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Fonterra normalised earnings meet guidance; drought hurts NZ, ANZ profit falls

Wednesday 25th September 2013

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Fonterra Cooperative Group posted full-year earnings that met its guidance as drought in the second half eroded returns from New Zealand Milk and rivalry eroded Australian margins, while sales grew in the rest of the world.

Normalised earnings before interest and tax fell 3 percent to $1 billion, the Auckland-based company said in a statement. That meets the guidance it gave on July 25, when it warned that earnings would miss $1.079 billion forecast in its Shareholders' Fund Prospectus last year because of the drought in New Zealand and intense competition in Australia.

Sales fell 6 percent to $18.6 billion and net profit rose 18 percent to $736 million, or 44 cents a share.

The world's biggest dairy exporter recorded a 1.4 percent drop in full-year EBIT to $494 million from its largest business, NZ Milk Products, as a strong first half gave way to a drought-afflicted second half, which cut milk collection by 9 percent and, more significantly, caused a spike in its own milk costs.

"The extreme drought caused unprecedented volatility - reflected in a 64 percent spike in whole milk powder prices from January 2 to April 16," chief executive Theo Spierings said.

"This, in turn, had a significant impact on the cost of milk purchased by NZ Milk Products and meant the high returns achieved in the first half as a result of price premiums, product mix, cost savings and productivity gains were eroded in the second half," he said. The company faces some headwinds in the first half of the current year, which will be below the same period of 2013.

Units of the Fonterra Shareholders' Fund fell 1.6 percent to $6.96, to be little changed this year.

Days after the end of Fonterra's financial year, the dairy company announced a recall of whey protein concentrate after initial tests suggested it was contaminated with a potentially deadly bacteria. While follow up tests showed the bacterium was a harmless strain, the commentary for today's results included assurances from both Spierings and chairman John Wilson that lessons had been learned.

"The precautionary recall challenged the cooperative but has also provided an opportunity to make a profound change for the better," Spierings said. "The actions we took were the right ones based on the information we had at the time.

Fonterra gave no detail of the likely costs of the recall in today's release.

The company's Australia and New Zealand business posted a 37 percent slump in EBIT to $142 million, relegating it to third largest among Fonterra's divisions, from second largest a year earlier. The unit recognised $30 million of costs from the closure of its Cororooke facility in Australia and $19 million of restructuring costs.

Within the ANZ division, volumes at its Fonterra Brands NZ were up 5 percent on the year and earnings "up slightly", though volumes fell for its Australian consumer brands, reflecting the loss of a large private label contract.

Fonterra has already flagged restructuring in Australia, including the rationalisation of brands and plant closures to cut costs and said today its Australian brands margins were "impacted by competitive pressure from retailers" while "strong competition for milk impacted Australian ingredients margins."

The company's Asia/Africa/Middle East division, which includes its largest market of China, posted a 15 percent increase in EBIT to $209 million and sales rose 3 percent to $2 billion. Earnings in China climbed 20 percent.

Latin America delivered a 4 percent gain in earnings to $137 million as sales volumes climbed 6 percent and revenue rose 12 percent to $1.1 billion. Soprole, its largest LATAM business, delivered 31 percent earnings growth to $109 million, while earnings at Dairy Partners Americas fell 46 percent to $25 million, mainly reflecting one-time gains a year earlier that weren't repeated, and less favourable exchange rate movements.

Fonterra's 2013 cash payout fell 4 percent to $6.16, reflecting a farmgate milk price of $5.84 per kilogram of milk solids and a dividend of 32 cents. Yesterday, the company raised its forecast 2014 payout to $8.62, made up of a farmgate milk price of $8.30 and an unchanged dividend of 32 cents.

Today it said the first half of the current year will be challenging, because of higher input costs, with the price of milk powder outpacing gains in cheese and casein. As a result, first half earnings will be "significantly lower" than a year earlier. Extreme price volatility on its product mix was likely to be a short-term impact though it was difficult to say when it would reverse.

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