Saputo to sell milk factories to Coles for $105 million

The sale of the two fresh milk processing facilities at Laverton North, Victoria, and Erskine Park, NSW, is excepted to close in the second half of this year.

The two huge plants were built by Murray Goulburn as part of its ill-fated push into the Australian domestic fresh milk market.

The Laverton North facility cost $80 million and was opened in 2014, while the Erskine Park plant cost $60 million and was opened in 2015.

READ MORE: Coles lifts farmgate milk price to secure supply in tight market

Coles CEO Steven Cain said the new facilities would improve security of its milk supply chain.

"These facilities also have sufficient capacity to facilitate further growth opportunities through new product innovation," he said.

Each facility has the capacity to process around 225 million litres a year.

They are predominantly used to process Coles Own Brand two-litre and three-litre milk.

"These facilities are state-of-the-art, delivering exceptional production efficiency and quality through highly automated processes," Mr Cain said.

Saputo has been struggling with falling milk supply in Australia, closing its Maffra factory last year and streamlining operations at other sites.

READ MORE: Saputo Dairy announces $20m investment in Smithton plant

Saputo chair and CEO Lino Saputo said the company was continually working to ensure it had the right manufacturing footprint and product offering to enhance its position as "a high-quality, low-cost processor".

"This marks an important step in executing our long-term vision for success in Australia as we maintain a sharp focus on efficiency to ensure we maximise the return on every litre of milk," he said.

The 48 Saputo employees at the facilities will be offered employment contracts with Coles.

Saputo's fresh milk products - including Devondale milk - will be continue to be processed at these two plants.

Saputo president and chief operating officer (international and Europe) Leanne Cutts said there would be no changes to Saputo's relationships with its suppliers.

Saputo would continue to collect and process milk throughout Victoria, NSW and Tasmania.

"As the Australian dairy industry landscape continues to evolve, this proactive measure aims to further adapt SDA's manufacturing network and is designed to strengthen our market competitiveness," Ms Cutts said.

The factories were built as part of a 10-year deal between Murray Goulburn and Coles for the supermarkets house-brand contract.

The factories represented the biggest investment in dairy processing in Australia in decades.

The Coles contract with the co-op started in 2014 and cut out foreign-owned Lions and Parmalat, which had previously held the contracts for the fresh milk market in Australia's two most populous states.

But there were concerns that the deal locked in $1 a litre milk.

At the time, Coles said it was confident it could keep selling milk for $1/L and still pay a premium to farmers, which would be adjusted regularly in response to national market trends.

In 2015 Murray Goulburn sought to raise capital through external investment, launching a $500 million float on the Australian stock market.

But the co-op collapsed after it triggered a milk pricing crisis in 2016 that saw it lose significant volumes of milk the following season and be unable to sustain its debt.

"MG has reached a position where, as an independent company, its debt was simply too high given the significant milk loss," the company's chairman John Spark said at the time.

Murray Goulburn sold to Saputo in May 2018 for $1.31 billion.

From the outset, Saputo had concerns about the deal with Coles.

Even before the takeover was completed, Saputo was looking closely at the profitability of the plants in Melbourne and Sydney, and their cheap supermarket milk supply contracts.

At the time, Mr Saputo said his company expected long-term sustainable value from its markets, dealing only with customers "who give you good value for the production effort employed".

READ MORE: Lino Saputo questions $1 milk

"We will honour the Coles contract in the fluid milk market in NSW and Victoria, but we think there are ways to run those plants more efficiently and effectively, and maybe different ways to increase volumes and returns," he said.

"But whatever we do it has to make sense financially - there has to be some profit at the end of the deal.

"Every one of our platforms needs to stand on its own feet.

"We are not going to exchange four quarters just to get a dollar."

After it took over Murray Goulburn, Saputo set about changing the arrangement with Coles.

In 2019 it announced it was looking at trying to process more milk through the big plants.

Then Saputo president and chief operating officer Kai Bockmann said the renegotiation of the contract with Coles had opened the way for it to process more milk through the Laverton North and Erskine Park plants.

"Those two assets were specifically built for the Coles business, but we were not happy with the terms and conditions under that contract, so we're looking to foster collaborative approach in terms of how we could work together and we found resolution just recently," Mr Bockmann said.

Saputo had hoped increased third-party processing of milk would build more profitability into its Australian business as it grappled with reduced milk supply.

But it has struggled in the Australian market, flagging plans last year to rationalise its Australian operations in response to falling milk supply.

Mr Saputo told an investor briefing in August that lower milk intake was continuing to impact efficiency.

"Managing our milk intake is our top priority for this business," Mr Saputo said.

"As part of our global strategic plan, we are continuously reevaluating our Australia network to make sure that we have the right infrastructure in place for the total milk that we have today and that we anticipate over the next few years.

"We're identifying new opportunities to streamline the operating model, and we are confident that our diversified platform will further support earnings as we assess our footprint."

In November, the company announced the closure of the Maffra plant.

In February it announced further investment in its Smithton, Tas, plant.

It said the move was set to place Tasmania at the heart of Saputo Dairy Australia's manufacturing operations for the future.

"As we are thinking about investing in the future, we need to work to our strengths, and the quality of the product and the talent of the team here at the Smithton plant made the choice an easy one," Mr Saputo said.

The 2019 renegotiated deal between Coles and Saputo saw the supermarket giant lock in direct purchase deals with individual farmers in NSW and Victoria.

Coles said its new offer would deliver more value to farmers and would improve price certainty into the future.

It expanded the arrangement to farmers in other states in 2020 and 2021.

READ MORE: Coles to buy milk direct from farmers, bypassing processors

Coles CEO Steve Cain said its acquisition of the two factories now would allow Coles to "build on the strong relationships we have developed with our dairy farmers since launching our direct sourcing model in 2019".

Just two months ago, Coles offered farmers long-term milk contracts out to 2026.

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