“The financial year that just ended was a difficult year and this has been reflected in our results,” MG CEO, Ari Mervis, said during its 2017 earnings call. “This was on the back of an approximately 22% reduction in milk intake to 2.7bn litres (713m gallons).”
Milk losses from its 2017 financial year are expected to continue to decline into 2018, hitting approximately 2bn litres (528m gallons), Mervis said.
Nutritionals, a smaller segment of MG, registered a decline of 34.6% to US$106.8m (AU$135m).
“This was largely driven by our primary B2B customer who has become increasingly self-sufficient in this area and has been less dependent on us topping of their capacity,” Mervis said.
“What it does give us is a greater degree of predictability as to demand but obviously has an adverse impact.”
The company has also faced slumping sales performance in Asia reporting its first annual loss since expanding to the region in 2015 due to tightening Chinese import regulations resulting in a 20% reduction in payment to suppliers.
As a result, MG has cancelled its $300m plan to partner with US infant formula producer Mead Johnson to open a production facility in China.
Cost cutting initiatives
To offset the impact of decreased revenue due to lowered milk intake, the company has introduced a number of cost cutting initiatives including the removal of the “contentious” milk supplier support package (MSSP), which caused a number of dairy farmers to cut ties with MG.
The company forgave all current debts and future payments under the program totaling AU$150m ($118.7m).
“We also recognize the milk supplier support package was very unpopular and we realized during the course of this year that we did need to remove it in order to restore some of our supplier faith and confidence in the cooperative,” Mervis said.
Additionally, MG closed three dairy processing plants earlier this year resulting in 360 job losses. Mervis added further cuts to production will be made as the company continues to restructure its operations.
“Our operating model is misaligned to our lowered milk intake,” Mervis said.
“We are culling some of the tail end lines of our production and some of those areas that were sub-economic.”
Possibility for acquisition?
Since announcing its revised strategic priorities and business improvement program, MG and its advisor Deutsche Bank have received a “number of confidential unsolicited proposals from third parties.”
"These proposals have ranged from concepts around certain non-core assets to larger proposals including whole of company transactions," the company said.
MG has asked Deutsche Bank to seek more detail to assess the merit of these proposals.
"We have asked Deutsche Bank to look at our holistic structure,” Mervis said. “Frankly, everything is up for consideration."