THE people of Leongatha and Maffra will be breathing a sigh of relief today at the news that their Murray Goulburn factories will not be touched following the big co-op’s asset and footprint review. In fact, neither facility is even mentioned in today’s announcement.
No news is good news.
And in more good news for dairy farmer supplier-shareholders, MG has written off the $410 million it hoped to recover from its suppliers.
Gippsland South MLA Danny O’Brien has already embraced the announcements as good news for Gippsland and for the region’s hard-pressed, hard-working dairy farmers.
Murray Goulburn Co-operative Co. Limited (MG) has today announced the following decisions as a result of its asset and footprint review which has been undertaken in recent months, as an appropriate response to reduced milk intake across the network.
These decisions are a continuation of efforts to address MG’s cost base, improve efficiencies and ultimately increase earnings and farmgate milk pricing and include:
• Closure of MG’s manufacturing facilities at Edith Creek, Rochester and Kiewa
• Forgiveness of the Milk Supply Support Package (MSSP)
• Total write-downs and associated deviation from the Profit Sharing Mechanism of up to $410 million, including non-recurring costs and a potential debt funded milk payment
• Dividend suspension and a review of dividend payout ratio
• FY17 forecast available Farmgate Milk Price of $4.95 per kilogram milk solids maintained
Closure of Edith Creek, Rochester and Kiewa
It is intended that the Edith Creek facility will be closed by Q2 FY18, the Rochester facility by Q3 FY18 and the MG facility at Kiewa by Q1 FY19.
The Rochester and Kiewa closures will occur in a staged manner and are expected to commence in August 2017. These initiatives will ensure that MG has an improved processing footprint going forward.
The closures are expected to impact approximately 360 employees. Once completed the closures are expected to deliver an annualised net financial benefit of $40 million to $50 million.
MG anticipates a net financial benefit in FY18 from the closures of approximately $15 million.
MG expects to spend $60 million of capital expenditure to enable the closures, which will be largely funded by maintenance capital expenditure no longer required at the sites.
MG will write-down assets of $99 million (post tax $69 million) and expects to incur cash restructuring costs of approximately $37 million (post tax $26 million).
These cash costs predominantly comprise redundancy and entitlement payments to impacted employees.
Forgiveness of the Milk Supply Support Package
In order to mitigate the risk of further milk loss, MG announced today that it will forgive the MSSP.
All future repayments of the MSSP which were to recommence from July 2017 will cease.
MG will also make a payment to continuing and retired suppliers who made MSSP contributions between July and September 2016, and to any suppliers who recommence supplying milk to MG by 31 July 2017.
As a result, MG will record a write-down of this asset of $148 million (post-tax $104 million). MG is taking this step in recognition of the unintended impact of the MSSP.
Dairy Beverages and Nutritionals capital projects and other write-downs
Following the completion of this asset and cost review, MG does not currently intend to proceed with the proposed major capital investments in Dairy Beverages and Nutritionals.
MG will also write-down the carrying value of these projects and various other assets totalling $62 million (post tax $53 million).
MG updates the market that due to weaker trading conditions the FY17 forecast available FMP of $4.70 per kilogram milk solids is expected to be approximately $4.60 per kilogram milk solids.
MG, however, remains committed to paying a FY17 available average FMP of $4.95 per kilogram milk solids.
MG has included in a deviation from the Profit Sharing Mechanism, an amount of up to $34 million, attributable to certain non-recurring costs identified during the asset and footprint review.
To protect against any potential further adverse performance for the balance of this financial year, MG has also provided access of up to $30 million of additional debt funded milk payments, to the extent required to maintain the forecast FY17 FMP of $4.95 per kilogram milk solids.
Deviation from Profit Sharing Mechanism
To enable MG to implement all of the above initiatives without impacting on the FY17 forecast FMP of $4.95 per kilogram milk solids, MG has resolved to deviate from the Profit Sharing Mechanism by an amount of up to $410 million.
The deviation includes the asset write-offs, non-recurring costs and potential debt funded milk payments, to the extent required.
The Board of Directors, with the unanimous support of the Special Directors, are of the opinion that these actions are in the interests of all relevant stakeholders. As required by the Profit Sharing Mechanism Deed, an independent expert’s opinion has been obtained from Grant Samuel and Associates Pty Limited, concluding that the deviation is in the overall interests of supplier shareholders (both as suppliers and as shareholders) and unitholders.
A summary of their opinion is attached to this announcement.
Commitment to a strong balance sheet
MG remains committed to ensuring a strong balance sheet throughout the footprint restructure and into the future.
MG has suspended dividend payments with immediate effect including the final FY17 dividend. MG will consider its dividend payout ratio and will provide an update on progress at an appropriate time.
This dividend suspension will generate additional capital, to support the balance sheet.
Base for rebuilding
Commenting on the outcomes of the review, MG’s Chief Executive, Ari Mervis, reinforced the importance of these decisive actions.
“At MG we are acutely aware of the impact that our decisions will have on our various stakeholders, including the communities in which we operate. We are committed to ensuring that we provide our affected employees with appropriate levels of support and the recognition that they deserve during this period of transition.
MG will support employees by providing access to career transition and redeployment services as well as working with Federal and relevant State Governments to leverage existing programs.
“These have been difficult decisions to make, however they are necessary steps on the journey to ensure the future strength and competitiveness of Murray Goulburn. A strong MG is of fundamental importance to the
Australian dairy industry and these decisions are necessary to lay the foundation for the future.”
A communication of these decisions to suppliers is attached to this announcement.