Fonterra 'here for the long haul'

Fonterra Australia 'here for the long haul'

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FONTERRA PLANS: Fonterra Australia managing director Rene Dedoncker outlined some of the company's strategies, at a Melbourne breakfast.

FONTERRA PLANS: Fonterra Australia managing director Rene Dedoncker outlined some of the company's strategies, at a Melbourne breakfast.

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Fonterra Australia won't be the first dairy processor to close unviable factories, says its managing director.

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Fonterra Australia managing director Rene Dedoncker says the company is in Australia to stay.

Speaking at a Melbourne breakfast on Wednesday, Mr Dedoncker explained the company's "big call" on closing its south-western Victorian factory at Dennington and taking back the Gippsland plant at Darnum.

"We are a profitable business, we are making money in Australia," Mr Dedoncker said.

"The milk price we are paying isn't coming out of the balance sheet, it's coming out of earnings."

He admitted the company "hadn't had its best couple of years in the sun, globally".

But he said Fonterra had a Triple-A credit rating.

"Our fundamentals are in great shape; we are not selling this business, we are here to make a difference," he said.

"We are going to contribute to the Fonterra story, but it's going to take time."

Mr Dedoncker said the decisions on Dennington and Darnum were evidence Fonterra was here to stay.

"We are not selling Darnum, we are not selling any other facility, we are not closing any other facility, we are [actually] investing in them," he said.

"We are making changes to our business, to strengthen it."

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Dairy challenges

Mr Dedoncker said there had been challenges throughout the whole value chain in the past 12 months.

Fonterra had planned for, and thought through, how to deal with those challenges.

"We have often talked about agility, but we cannot stand in front of farmers and give excuses," he said.

"We need to let them know what we are doing about those challenges."

Mr Dedoncker said that meant Fonterra had to make tough calls, which it had on Dennington and Darnum.

"We are probably one of the first [processors] to make some bigger calls on ageing infrastructure," he said.

"I don't think we'll be the last, I'd be surprised if we are the last.

"We know we need to back our most efficient assets, and I think we will see the industry start to deal with that."

He said decisions being taken in Australia had been endorsed by the company's New Zealand board.

"They have reviewed everything," he said.

"A strategy is as good as the environment in which you are executing it.

"As soon as that environment changes, you have to adapt to that."

Dennington closure

Mr Dedoncker said the closure of Dennington was challenging and one of the toughest calls the company had to make.

"It's difficult because of the human impact, it's difficult because of the heritage," he said.

"But with a commercial hat on, the challenges we faced were simple - do we run all our facilities at sub-optimum levels, or do we start to make some decisions around some of our assets that are ageing and that are increasingly less fit for purpose?"

Dennington had an open top drier, which presented problems with foreign matter and hygiene.

The factory also used to provide 25,000 tonnes of product to Nestle, which had since moved off site.

"We started to struggle to get the right demand, for that facility," he said.

"When we did the economics it was clear we had to make a tough call."

The Dennington factory was acquired by Fonterra in 2005 and will close in November.

The other decision Fonterra Australia had made was to take back full control of Gippsland's Darnum processing plant, after difficulties with the joint venture with Chinese company Beingmate.

"They were not honoring their part of the joint venture, here in Australia," he said.

He said Fonterra needed the facility working to full capacity.

"The partner was not the right choice, in the Australian context," he said.

"We could have kicked that can down the road, we could have tried to make it work, but we chose not to."

He said Fonterra could have done the same for Dennington, but that would have been delaying the inevitable.

Business behind business

Mr Dedoncker said Fonterra was concentrating on explaining what he called "the business behind the business".

"Behind Fonterra are some really strong brands," he said.

"In dairy, Western Star is the oldest butter brand in the country, growing about 6 per cent in volume and a similar amount in value."

He said it was on one in three shelves and 200,000 new consumers were trying Fonterra products each year.

"Our market share is very healthy," he said.

"But you have to lift the bonnet.

"You don't want to be making money on a declining volume share, you want to be making money on something that is stable and growing."

He said Fonterra had a competitive advantage.

"The power of a brand means you bring some balance to the negotiating table, and that's important," he said.

"We reckon we know chefs better than anyone else.

"They just don't want to buy price per kilogram, so what we have invested in, over years and years, is intellectual property, in the way we go to market in this space.

"We talk to chefs, every day, about what keeps them awake at night."

Mr Dedoncker said Fonterra was also pulling back on trading milk and milk products.

"If you think about what do you do, when you have got less milk, you have to make a choice, you have to make less of something," he said.

"We are prioritising our food service business and our brands because they underpin our farmgate milk price and shareholder return.

"We are selectively investing in partners that give us certainty and a return."

This story first appeared on Stock & Land

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