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Dairy Farmers Chief Executive Rob Gordon said: “It is nearly two years since we embarked on our two-to-four-year Step Change – Grow Fix Exit journey to transform the business into a leading Australian branded dairy business. Fiscal 2006 marks a major milestone in our progress.
“The change agenda we set was undeniably ambitious. And, notwithstanding this major restructuring – and challenging cost and trading environments – we have achieved a solid result in a year of significant investment. As a consequence, we have today a leaner, more focussed and attractive business.
“In the past 12 months, we have lowered our cost base, created a profitable portfolio of value-added branded products and developed our people capabilities. As a result, we are well positioned to use this strong platform to launch into the growth phase of our business turnaround,” said Mr Gordon.
Financial Results Summary
Mr Gordon said, “As part of the re-focus, we have successfully grown the high-margin end of the business with an improved product mix and sustainable earnings up $57 million in 2006 from increases of $19 million in fiscal 2005. The deliberate exit of low-margin and commodity businesses to reshape the product mix has reduced revenues from 30 June 2005 of $1.18 billion to $1.16 billion in the year to 30 June 2006,” he said.
Underlying Earnings Before Interest Tax Depreciation and Amortisation from continuing operations before significant items was $75.2 million, compared with $77.7 million in the prior year. While Net Profit After Tax on a continuing and discontinued basis increased from $12.2 million in fiscal 2005 to $17.4 million for the year ended 30 June 2006. Consistent with new accounting standards as they apply to co-operatives, Dairy Farmers’ NPAT includes dividends as an interest expense.
“Like many in the industry, we faced an accelerating cost environment not least of which was an increase in milk payments to competitive levels which resulted in an additional $20 million in year to 30 June 2006. We had said from the outset that this was a year of investment in higher milk payments as well as increased marketing spend,” said Mr Gordon.
At year end, Dairy Farmers’ business fundamentals were underpinned by a solid balance sheet. Debt levels remain low, with leverage of 35 per cent providing a platform to pursue future strategic growth opportunities.
Dividend and Dividend Reinvestment Plan
The Board has announced a fully franked interim dividend of four cents per share, bringing total dividends in relation to fiscal 2006 to six cents per share fully franked. The dividend will be paid to shareholders on 1 November 2006.
In light of the solid balance sheet position and to minimise dilution impacts in the lead up to its planned restructure, Directors have confirmed suspension of the Dividend Reinvestment Plan.
Step Change Strategy on Track
Mr Gordon said, “During fiscal 2006, we have been focused on bedding down the Exit phase of Grow Fix Exit while making considerable inroads into the Fix phase. We finalised the rationalisation of our supply chain network and cut overheads to generate the cost savings necessary to offset heavy investment in our future.
“The anticipated Step Change cost savings of $42 million per annum were largely delivered during fiscal 2006 flowing through primarily in the second half as costs-out were supplemented by a review of strategic sourcing and freight provider rationalisation.
“In the second half of fiscal 2006, Dairy Farmers conducted a review of its national freight arrangements, tendered the business, and, with effect from September 2006, reduced its service providers from more than 90 to less than 10. By consolidating providers of other goods and services, savings across areas of procurement have also been identified and will be delivered in 2007 with full year benefits flowing into 2008.
“As part of taking costs out of the business, corporate overheads were reduced by $7.2 million. Major manned distribution facilities including Arndell Park in Sydney were established while other sites were reconfigured to self-managed facilities. The processing and distribution network was resized and reshaped, and four manufacturing facilities were closed,” said Mr Gordon.
As a result of these initiatives, the co-operative’s employee base was reduced by 350 in year, bringing total staff reductions to more than 600 during the past two year period. To ensure impacted employees had the best possible chance of securing other roles, an extensive redeployment, retraining and redundancy program was successfully implemented.
Partnerships and alliances
During the year, Dairy Farmers increased advertising spend by a further 15 per cent, and continued to invest behind its eight key brands to grow the core portfolio which saw a substantive increase in new product development.
In close collaboration with its key retail partners, Dairy Farmers continued to focus on its innovation pipeline to bring a range of new products to market including dairy desserts, yogurts, cheeses and specialty children’s snacks and milks.
“During the past year, we have worked tirelessly to ensure we got things right with our retailing partners. We invested in a new customer service operation and third party warehousing to improve service levels to supermarkets as well as completely revamping our franchise owner structure and doubling our route sales force,” said Mr Gordon.
Outlook
We stated from the outset that 2006 would be a year of investment in farm-gate milk price to secure supply and increased investment behind our key brands to create a higher-value branded portfolio.
Mr Gordon said that with Step Change benefits delivered predominately during the second half of the 2006 financial year, the earnings run-rate improvement in the final quarter of the 2006 financial year was encouraging, and has provided a positive start to the current year.
“We are confident that our hard work is beginning to deliver results,“ he said. “Benefits of brand investment were evident in the improved revenues of our eight champion brands up 4 per cent in the first quarter of 2007 when compared with the same period in the prior year.
“We have already identified many of the projects which will deliver the upward trajectory in top and bottom line growth necessary to maximise shareholder value in the coming year, “he said.
