RELEASE of the Murray Goulburn (MG) result has crystallised the worst aspects of the current malaise in the dairy industry.
MG stated in a release that at the year’s end it had closing debt of $507 million and net debt after cash of $480.
On this basis MG’s gearing level (MG’s primary credit metric) at year end was 29.0 per cent - down from 48.3pc in FY15.
This result was primarily driven by the proceeds received from the listing of the MG Unit Trust in July 2015 and early efforts to sustainably reduce working capital.
This is a gross miss-statement.
They claim the return to growers who are also fully entitled shareholders is $5.604/kg solids.
If as they claim all proceeds go back to the co-operative (and shareholders) then it is logical to also include the extra debt of $280m or average $100k per supplier in the debt calculation.
That calculation takes net debt to $760m up from $635m in FY2015.
That calculation shows debt at 45pc - the same as last year and after receiving $500m from the share offering.
So to summarise - real debt is up, despite the share capital raising, with a 3pc reduction in revenue and when compared with companies that did not backdate a reduction in milk price, a $200m EBIT loss, rather than the $80m EBIT profit listed.
It is important to note that Warrnambool Cheese and Butter, National Foods, Bega, and Norco managed the international milk price without clawing money back from growers.
Only Murray Goulburn and Fonterra chose to lay their mistakes on their growers.
Further having screwed their growers last year Murray Goulburn is at the bottom of the majors in their milk price for F2017.
The sleeper in this is confidence and relationships.
Also there is no obvious champion who can regain the confidence of the industry generally.
Murray Goulburn and Fonterra have broken the positive relationship with their suppliers.
It was reported last week that Fonterra’s July collections of milk in Australia were 22pc down on July 2016.
Every farmer who supplies either MG or Fonterra, and who can, is looking at other milk companies to take their milk.
Some shareholders in MG are working on an action against MG.
Not much goodwill there.
Some farmers are considering a second class action.
Woolworths just discontinued a $100m deal on cheese with MG.
Not much sign of goodwill there.
ACCC have a role to look at whether the actions of MG and Fonterra constitute unconscionable conduct in the same terms as happened with Coles and some suppliers recently.
ASIC has a role to investigate whether MG breached constant disclosure rules.
MG did not put any contingent liability note against its stated profit when there are at least four bodies, two being government regulators who have signalled possible action over the decisions of the MG board and management.
The effect of all this and their policy of distributing all “profits” is that if any one of these potential actions proceeds, MG is up for legal costs to defend and potentially substantial payments as well.
Because no provision has been made for these contingent liabilities, such funding must come from future years or debt, which is essentially the same thing.
Add all these factors together:
• Growers trying to leave = lower milk supplies
• Shareholders unhappy = no capital from the share market
• Customers showing signs of unrest= lower product returns
• Potential court action= increased costs
• No champion to improve reputation
It is most likely that volumes of milk will fall significantly, leaving some assets underutilised.
Then comes the very tough decisions about closing or selling assets.
This inevitably will lead to increased overheads and higher costs of production which will further dilute profitability.
MG will be weakened further because the current board and management has not shown any ability to understand how to deal with adversity.
The death spiral has started.
Thankfully we do have other companies that will pick up the milk and produce profitable increases in their own product lines.
We are looking at the carcass of the whale in the dairy industry - the carrion will be picked over by the scavengers who will clean up the rotting flesh.