MURRAY GOULBURN CO-OPERATIVE CO. LIMITED 5 8 T H A N N U A L R E P O R T

Transcription

1 MURRAY GOULBURN CO-OPERATIVE CO. LIMITED 5 8 T H A N N U A L R E P O R T

2 MURRAY GOULBURN OVERVIEW 2008 SALES REVENUE $ millions MILK INTAKE million litres DOMESTIC REVENUE $ millions EXPORT REVENUE $ millions The Annual General Meeting of Murray Goulburn Co-Operative Co. Limited will be held at 1.30pm on Wednesday 26th November 2008 in the Members Lounge, Moonee Valley Racecourse, McPherson Street, Moonee Ponds. Registered Office & Principal Place of Business 140 Dawson Street, Brunswick Victoria 3056, ACN , ABN Bankers ABN AMRO Bank N.V., ANZ Banking Group Limited, BNP Paribas, Commonwealth Bank of Australia, Rabo Australia Limited, Rural Finance Corporation of Victoria, Westpac Banking Corporation Solicitors Gadens Lawyers, Barbour Arnold & Cousins Auditor Deloitte Touche Tohmatsu

3 Contents Directors 2 Chairman s Report 4 Operations Review 8 Financial Report 31 TOTAL ASSETS $ millions EQUITY $ millions PRIMARY PRODUCTION 000 s metric tonnes EXPORT VOLUME 000 s metric tonnes FACTS AT A GLANCE ($ Millions) Sales Revenue 2,635 2,173 2,027 1,867 1,631 Profit before Income Tax Total Equity Issued Capital Reserves and Retained Earnings Total Assets 1,790 1,483 1,586 1,405 1,293 Milk Intake ex Suppliers (Million Litres) 3,250 3,335 3,599 3,548 3,506 Total Export Revenue 1,437 1,206 1,228 1,118 1,013

4 DIRECTORS Ian W. MacAulay Chairman Dairyfarmer Director since 1991 B. Agr. Sc. FAICD Director, Geoffrey Gardiner Foundation Stephen J. O Rourke Managing Director B.Comm, ACA Director since 1993 Director, Dairy Australia Ltd Grant J. Davies Deputy Chairman Dairyfarmer Director since 2004 Chairman, Audit Committee Donald F. Howard Deputy Chairman Dairyfarmer Director since 1997 Dip. Company Directors (ANU) FAICD Chairman, Compliance Committee William M. Brown Dairyfarmer Director since 1994 Cert. Company Directors (ANU) FAICD Director, Dairy Technical Services Ltd. Lindsay A. Jarvis OAM Dairyfarmer Director since 1985 Grad. Dip. System Agriculture FAICD Chairperson, Goulburn Murray Water - Murray Systems Water Service Committee Warren H. Miles Dairyfarmer Director since 2007 MOFAC Dip. Farm Management Stephen T. Mills Dairyfarmer Director since 2001 FAICD Chairman, Finance Committee Chairman, Goulburn - Murray Water Corporation John P. Pye Dairyfarmer Director since 2005 Chairman, Zone Committee Director Southern Rural Water Advanced Diploma Agr. John T. Vardy Dairyfarmer Director since 1998 Dip. Company Directors (ANU) Chairman, Supplier Relations Committee William J. A. Verboon Dairyfarmer Director since 2004 Ian C. Bird Company Secretary B.Bus. ASA. 2

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6 CHAIRMAN S REPORT Mr Ian W. MacAulay, Chairman Murray Goulburn Co-operative retained its dominant position in the Australian dairy industry and is not only the benchmark for farm gate milk price but the main driver for better returns for the nation s farmers. This objective can only be achieved with a co-operative structure. The year 2007/08 has seen Murray Goulburn achieve some outstanding records: a milk price more than 50% above the previous highest milk price; revenue up to a record $2.6 billion; a record profit before tax of $101.3 million; and strong dividends were paid. The balance sheet has again been strengthened as equity rose $101 million to $758 million. The ability of the Co-operative to retain profit importantly builds strength to provide for future investment opportunities. These results were achieved despite a slight decrease in milk volume attributed to seasonal conditions including the record lack of irrigation water for our northern suppliers due to a continuation of drought. The higher milk price provided the returns needed by farmers to cope with unprecedented rises in farm input costs during the year. In the severely drought affected regions, returns allowed many farmers to maintain production and more importantly maintain viability. In the less drought affected regions stronger returns provided capacity for on-farm investment required for the long term viability and growth of the industry. The Co-operative has also been pro-active in supporting suppliers through the difficult times with interest free fodder loans, bulk purchase of palm kernel, hay and grain and substantial finance support. Support and assistance from field staff to suppliers has been of critical importance. As Murray Goulburn Trading increases its nutritional and agronomic advisory services, the Co-operative s ability to service its members again sets the industry benchmark. Our reason for being and our commitment to the Co-operative s supplier shareholders staunchly remains To maximise returns to Murray Goulburn farmers today and in the future. A plan to create sensible dairy industry rationalisation in Australia involved considerable effort by management during much of the second half of the year. Although the effort was not completely wasted the result has been the potential loss of yet another co-operative to foreign investors leaving Australian dairy farmers to rely more than ever on the success of the Murray Goulburn Co-operative to drive milk price and farmer returns. All the Company s divisions performed well with the export market particularly showing excellent returns despite lower volumes. The domestic business again grew strongly with Devondale now becoming the only major true Australian dairy brand. The particularly strong growth in MG Trading indicates how important this business has become in servicing the input needs of farmers. 4

7 The year 2007/08 has seen Murray Goulburn achieve some outstanding records. 5

8 CHAIRMAN S REPORT The Co-operative continues to innovate in a wide range of areas from fuel efficiency to product development. Research and capital investment are essential ingredients for our long term success. With an annual capital expenditure of approximately $74 million the processing capacity and capability of the business is strong. In addition to in-house development the Company has been able to successfully partner with the Department of Primary Industry and the Gardiner Foundation on a number of key research projects. Farm numbers continued to decline as the effects of farm rationalisation continue due to drought, urbanisation of rural areas and retirement. Some new farms entered the industry but only replaced about 50% of volume lost to retirements. It was pleasing to see the support for the Co-operative as milk supply gains more than doubled the volumes lost to other processors. The Company s share of the Australian milk supply was maintained at 36%. Corporate sponsorship is directed towards supporting dairy communities and again major support was given to the UDV, South Gippsland Dairy Expo and The Australian Dairy Conference plus many community activities. A special donation was made to victims of the Chinese earthquake disaster. The Co-operative s board will begin a major phase of renewal following the retirement of long term director Lindsay Jarvis. Lindsay s contribution to the industry in general and Murray Goulburn Co-operative in particular has been exceptional. It will be a challenge to replace his 30 years of experience on co-operative boards and the lateral thinking that he has provided. The Australian dairy industry owes Lindsay a debt of gratitude. As part of the Co-operative s commitment to continual improvement, four directors will attend the Australian Institute of Company Directors course this year for further training to broaden their knowledge with a view to enhancing their service to the board and the Co-operative. 2007/08 has been a year of challenges, opportunities and conundrums, and to achieve such solid results appreciation goes to the Company management, staff and employees. We also value our customers support. Our vision to be the first choice supplier of customised dairy based products to our chosen market is a serious commitment to our customers. The relationship and support of all of our business partners is highly valued and regarded. As Murray Goulburn enters the 2008/09 year the Co-operative - with a solid management team and a strong balance sheet - is well placed to meet the ever increasing challenges which lie ahead. We have made innovative changes to our capital raising. The Company is adopting practices to cope with the effects of doing business in a carbon constrained economy and we continue to seek new avenues for increased milk production and investment in product development. Murray Goulburn s customers, suppliers/shareholders, employees and business partners can be proud that we are an Australian co-operative. Murray Goulburn farmers can have pride in saying we own the Company. 6

9 Murray Goulburn farmers can have pride in saying we own the Company. 7

10 OPERATIONS REVIEW Mr Stephen J. O Rourke, Managing Director The 2007/08 year was the strongest financial result in Murray Goulburn s history. The result delivered on the Co-operative s primary objective of maximising returns whilst achieving a strengthened financial position for future years. Although continuing drought conditions impacted milk intake, the Co-operative outperformed its major competition. Milk intake was 3.25 billion litres, 2.5% down on the previous year but better than the national average which fell 4.6%. The Co-operative s milk represented 52% of all Victorian milk intake and 36% of Australia s milk supply. Revenue for the year increased by $462 million to a record $2.63 billion, a 21% increase on last year and double that of 10 years ago. The Co-operative s strategy of a higher value product mix together with growing the domestic and Trading stores divisions successfully contributed to this exceptional revenue growth. Profit before tax reached an unprecedented $101 million, up $75 million on the previous year and surpassing the previous record by 60%. A 12% dividend was declared on ordinary shares just after year end. The fundamental objective of the Co-operative is to maximise returns to its farmer/ shareholders and Murray Goulburn s weighted average milk price for the year of $12.20/kg butterfat equivalent up 58% on 2006/07 achieved this objective and provided farmers with much needed revenue in the light of substantially increased farm input costs. This outstanding result emphasises the value of the Co-operative in driving the milk price in Australia for the benefit of the nation s dairy farming community. For Murray Goulburn s part, the Co-operative s supplier/shareholders are the exclusive recipients of the returns to the Co-operative with no diversion of bottom line profit to third parties. Total assets at year end were $307 million higher than the previous year at $1.8 billion. Total equity rose $101 million to $758 million including retained profits and reserves which grew 26% or $92 million to $445 million. This strengthening balance sheet is critical for the Co-operative to continue to invest for growth and to concurrently maximise returns to its supplier/shareholders. The Co-operative continued its on-farm support initiatives and assisted farmers with several new programmes to aid productivity and help supplier/ shareholders deal with the ravages of the ongoing drought. Trading store rebates and on-farm interest free finance programmes provided farmers with financial assistance to protect their farming businesses. More than $70 million in interest free or low interest loans were advanced to Murray Goulburn members during the year. 194,000 tonnes of grain, hay and palm kernel extract were secured and made available for members at subsidised prices to ensure a sufficient fodder source existed to blunt the effects of difficult seasonal conditions. Expanded nutrition, agronomy and productivity support services were also made available to all members. 8

11 Revenue for the year increased by $462 million to a record $2.63 billion, a 21% increase on last year and double that of 10 years ago. 9

12 OPERATIONS REVIEW Capital expenditure for the year totalled $74 million and focussed on operational efficiencies, technology and the environment. Over the last decade, the Co-operative has spent more than $760 million on capital which has enabled Murray Goulburn to utilise the most modern food processing technology to achieve low cost manufacturing outcomes which in turn contribute to maximising returns to supplier/shareholders. As markets for Murray Goulburn s product become increasingly sophisticated, the Co-operative s cutting edge manufacturing platform continues to provide customers with the confidence to acquire products from a reliable and safe production source. 2007/08 represented the most successful year in the Co-operative s history. As international business moves into a challenging economic cycle, Murray Goulburn s strong financial base and proven investment and market strategies means it is well equipped to meet its objective to continue to maximise returns to its supplier/shareholders both now and in the future. Capital programs were focused on projects that delivered a more profitable product mix as well as continuing to address key areas of the environment and occupational health and safety. Major UHT upgrades were completed at both Leongatha and Edith Creek at a total cost of $20 million. The main aspects of expenditure were centred on growth of retail brands and business together with expansion of contract manufacturing capability. The main challenge ahead is to continue improving plant reliability to maximise return on capital. Commissioning of the lactose upgrade at Cobram at a cost of $7 million increased the lactose yield by 25% whilst producing a whiter, lower ash product suitable for high value-add categories. The water re-use and recycling plant at Leongatha entered its final phase of construction during the year. This project is part of a $20 million commitment by the Co-operative to best practice environmental standards at Leongatha and is aimed at the factory s objective of water self sufficiency. Leongatha s 10-year plan continued with the MANUFACTURING Total production for the year grew 4.2% to 668,526 tonnes. While this was a reflection on available milk supply, it also highlighted the Co-operative s continuing manufacturing strategy of maximising returns on milk solids while recovering, wherever possible, waste streams into productive use and minimising operational cost. commencement of the new garage facility and the installation of an upgraded spreads plant to produce a new generation of low fat spreads to augment the Extra Soft range and the re-establishment of site utilities. In response to ever tightening food safety requirements, security at Maffra and Koroit was upgraded to improve control of people entering and leaving the site. 10

13 Capital programs were focused on projects that delivered a more profitable product mix as well as continuing to address key areas of the environment and occupational health and safety. 11

14 OPERATIONS REVIEW AMF facilities were consolidated during the year with the transfer of key equipment from Rochester to Maffra thereby streamlining the manufacturing process and generating further efficiencies in production. During the year Murray Goulburn began work to satisfy the requirements of the Federal Government s National Greenhouse and Energy Reporting Act 2007 (NGERS), and associated regulations. Information reported under NGERS will underpin the Federal Government s proposed National Emissions Trading Scheme and be publicly disclosed. Murray Goulburn will develop a high quality greenhouse emissions accounting and reporting system that will integrate with the Company s existing SAP system and be largely automated. The data generated from this system will be used to satisfy Murray Goulburn s compliance obligations under NGERS and it is expected will assist the Co-operative in its emissions reduction programmes. The Co-operative s credentials as a supplier of quality dairy and nutritional products are inextricably linked with environmental performance. The success of the Company s pioneering work in environmental management and ongoing focus on continual improvement is aimed at ensuring positive environmental outcomes for our farmers, business partners, regulators and the community. Projects utilising cutting edge technology have revolutionised effluent treatment at key manufacturing sites. Water re-use schemes employed at various plants maximise water recycling opportunities and return a valuable economic and environmental resource to the farm. Murray Goulburn is also involved in investigating alternate energy streams. During the year the Company released its second Environmental Report. Murray Goulburn is committed to the environmental sustainability of its business from cow to customer. A major area of focus over the past 12 months, which has helped to further reduce the Co-operative s property risk, has been the investment of $1.5 million in carbon monoxide monitoring technology in our powder drying plants. This new technology reduces the risk of powder combustion during manufacture and ensures the highest level of protection for staff, equipment and buildings, as well as preventing manufacturing disruptions. Thirteen dryers now have this technology installed. Significant changes were made to Murray Goulburn s workers compensation management process in an effort to improve the return-to-work (RTW) outcomes of injured employees. Key changes included the creation of a documented library of all job tasks, the creation of a phased RTW program based on employee capacity and a formalised approach to allocating alternate or modified roles during rehabilitation. To further enhance and support this area, additional resources working with our rehabilitation providers have been allocated to give ongoing support to injured employees. Murray Goulburn spent $2.8 million capital on safety and injury prevention projects during the year, up 22% on the previous year. The Co-operative continues to improve its safety systems not just to meet compliance requirements but to exceed them. Successful prevention strategies developed during the year, including safety training and awareness programmes, lifted the bar on OH&S standards at all sites. 12

15 The success of the Company s pioneering work in environmental management and ongoing focus on continual improvement is aimed at ensuring positive environmental outcomes for our farmers, business partners, regulators and the community. 13

16 OPERATIONS REVIEW Murray Goulburn manages a large modern farm to factory transport fleet of some 174 trucks and tankers. An extensive transport safety review commissioned by the Co-operative and co-sponsored by the Gardiner Foundation and GIO recommended new transport safety practices which augment the Co-operative s OH&S objectives. In Australia, Coles has selected the BRC standard as one of its approved QA system options required for companies supplying Coles own brand products. Adoption of the BRC standard by MG will help maintain the Co-operative s reputation for safe, high quality products into the future. CAPITAL EXPENDITURE $ millions Besides facilitating the production of safe, high quality products and meeting regulatory and customer expectations, QA systems in-place have also been effective in maintaining positive trends in percentage of product right first time and overall customer satisfaction A critical aspect of the Co-operative s QA Systems is product testing and analysis and some major changes were made in this area during the year. During the year the company announced the QUALITY ASSURANCE Accreditation of manufacturing facilities to the internationally recognised BRC Global Food Standard continued with Leongatha and Edith Creek being awarded certification in late The BRC Food Standard was initiated more than 10 years ago by a key group of British retailers and suppliers whose aim was to develop a single food industry best practice standard which was widely accepted. Over the years the standard has been refined with input from a large number of stakeholders and it is now truly a global standard. closure of the Pathogen and Supplier Central Testing Laboratory at Yarram. This facility handled Company testing requirements for farm milk payment purposes, pathogen testing of environmental and product samples, and a range of other microbiological testing. The laboratory played an important role as an integral part of Murray Goulburn s Quality Assurance program since it began operation in the early 1980s. However constantly escalating testing requirements and substantial increases in the costs and complexity of operation finally made the laboratory unviable. Testing was progressively outsourced to DTS Food Laboratories in Melbourne and the doors at Yarram closed in late September. Displaced staff were provided with job placement assistance including deployment of some to DTS and job opportunities at other Murray Goulburn sites. 14

17 A critical aspect of the Co-operative s QA Systems is product testing and analysis. 15

18 OPERATIONS REVIEW DTS Food Laboratories was formed in 1954 by 20 Victorian dairy co-operatives to provide a centralised testing service for the dairy industry and Murray Goulburn is a major shareholder. It is the largest food testing laboratory in Australia, employing around 200 staff and provides farmer payment testing for Victoria, Tasmania and part of South Australia in addition to its major business of microbiological and chemical testing of food products. RESEARCH & DEVELOPMENT The R&D highlight for the year was the successful commissioning of a new process to manufacture lactose. This has resulted in markedly increased yields of highest quality, edible grade lactose with the added benefits of significantly reducing waste and effluent. The process was developed by Murray Goulburn and first demonstrated to have potential on a pilot-scale at the Cobram pilot plant facility. Final process development and optimisation was successfully accomplished on full scale commercial plant. A further significant success was the development and commercialisation of Devondale Reduce Dairy Spread containing plant sterols for reducing cholesterol reabsorption. This is the first milk fat product of its type to be launched in Australia. A range of new cheese products were developed for export and domestic markets. Research and development work over a 4 year period has successfully cut maturation time required to achieve full flavour development enabling more rapid filling of orders and a reduction in maturation costs. Murray Goulburn is a foundation member of Dairy Innovation Australia Ltd and has active input through board membership and portfolio and project management activities. Dairy Innovation provides very important underpinning science and technology support to the Co-operative s applied development activities and long term development. Murray Goulburn s research and development activities continue to have two primary goals: the continuous improvement of manufacturing operations including associated product quality and consistency and secondly, the development of improved and new ingredients and products to meet the demands of customers globally. Our focus is on continuous improvement of product quality and consistency, reducing costs of manufacture and development of innovative products. LOGISTICS Storage and Distribution in 2007/08 delivered a supply chain cost below the previous reporting period despite an environment of increased operational costs, notably fuel, across all sectors. There has been significant consolidation of the transport and warehousing industry which has necessitated changes to a number of supply chain partners. Continued focus on the development and implementation of quality systems delivered positive results in relation to ISO 9001:2000 accreditation. HACCP accreditation has continued to deliver food safety awareness and processes for operational staff, ensuring Murray Goulburn food safety standards are maintained at the highest levels. 16

19 Our focus is on continuous improvement of product quality and consistency, reducing costs of manufacture and development of innovative products. 17

20 OPERATIONS REVIEW Robust information systems continue to be developed to meet ever changing customer and internal management requirements. The warehouse management system of Murray Goulburn is an in house solution which is capable of rapid modification at reasonable cost to ensure that customer requirements are achieved within agreed timeframes. A major achievement has been the integration of a radio station to monitor and track fleet movements at the Integrated Logistics Centre (ILC). This technology is world class and Logistics will review execution of this technology across the supply chain during the next financial year. The Australian grocery supply chain has been transformed over the past five years as the major retailers seek to reduce costs and improve on-shelf availability. This has resulted in closer working relationship with Murray Goulburn with the objective of executing a combined supply chain program that will ensure Murray Goulburn builds on current relationships and reduces overall domestic operational costs. The ILC completed a major civil works and materials handling solution to support the increased supply chain demand on the domestic market. The installation of a High Density Storage (HDS) system has resulted in improved warehouse utilisation, operator productivity and fleet turn-around times, reduced inventory damage and safer working conditions. The commissioning of the HDS has also resulted in the closure of distribution from an external logistics facility in Tasmania. The successful interfacing of the HDS with Murray Goulburn s warehouse management system has maintained the Company s systems at the leading edge with acclaim from overseas systems providers and customers alike. Centralisation of the MG Classic Foods Customer Service operation at the ILC has provided assistance in continuing administrative efficiencies. A number of new Contract Pack customers and suppliers have strengthened the focus of this team for upstream and downstream requirements to ensure total customer satisfaction. The Logistics team has continued to progress the supply chain continuous improvement program in regards to mass management accreditation with sub-contractors. These programs have delivered outcomes beneficial to freight movements from all manufacturing facilities and where possible for national distribution resulting in continued cost savings for Murray Goulburn throughout the supply chain. EXPORT Total export sales for the year were $1.437 billion, $231 million or 19% up on the previous year. This result was achieved on volumes of 317,597 mt or 15% down on the previous year. This record result reflected historically high commodity prices off-set to some extent by a very strong Australian dollar and the continuation of the drought. Sales volumes were well down on previous seasons largely because of lower milk volumes due to the continuing drought. Notwithstanding early forecasts of savagely reduced milk supply, a recovery in milk production during the second half of the season enabled the Co-operative to achieve sales above budgeted levels. 18

21 Total export sales for the year were $1.437 billion, $231 million or 19% up on the previous year. WORLD COMMODITY PRICES* $ Aust/tonnes fob SMP WMP Cheddar 3400 AMF 2500 Butter JUL 98 DEC 98 JUN 99 DEC 99 JUN 00 DEC 00 JUN 01 DEC 01 JUN 02 DEC 02 JUN 03 DEC 03 JUN 04 DEC 04 JUN 05 DEC 05 JUN 06 DEC 06 JUN 07 DEC 07 JUN 08 AUD/USD EXCHANGE* JUL 98 DEC 98 JUN 99 DEC 99 JUN 00 DEC 00 JUN 01 DEC 01 JUN 02 DEC 02 JUN 03 DEC 03 JUN 04 DEC 04 JUN 05 DEC 05 JUN 06 DEC 06 JUN 07 DEC 07 JUN 08 * Source Data Dairy Australia Ltd 19

22 OPERATIONS REVIEW The surge in milk continued late in the season when market conditions had quietened and as a result, closing stock was slightly higher than targeted. Market prices were well above historic high levels for the first half of the year which resulted in a better than budgeted sales value and gross profit performance. As anticipated, market prices began to weaken during the second half of the season as record high commodity prices started to flow through the supply chain to reflect in higher retail prices at the consumer level. As a consequence, demand from some customers dropped while both finished goods and raw material inventories started to rise at the customer level in some markets. To further improve the Co-operative s strong position in ingredients, a strategic decision was taken to merge the Domestic Industrial Sales Group into the Export Group to create a seamless Global Ingredients Division. The benefits of this move include rationalisation of product specifications and a simplification of business processes. The change also enables the Company to more easily capture sales arbitrage opportunities between export and domestic product ranges. The move also recognises the trend toward globalisation and the increasing demand of global food companies to offer a comprehensive range of products and services under a single global contract that supplies their operations across multiple countries. On the global dairy scene government stocks in Europe and the United States remain at record lows. Public intervention stockpiles of butter and skim milk powder in Europe remained at zero, where they have been since The EU continued to operate a private storage aid scheme for butter. The aim of the program was to smooth out the seasonal supply of butter. At 30 June 2008, the PSA butter stockpile was 128,000 tonnes compared to 90,000 tonnes the previous year. The government stockpile of skim milk powder in the US also remained at zero as at 30 June In Europe the European Commission agreed to a 2% quota increase (additional to the 0.5% increase programmed for 11 member states as part of the 2003 CAP reforms) for all member states. The increase came into effect from 1 April When the European Commission proposed the 2% quota increase (2.5% in total), it estimated that up to 60% of the extra quota would be produced. The reason for the 2% increase in milk quotas in 2008/09 was so European dairy industries could respond to local and international market opportunities. Significant increases in production in countries such as France, in response to high milk prices are expected to drive extra quota production to as much as 80%. In contrast it is expected that continued structural deficits are predicted for some countries such as UK, Sweden and Finland so milk quota will not be met. Since 2001 US milk production has averaged annual growth of 2%. In 2007 milk production finished at more than 81 billion litres. US farmers continued to expand their herd and feed more grain which has driven the milk production boom. This trend continued into 2008 with milk production up a further 2.75% in the first six months of the year. It is expected that US milk production will start to slow as higher feed prices coupled with falling milk prices lead to a squeeze of farmer margins. 20

23 To further improve the Co-operative s strong position in ingredients, a strategic decision was taken to merge the Domestic Industrial Sales Group into the Export Group to create a seamless Global Ingredients Division. 21

24 OPERATIONS REVIEW Because of this milk growth the USA is now playing a more significant role in the global dairy market. The record high global commodity prices have meant that USA prices have become more competitive on the global market. In Mercosur, Argentina s milk output in 2007 stood at 9.53 billion litres, down from billion litres in 2006 a reduction of 6.3%. This was mainly due to adverse weather conditions including a severe drought in the last quarter of 2006 which extended into early Expectations are for production to finish 2008 up 5% at 10 billion litres. According to reports, milk production will increase by 8% in 2008; which comes as a result of cow numbers increasing and milk yields improving. Uruguay milk production is expected to finish up 3% in This follows a 5% drop in 2007 due to adverse weather conditions. In the hope of achieving progress in the Doha Trade Round a new round of ministerial meetings was held in Geneva in July which ultimately collapsed. The starting point for the talks was a draft negotiating text issued in early July. Reports indicated that the talks broke down over disagreement on the Special Safeguard Mechanisms. The biggest downside for dairy as a result of the collapse in the negotiations is the uncertainty surrounding the elimination of export subsidies. A commitment was made to eliminate export subsidies in 2005 should a deal be achieved. The same argument applies to trade distorting domestic subsidies with the US unlikely to reduce these in the absence of WTO disciplines. It is only through the multilateral trading system that reductions in both export and domestic subsidies can be achieved. Delay or abandonment of the Round will not help with improving disciplines on these trade distortions. MG NUTRITIONALS The unprecedented global demand and high prices for dairy commodities experienced during 2007/08, posed a challenge to some aspects of MG Nutritionals business. In the case of protein products such as NatraPro Casein, Caseinate and MPC s, as is so often the case in a rising market, price increases lagged well behind those achieved for commodities throughout the year. Demand for these products was consistent throughout this period and supply of these specialty lines was maintained to all customers. Against this backdrop, MG Nutritionals experienced strong demand for its infant nutrition range of products with new business, particularly from Australasia. These included both bulk and canned products, all of which required a large product development effort. Prior to the commencement of the year, the decision was made to cease manufacture of NatraPro WPC80 and WPI at Murray Goulburn s Cobram plant, except as required to support MG Nutritionals highly specialised and proprietary ASCEND sports protein range. Because of the dependence of some customers on NatraPro WPI, this decision was not made lightly, but was necessary due to availability of cheap products from global suppliers and better opportunities to utilise the Company s whey solids at Cobram. 22

25 During the past 12 months, MG Nutritionals discovery program yielded some exciting findings in bone health, weight management, muscle function and coronary vascular related diseases. 23

26 OPERATIONS REVIEW The ASCEND Proven Sports Protein range of products successfully completed its first full year of operation. Marketing activities concentrated largely on elite and professional athletes and teams (including several leading AFL teams) and the generation of a word of mouth campaign. Sponsorships included the South Dragons NBL Basketball team and numerous individual elite athletes and teams, competing at national, international and Olympic levels. Distribution and sales channels included on-line, Terry White Pharmacy and selected specialised supplement stores such as Evylyn Faye Nutrition, Melbourne, and Lift Nutrition, Melbourne. New products developed and undergoing trials include ASCEND bars and beverages containing unique BioAssured NatraBrand bioactive protein ingredients. In the U.S., Progenex Australia Pty Ltd was established as a joint venture company marketing and selling sports nutrition products based on MG Nutritionals research and development activities. It will largely concentrate on the body building and weight lifting market. MG Nutritionals Proform powdered Formulated Meal Replacer range experienced strong growth during the year. Proform is a unique product range that has been designed by Australian dieticians and nutritionists specifically as a complete source of balanced nutrition and a source of energy. It has application ranging from weight loss and sports through to recuperation from illness, post operative care and elderly nutrition. The product was relaunched during the year in a new pack design under the name Proform Nutrition & Energy. During the past 12 months, MG Nutritionals discovery program yielded some exciting findings in bone health, weight management, muscle function and coronary vascular related diseases. This research has been done in conjunction with leading universities and government research organisations throughout the country. The best of these research projects will be candidates for fast-track commercialisation. DOMESTIC Domestic division sales grew by 27.3% with growth across all major categories. Total product sales for the Branded, Corporate Brands, Food Service, Kiewa and Contract Pack business units across Australia reached $618 million with the addition of a full year s sales value for MG Classic adding a further positive result. Devondale Devondale business grew 14.5% with factory sales exceeding $191 million for the full year. The Devondale milk business continued to grow with value sales improving 14%. The year saw a strong market share performance with Devondale holding more than 40% in value terms of the total LLM market. New product introductions during the year included Omega 3 and Devondale Reduce, the first UHT milk with the addition of plant sterols to reduce cholesterol absorption. Devondale maintained its share of the dairy spread market and remains the leading national brand. Strong consumer support for Devondale cheese was illustrated by sales growth. The launch in June of the new Devondale Moo Zoo range of snacking cheese products and Devondale Organic continues the Co-operative s ambition to launch innovative products into markets with strong growth potential. 24

27 Domestic division sales grew by 27.3% with growth across all major categories. 25

28 OPERATIONS REVIEW The year s major initiative was the development and launch of the Devondale Farmer Family marketing campaign. Farmer Families is an important way to differentiate the brand values and continue to strengthen buyer loyalty. The new Devondale campaign began towards the end of the year and was launched just after year-end and is built around a number of key messages, including; Spirit of co-operation. Helping out other Australians is a form of co-operation, of working together. Murray Goulburn s basic co-operative philosophy and this basic Australian philosophy are well matched. Australian Milk AND Australian Owned. Australia s largest farmer owned co-operative. There are many companies that farmers supply milk to, but very few where they also own the company. Starring MG farming family members, the commercials use not only real people, but also tell a great story of why consumers should buy Devondale: Devondale is owned by the largest community of Australian farmer families all working together. We supply the milk and we own the company. When you buy Devondale, your family is supporting our families. The TV and magazine campaign ran nationally in both metropolitan and regional areas between July and October 2008 using the theme: From our families to yours. Corporate Brands This division achieved strong sales growth of 26% with sales reaching $289 million. MG s market share of supply to retail customer brands continued to grow and, as retailers are increasingly following a growth strategy, it remains an important part of the Co-operative s overall offering to retail partners. Food Service The Food Service division achieved sales growth in a very competitive market, with value sales growing 13.8% and growth across all major categories. As a further sign of continued strength within the Food Service market MG received the 2007 Supplier of the Year Award in the chilled section from the Countrywide National Supplier Network. This was the third consecutive year MG was awarded this title. Sales within the specialty cheese category continued to grow as the division launched a fetta product to complement the existing range. FIELD SERVICES The Field Services group again worked closely with suppliers in a year of difficult environmental conditions and a very competitive local industry faced by ever increasing costs. Field staff completed approximately 11,500 visits during the year with MG Milkcare audits being the major reason, followed by supplier relations, milk quality issues and supplier finance. The poor early spring throughout south eastern Australia led to extreme shortages of fodder and thus prices of both grain and hay rose sharply. Field Services joined MG Trading and MG Agrilink to source and finance around 194,000 tonnes of MG farmers requirements during this period. The group continued a close liaison with the industry, working with Dairy Food Safety Victoria to develop food safety procedures, and with Dairy Australia on the Taking Stock farm analysis project. 26

29 There are many companies that farmers supply milk to, but very few where they also own the company. 27

30 OPERATIONS REVIEW Murray Goulburn farmers maintained an excellent record for farm milk quality with 86% of all milk supplied being of premium quality. Milkcare, the on-farm food safety and quality assurance program, continued to be an industry leader. MG currently employs 24 field staff who are Dairy Food Safety Victoria (DFSV) trained and approved auditors. During the 2007/08 year, 1,950 audits were completed on MG farms to meet the statutory requirements of Victorian, South Australian and NSW food authorities. Colostrum supply increased by 44% over last season, making it the Co-operative s largest intake on record. Suppliers were paid $2 per litre based on average quality results. For the first time, Murray Goulburn presented at the Mystery Creek Field Days in the Waikato District of New Zealand, the largest agricultural event in the southern hemisphere. This presence was to demonstrate that Murray Goulburn offers a viable and more than competitive supply option for any potentially relocating New Zealand dairy farmers. The event was attended by Co-operative Chairman Ian MacAulay and three senior Murray Goulburn field officers. In June, the web version of MGF@RM, the Co-operative s farmers internet service was launched replacing an outdated version made redundant by improved telecommunications in country areas. The most popular pages include pay statements, production results, company notices and an income estimation tool which enables suppliers to predict income flow over the succeeding 12 months. An innovative project in the Yarram district with a group of suppliers piloted a method to enable them to demonstrate and report on environmental management on-farm. Collaboration of the West Gippsland Catchment Authority and The Victorian Department of Primary Industry and funding from the Australian Government National Landcare Project made the project possible. During the year the Co-operative commenced a pilot program in the Maffra area for the development of whole-of-farm risk management protocols. Industry, district and company news was well catered for with suppliers receiving monthly regional newsletters throughout the year. INFORMATION TECHNOLOGY The Co-operative s Information Technology facility operates in an environment of continuous advances in technology, which together with enterprise growth, results in a constant demand for enhanced computer based system capabilities. Its mission is to continue to develop its critical information technology facilities to increase efficiency in production and distribution, reduce costs in operational areas and provide significant improvements in management reporting and communications. The core Enterprise Resource Planning system (SAP), which performs the majority of the Company s financial functions and logistics processes, has been significantly upgraded during the year. This has required new IBM hardware, firmware and operating software resulting in considerably increased processing and data storage capabilities. 28

31 Through its grain and fodder trading business, MG Agrilink supplied in excess of 194,000 tonne of grain, fodder, cereal by products and PKE during the year. 29

32 OPERATIONS REVIEW In conjunction with Telstra, the Co-operative successfully implemented Remote Worker capabilities. This feature enables field staff, international sales representatives and key management to access all the company information technology systems from anywhere in the world through a personally selected high security portal. Head Office security was upgraded during the year including enhanced surveillance and ID systems. These facilities were added to other sites during the period. TRADING The Trading Company recorded another successful year, with sales of $243 million, up $44 million or 22% on the previous year. Participation by Murray Goulburn Co-operative farmers represented 72% of the total sales business, an increase of $49 million or 39.5%. The MG supplier participation reflected in the record Loyalty Reward Rebate payment to the suppliers who utilised the Trading stores as their first point of call for farm merchandise. The total Loyalty Reward Rebate payment was $4.2 million up 54% on the previous year. The exclusive Murray Goulburn Co-operative Supplier Loyalty Reward programme was introduced in 2005/06 and has now paid to those suppliers who support the Trading stores over $9.0 million in the first three (3) years of the programme. The business was challenged by the continuing issues faced by farmers with poor seasonal conditions, lack of irrigation water, very high feed and other input costs. Many major products involved in primary farm production, such as fuel, fertilizer, herbicides, wire and steel increased dramatically during the year. The Trading Company used its bulk buying capacity where ever possible to minimise these increases. Through its grain and fodder trading business, MG Agrilink supplied in excess of 194,000 tonne of grain, fodder, cereal by products and PKE during the year. A purpose built bulk fertilizer facility at Kiewa was completed during the year, which also saw the introduction of 10 tonne fertilizer field bins into the region for the first time. The facility will provide a specialised fertilizer blending capacity supported by strong agronomic advice, enabling farmers to maximise specialised fertilizer blends. The Company relocated its rural store operations in Heywood to a larger facility, with the prime concentration on farm requirements. A new merchandise store was built in Leongatha, giving those farmers in the region a modern and comfortable shopping environment specialising in farming merchandise. The old Leongatha store will make way for the major development at the Leongatha manufacturing facility. The Trading Company continued to invest in technical sales resources with the appointment of extra agronomists, allowing farmers to utilize expert agronomic advice to maximise yield and minimise input cost. 30

33 MURRAY GOULBURN CO-OPERATIVE CO. LIMITED AND CONTROLLED ENTITIES FINANCIAL REPORT 2008 for the Financial Year ended 30 June 2008 The financial report covers both Murray Goulburn Co-Operative Co. Limited as an individual entity and the consolidated entity consisting of Murray Goulburn Co-Operative Co. Limited and its controlled entities. Murray Goulburn Co-Operative Co. Limited is a company limited by shares and domiciled in Australia. Directors Report 32 Income Statement 36 Balance Sheet 37 Statement of Recognised Income & Expense 38 Statement of Cash Flows 39 Notes 40 Directors Declaration 71 Independent Auditor s Report 72 Audit Independence Declaration 73 31

34 MURRAY GOULBURN CO-OPERATIVE CO. LIMITED AND CONTROLLED ENTITIES Directors Report Your Directors present the following report for the financial year ended 30th June, Directors The directors listed on page 33 each held office as a director of the company during or since the end of the financial year. Company Secretary IC Bird (B.BUS. ASA), company secretary, joined the company in Principal Activities The principal activities of the consolidated entity constituted by the company and the entities it controlled during the year have been: - The processing of the whole milk of its shareholder suppliers and the manufacture, marketing and distribution of dairy products. - The operation of retail stores as a service to the suppliers. No significant change in the nature of these activities occurred during the year. Dividends Paid or Recommended The following dividends were paid or recommended during or since the financial year end : a) In respect of the financial year ended 30th June 2007 as recommended in the 2007 financial report : $000 Interim dividend paid on 9 July 2007 On A and C class preference shares at 4.0% unfranked 1,302 On B class preference shares at 2.5% unfranked 168 Final dividend paid in October 2007 On ordinary shares at 12.0% unfranked 21,046 On A and C class preference shares at 4.0% unfranked 1,390 On B class preference shares at 2.5% unfranked ,106 b) In respect of the financial year ended 30th June 2008 : Final dividend paid on 27 June 2008 On A and C class preference shares at 8.0% unfranked 2,801 On B class preference shares at 5.0% unfranked 427 Final dividend recommended for payment during October 2008 (Dividends declared subsequent to 30 June 2008 and therefore not recognised) On ordinary shares at 12.0% unfranked 22,229 25,457 Review of Operations The consolidated entity recorded profit before income tax of $101,282,000 (2007: $25,748,000 profit) for the financial year ended 30 June Future Developments Disclosure of information regarding likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations is likely to result in unreasonable prejudice to the consolidated entity. Accordingly, this information has not been disclosed in this report. Significant Changes in the State of Affairs No significant change in the state of affairs of the consolidated entity occurred during the financial year. Remuneration The remuneration report containing the remuneration of key management personnel is provided on pages 34 to 35. Events Subsequent to Balance Date Other than the declaration of dividends detailed in Note 7 Unrecognised Amounts, no matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in financial years subsequent to the financial year ended 30 June Environmental Regulations Murray Goulburn is licensed by EPA in relation to the operation of its eight manufacturing sites throughout Victoria pursuant to the Environment Protection Act (1970) and its one manufacturing site in Tasmania. The company has continued its policy of maintaining programs and systems, which will impact positively on the environment through reductions in emissions, energy use and product losses, and the maximising of re-use and recycling initiatives. Amongst Murray Goulburn s achievements during the year was the construction and commissioning of a new 200 mega litre irrigation dam at Rochester designed to capture water emitted from the factory for final use on the company s irrigation farm. The dam will add additional capacity to the existing infrastructure in place and augments the extensive re-use initiatives in place throughout the organisation. Cobram saw improvements to its existing infrastructure through the rebuilding and desludging of its primary aeration pond and further extensions and take up on the re-use pipeline established in Improvements in the areas of management of environmental issues at a local level are essential elements of the program. Additional programs included community consultation and liaison with local authorities including environmental interest groups and the publication of environmental policies and performance. Included in these initiatives was the release of Murray Goulburn s Environmental Report 2008 which details the extensive nature of the company s programs, technology and achievements for public perusal. The report was well received by all stakeholders. Continual environmental improvements remains an important focus for the company in order that the sustained viability of its supplier shareholders continues and supports the objectives of both strong and vibrant supply whilst adhering to the obligations of the environment and EPA. The company had no material events of non-compliance during the financial year. Insurance of Officers During the financial year the company paid a premium of $180,324 to insure the directors and senior managers of the company. The liabilities insured include costs and expenses that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the consolidated entity. Auditor s Independence Declaration Our auditors have provided the Board of Directors with a signed Independence Declaration in accordance with section 307C of the Corporations Act This declaration is included at page 73 of this financial report. Rounding of Amounts to the Nearest Thousand Dollars The company is of the kind referred to in ASIC Class Order 98/0100 dated 10 July 1998, and in accordance with that Class Order amounts in the directors report and the financial report have been rounded off to the nearest thousand dollars. 32