Australia still vital to Fonterra, says managing director René Dedoncker

Fonterra announced the new direction and a changed structure on Thursday in the wake of a $NZ605 million loss for 2018-19 - its second consecutive year of losses.

The new structure would benefit Australia, allowing the different parts of the business here to be reported as one, Mr Dedoncker said.

The Australian operation had already been reviewed, had already made cuts to make it a leaner business and was now focused on maximising value from the milk available to it.

Mr Dedoncker said the Australian milk pool complemented Fonterra's NZ milk pool, which at 18 billion litres was twice the size of the entire Australian milk pool.

"So there's no surprise that the strategy is focused on making sure that that (NZ) works," he said.

The Australian milk pool would be vital - where it could pay its own way - in many markets, such as Japan, for example, which wanted a dual cheese source and didn't want to source product from just NZ.

The major overhaul of Fonterra's current divisions will see it move away from two large, central businesses - ingredients, and consumer and food service - to three geographic business units - Asia Pacific (APAC), Greater China (GC), and Africa, Middle East, Europe, North Asia, Americas (AMENA).

Australia would be part of the APAC unit.

Mr Dedoncker said although the Australian business had been run as an integrated business, results from different parts were reported separately in the Fonterra results.

"I run an integrated business here; I've got a consumer business, a food services business and ingredients business and I've got the full supply chain, factories and farms - so its kind of like a mini-Fonterra," he said.

The difference in the reporting of the Australian parts of the business was evident in the 2018-19 annual report.

The gross margin in the Australian ingredients business was down 87 per cent - from $77 million to $10 million, primarily due to the impact of drought and reduced milk collections.

But the Australian consumer and food service divisions performed well.

Mr Dedoncker said the review of the Australian operation was complete.

"We have dealt with the hard call on Dennington; we have also made some restructuring over the last six months, and the decision is not to exit but to make sure we pay our own way," he said.

The restructure had seen the loss of 28 jobs at Fonterra's Australian headquarters at Richmond, Vic.

The Australian business had been profitable.

Mr Dedoncker said it was vital that the business paid a competitive farmgate price and delivered a shareholder return to its NZ farmer owners.

"It's not one or the other - they need to co-exist," he said.

"That's what we did last year, we were profitable in this country, we paid farmers, we paid a dividend, the year before the same and the year before that."

Mr Dedoncker said Fonterra was focused on maximising value from its smaller milk pool.

This included ensuring its manufacturing sites were fit for purpose.

The Stanhope, Vic, factory, for example, was effectively two factories housed under the one roof, but the workforce was structured as one crew - with all staff able to work in either side of the factory.

"That's intentional because we couldn't afford to have two separate crews, so we made smart calls early to give ourselves flexibility," Mr Dedoncker said.

The company was also focused on defending and growing its Australian food service business and gowing its value-add and nutritionals businesses.

It was also stepping back from commodity trading.

"With a larger milk pool, there was always a tail of the milk you needed to deal with and that meant you had to trade it somewhere," Mr Dedoncker said.

"We've now got a milk pool where we can optimise all of it and make really clear choices to create value.

"So we are not in a position where we are just working with traders, we are simply doing it when we need to.

"So if we make a whole lot of butter, skim (milk powder) is a byproduct and we will trade that on the Global Dairy Trade."

Mr Dedoncker said although the company would love to see growth back in the Australian industry, it was not designing a plan based on growth, but was working to optimise the milk it had.

"You've got to cut a cloth around today's reality and that what we've done," he said.

Fonterra's milk collections in July were down 28.9pc, continuing the trend from 2018-19, when it lost 20.3pc.

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