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Fonterra lifts sales in 1H; profit halves as margins shrink

Fonterra lifts sales in first-half; profit halves as margins shrink

By Jonathan Underhill

March 26 (BusinessDesk) – Fonterra Cooperative Group posted a 53 percent drop in first-half profit as the price of milk ran ahead of prices for products such as cheese and casein, slashing margins at the world’s biggest dairy exporter.

Profit fell to $217 million, or 13 cents a share, in the six months ended Jan. 31, from $459 million, or 28 cents, a year earlier, the Auckland-based company said in a statement. Sales climbed 21 percent to $11.3 billion in a period that included record December shipments to China of 110,000 metric tonnes.

Fonterra sees no let-up in the second half, with profit likely to undershoot its first-half result on continued negative impact on product mix margins and higher input costs making it hard to drive growth in its branded and food service businesses, it said today.

The price of whole milk powder, one of the reference commodities used to calculate the farmgate milk price, surged 60 percent in the first half, contributing to a 35 percent increase in revenue from NZ Milk Products, Fonterra’s biggest division. But non-reference products – the casein and cheese streams that count milk as their biggest input costs – didn’t rise as much, meaning the company couldn’t pass on the higher cost of milk.

“Sustained high prices, especially for milk powders, saw revenue increase … but these also led to higher input costs,” Fonterra said. “The increasing pressure on margins was also evident in our consumer and food services businesses. Here the balance needed to be struck between passing on rising costs immediately or continuing to build our market presence and volumes to secure long-term growth.”

Fonterra’s gross margin in the first half tumbled to 12.5 percent from 18.6 percent.

The company had already telegraphed the issues it has with product mix, where its factories can produce milk powder streams to cheese and casein streams at a ratio of 75 percent to 25 percent. In November it took a $157 million provision against inventory of specialised ingredients and branded consumer products at NZ Milk Products because of the margin squeeze. And in December it slashed its forecast 2014 dividend payment by two thirds, while keeping the farmgate milk price at a record high.

“We processed as much of this milk into the higher returning milk powder product streams as we could,” chief executive Theo Spierings said. “However, our current asset footprint meant that around 25 percent had to be processed into cheese, casein and other non-reference commodity products which earned negative returns over the period.”

As part of the company’s response, it will bring forward planned capital investments including building new capacity to reduce its product mix constraints. That will result in an additional $400 million to $500 million capital spending over the next three to four years.

Fonterra declared a first-half dividend of 5 cents a share and affirmed its forecast for full-year payments of 10 cents.

Units in the Fonterra Shareholders’ Fund, which are entitled to dividends on the ordinary shares, were last at $6.22 on the NZX and have fallen 8 percent in the past year while the NZX 50 Index climbed 18 percent. The units are rated a ‘hold’ based on the consensus of analysts polled by Reuters.

Among the company’s other divisions, Oceania reported a 53 percent decline in normalised earnings before interest and tax to $46 million. Sales fell 10 percent to $1.8 billion and its gross margin shrank to 18.8 percent from 21 percent. Oceania includes consumer and ‘out of home’ food service in Australia and New Zealand, dairy processing in Australia and the RD1 rural supplies chain.

Asia revenue was little changed at $1.05 billion from $1.049 billion while normalised EBIT dropped 68 percent to $32 million. Gross margin shrank to 26.6 percent from 34.5 percent. While volumes grew to China, sales volume to Sri Lanka, where the company was temporarily forced to suspend its market operations, fell 33 percent and had “a significant impact” on first half earnings for the division.

In Latin America, revenue rose 2 percent to $570 million and normalised EBIT climbed 6 percent to $71 million. The gross margin slipped to 26 percent from 26.5 percent.

(BusinessDesk)

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