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Fonterra facing fierce competition in AU consumer product markets

Wednesday 26th September 2012

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Fonterra Cooperative Group's 20 percent drop in earnings across its Australia New Zealand business mainly reflects fierce competition across the Tasman for sales of branded consumer products such as yoghurt and cheese.

The world's largest exporter of dairy products, posted normalised earnings before net finance costs and tax in the ANZ division $204 million in the 12 months ended July 31, down from $256 million the previous year, as sales fell to $3.1 billion from $3.5 billion. Volume fell 4 percent after adjusting for the sale of its Western Australian businesses.

The ANZ unit includes fast-moving consumer goods in Australia and New Zealand, Australian ingredients including milk supply and manufacturing, and most food service sales in the region. Chief executive Theo Spierings said the Auckland-based company was holding its market share of milk production in Australia, but in the past few years the volume share of branded operations has declined.

"The retail scene is causing more pressure," Spierings said on a conference call. "We were optimistic we were seeing a reverse of that trend (but) that's not happening."

Fonterra cited "weakening consumer spending" in Australia "which resulted in increased pressure on pricing and increased competition in the cheese and yoghurt categories." Earnings fell as the company increased its trade spending to restore market share in Australia, where its rivals for consumer products include Nestle. By contrast, New Zealand earnings before interest and tax grew slightly in the latest year, reflecting the company's "market leading competitive position."

"The trading environment in Australia remains challenging with a continued downturn in consumer spending and aggressive competition," Fonterra said.

The ANZ division is the second-biggest generator of earnings for Fonterra after the company's powerhouse division, New Zealand Milk Products, which collects, processes and exports milk from its New Zealand farmers. External revenue for NZ Milk climbed to $14 billion from $13.8 billion, and generated $515 million of normalised earnings, up from $420 million.

Fonterra's total payout to farmers fell 19 percent in the latest year to $6.40 per kilo of milk-solids, missing the company's May forecast, which reflected lower prices for milk and a stronger kiwi dollar, offset by record milk production.

Fonterra Shareholders Council president Ian Brown described the performance as "reasonable" but expressed concern about the ANZ business again failing to provide adequate returns.

"Unfortunately ANZ has not delivered to target. We are aware that market conditions are particularly tough at present and understand plans are in place to ensure the business improves," he said in a statement.

Sales in the financial year ended July 31 fell 0.5 percent to $19.77 billion, even as volumes increased 2 percent to 3.94 million tonnes. Pretax earnings climbed 9 percent while net profit fell 19 percent to $624 million, mainly reflecting year-earlier tax credits of $202 million.

"All around the world we saw record dairy production, which was mirrored back here in New Zealand," said outgoing chairman Henry van der Heyden. "Global dairy demand held up reasonably well but this ocean of milk obviously impacted on global commodity prices."

Based on auctions on the GlobalDairyTrade platform, prices of dairy products sank to a 34-month low in May, though there have been gains in the past four fortnightly sales. Today Fonterra said some recovery had been expected in prices and was "partly offset by further appreciation of the New Zealand dollar."

Van der Heyden was fronting is last annual results as chairman before retirement. On the conference call he went on the front foot to discuss the former CEO Andrew Ferrier's final payment from the company, which amounted to $8.2 million.

"I know it is a lot of money but the absolute core of the payment is based on performance," he said.

The company declined to update its forecasts, saying it is now in the 'blackout' period ahead of the prospectus for its Trading Among Farmers fund. The prospectus is expected toward the end of October with the launch of TAF slated for the end of November.

Fonterra towers over other corporates in New Zealand, generating almost four times more revenue than Telecom, the nation's largest listed company, with about $4.5 billion of sales last year. Dairy products are New Zealand's biggest export.

Normalised earnings for Asia/Africa, Middle East rose 1 percent to $194 million while for Latin America earnings gained to $129 million from $119 million.

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