with a range of key strategic partners, including Coles Express, 7-Eleven, Hungry Jack’s, IKEA, IGA and McDonald’s, providing exciting opportunities for growth in this part of the business.
“As a result, we’ve improved our market position in the important convenience channel with 16.6 per cent milk volume growth during the last quarter to March 2006 when compared with the prior period in 2005.
“In our route and convenience sector, during the half year 2006 compared with half year 2005, Dare sales increased by 11 per cent and Moove was up 22 per cent. As a result of reorganising our route sales force from November 2005, we have witnessed increased product sales with Dare iced coffee up 21 per cent and Moove flavoured milk sales up 41 per cent in the last quarter alone compared with the comparable period.”
Next Steps
“Looking ahead, we anticipate a solid second half performance as we continue to find ways to improve member value. Our immediate focus is on value-improving programs which include our next phase of cost reduction by rationalising freight providers and improving our procurement processes as well as supporting organic and other growth opportunities.”
We will continue to apply strict criteria as we seek to leverage our balance sheet by exploring options for growth. Criterion includes:
1. Maximising shareholder value – by improving the overall business
2. Investing in a sustainable milk supply – paying farmers a competitive milk price in turn provides a secure supplier base
3. Optimising the return on capital invested – becoming an efficient low cost competitive processor
4. Increasing sales of premium brands – investing in champion brands to strengthen our market shares and extend product innovation and distribution
“Like all businesses going through major change, we know there’s still more hard work to be done. However, as the benefits of our efforts flow through with increasing intensity, they will provide the leverage we need to achieve real, sustainable growth ahead of a potential listing on the Australian Stock Exchange,” concluded Mr Gordon.
