Brownes looking to black
The new chief of Brownes has shown his resolve to get the dairy company back on track by walking away from Lactanz Dairies.
Brownes paid $7 million for the herds attached to its biggest supplier, Lactanz Dairies, but sold the herds back to the Lactanz farms, currently in the hands of receivers Ferrier Hodgson, at a loss of $2 million less than a year later.
Recently appointed chief executive and managing director of Brownes, Tony Girgis, said he was not interested in anything which did not turn an immediate profit.
Mr Girgis confirmed his company had withdrawn a supply offer to Lactanz Farms a fortnight ago, saying the company "did not need the milk".
The withdrawal from Lactanz means that Brownes' milk supply will be down at least 15 million litres come June 30, with the industry also reporting at least another 10 million litres could also be on the line for Brownes coming into the next financial year.
Brownes has been in economic freefall of late, wiping about $6 million from bottom-line earnings to record a profit of $10.6 million last year.
The company has also been in the hot seat with many of its 70-odd suppliers, after it offered a handful of producers a premium price in a desperate move to shore up milk supply last year.
Since then, relations with its suppliers have continued to sour and that, combined with a disastrous financial result, fuelled some severe soul-searching by the board that seems to have become increasingly desperate to offload the troubled company.
Former managing director Ben Purcell parted ways with Archer Capital-controlled Brownes in a cloud of controversy in January, after a tumultuous year resulting in a 36 per cent decrease in profit for the State's biggest milk supplier, adding to financial woes of the already debt-ridden Archer group.
Since his resignation, further ominous signs of instability continued to plague the company, with the interim managing director Craig Wood walking out a fortnight ago, followed by the resignation of strategic projects manager Laurie Cransberg.
Also in recent months, Brownes has announced a string of moves to slash costs, with the quashing of its Kick brand and change of milk payment days to its suppliers.
The payment change once again drew the ire of the company's suppliers after it was recognised the change of days would save the company millions of dollars in interest, while potentially throwing farmers' loan schedules into disarray.
"The (Lactanz milk) is received during the spring flush and put into cheese which is no longer a focus," Mr Girgis said. "Therefore, the milk is simply not required. Obviously, we can meet our contracts and the appropriate planning was done."
Mr Girgis said the current milk supply environment and the company's financial situation was not conducive to be able to offer its suppliers price increases.
"The business is not in a position of surplus profits," he said.
"The volume growth we got previously affected the profitability of the business.
"We did not dot the "i"s and cross the "t"s as sharply as we could have and as a result our cost structure went up. The price of milk solids in the eastern seaboard has gone down by about 50 per cent making it a buyers market where prices are falling."
Mr Girgis said he felt empathetic to Brownes' long-term suppliers, but to offer a price rise for milk did not economically stack up.
"I've met a number of farmers now and the deduction from those meetings is that it's not that anyone's not making money from the price they've got now, it's just that they'd have liked or would like the higher price," he said.
"The reality is, economically we cannot pay a price 10c to 15c higher than the western seaboard. That's just suicide. You'd either not do the business or you try to work through your cost structures, including your supply chain. It's regrettable we've got a handful of farmers doing well out of this in the short-term, and I will say short-term because they're not very long contracts.
"The Archer board considered that if we were to pay everybody the same price we may as well turn off the lights and hand in the keys, with 300 jobs going out the door. We have to resists these unrealistic economics."
Meanwhile, WAFarmers milk president Phil Depiazzi said Mr Girgis needed to quickly amend his attitude towards its suppliers.
"Unless Mr Girgis quickly changes his approach, I believe Archer Capital will be very unimpressed with the results he is able to achieve for the group," he said.
"To this point Mr Girgis has shown a complete disregard for his farm suppliers and a complete lack of understanding of the milk supply industry."
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