By Jared Lynch and Darren Gray
Investors have savaged Murray Goulburn in a tumultuous day for Australia's biggest milk processor after it butchered its profit forecasts and its managing director resigned.
Units in Murray Goulburn's ASX-listed trust plunged 42 per cent to $1.24 on Wednesday after the co-operative told the market it would struggle to meet even half of the net profit forecast outlined in its prospectus from less than a year ago.
The downgrade came after sales of adult milk powder for the March quarter were lower than expected, with the decline continuing into April.
The company now expects a net profit after tax of between $39 million and $42 million. This compares with its guidance of $63 million from February, and its prospectus forecast of $89 million.
Dairy farmer Paul Mumford on his Won Wron farm.Credit: Joe Armao
It will also slash the farm gate price from $5.60 a kilogram to $4.75-$5 – the first-mid season cut since the financial crisis.
The size of the gap between the bullish estimates of managing director Gary Helou and the actual numbers led to Mr Helou resignation, ending his five years at the helm of the co-operative.
Something amiss
Murray Goulburn's board noticed something was amiss last Tuesday when it viewed the sales figures for the March quarter.
"We could see there was a deviation of the forecast against the actual run rate," chairman Philip Tracy said.
Proud man: Gary Helou has resigned as Murray Goulburn's managing director.Credit: Wayne Taylor
"We sent management back to have a look at April's numbers."
Mr Helou remained upbeat the following day, telling The Australian's Global Food Forum that Murray Goulburn's price target for farmers of $6 a kilogram was achievable, "regardless of what's happening in commodity markets".
On Friday, after management had reviewed the April sales figures, Murray Goulburn was plunged into a trading halt, which lasted for three days and led to a 38 per cent plunge in its profit estimate, and Mr Helou and chief financial officer Brad Hingle departing the co-operative.
"The quantum of that gap [between sales estimates and actual figures] warranted swift action," Mr Tracy said.
"We reflected over the weekend, and Gary did the same – he's a proud man and he was disappointed. It got to the point where he offered his resignation and we accepted it."
China and dollar hit sales
Mr Tracy said sales were hit by increased competition in China and Beijing's crackdown on online sales – which led to Murray Goulburn's Devondale-branded powered and UHT milk being withdrawn from popular websites, including Alibaba's Tmall – and a spike in the Australian dollar.
But it is understood Mr Helou – who has been replaced by business operations executive David Mallinson – was adamant on Wednesday's that the board's revised profit forecasts were too conservative and the company's overall strategy was sound.
Mr Helou also issued a statement to the ASX on Monday last week, stating the co-operative did not expect China's regulatory changes to materially hit earnings.
Mr Tracy said the board wasn't in possession of all the information when that statement was released, but said Beijing's tightening of e-commerce trade had "really caused some doubt in the minds of traders".
PAC Partners analyst Paul Jensz said Murray Goulburn was experiencing growing pains and the shift from a commodities driven to a brands focus business was "always difficult".
"It took Tassal five years and Select Harvests three or four years. Murray Goulburn began this strategy in 2012, but they're still early in the evolution process, which becomes more difficult if you have to raise money," he said.
"You have to put forward what you think is a realistic plan and stick to it."
'Shocking' downgrade
Morgans analyst Belinda Moore said the size of the profit downgrade – which came less than a year after Murray Goulburn raised $500 million through its partial float on the ASX – was a shock and would hurt other co-operatives planning similar ASX listings.
"It's a disaster," Ms Moore said.
"They have lost a lot of confidence. [The] downgrade is extremely disappointing particularly in light of its recent ASX announcements around China regulatory change – no material impact – and upbeat comments by management in the press."
Ms Moore said the cuts to the farm gate price would put many farmers in a loss-making position this season.
Adam Jenkins, president of United Dairyfarmers of Victoria warned that some dairy farmers might choose to exit the industry.
"This has major spillover effects, in confidence and growth," he said.
"It is a very, very poor turn of events. Coupled with obviously, the dry conditions and the time of year that we're heading into. People are setting up their production systems going into the new year," he said.
Farmers knocked
Mr Jenkins said preliminary estimates produced by dairy farmers and consultants in the wake of Murray Goulburn's announcement suggested that an average farm supplying Murray Goulburn could be "between $100,000 and $120,000 worse off' over the next 38 months because of the milk price cut.
"It will knock their confidence and trust, it's going to knock their cash flows, it'll knock their production and obviously it will knock their local communities – that's the flow-on effect."
Murray Goulburn has launched a support package to suppliers, which gives them the cash equivalent of $5.47 a kilogram for the rest of this financial year – adding an extra $95 million to $165 million to its debt levels.
The co-operative will recoup this cost, with interest, from farmers within the next three years.
It expects to pay a full-year dividend of 7.1 to 7.8 cents a share based on the $39 million to $42 million profit forecast.