Fonterra Flags ‘Challenging’ Outlook With Drought The ‘New Norm’

By Glenn Dyer | More Articles by Glenn Dyer

Fonterra, the giant NZ dairy group is looking at a substantial slide in earnings for 2018-19 thanks to the impact of the continuing drought in Australia, pressures in its Chinese markets and pricing pressures on some key products.

The company told stock exchanges on both sides of the Tasman yesterday that while revenue for the nine months to 30 April 2019 was 1% higher at $NZ15 billion, normalised earnings before interest and tax (EBIT) was down 9% to $NZ522 million.

That was despite a 4% rise in and sales volumes to 16.6 billion liquid milk equivalent (LME). Gross margin was $NZ2.2 billion, down 3%.

In Ingredients, sales volumes for the first nine months were up 10% to 16.3 billion LME, gross margin was down to 8.6% from 9.6% and EBIT was down $NZ64 million to $NZ602 million.

In Consumer and Food service sales volumes were down 1% to 3.8 billion LME, gross margin was down to 22.8% from 23.6% and normalised EBIT was down $NZ62 million to $NZ266 million.

Fonterra Chief Executive Miles Hurrell said the New Zealand Ingredients business is performing as expected but Australia Ingredients continues to face challenges and it is taking longer than planned to lift performance in some parts of the Co-op’s Consumer and Foodservice business.

“Due to the challenges in Australia Ingredients and tightening relative price differences between reference products, or those products that inform the Farmgate Milk Price, and non-reference products – that’s all our other products, we are reducing the forecast full-year normalised EBIT for the whole Ingredients business to $NZ645 – $NZ725 million, down from the $NZ750 – $NZ850 million range we shared at our Interim Results.

“Consumer and Foodservice improved its performance in the third quarter relative to the first half. Due to our performance in Latin America, we have lowered our forecast normalised EBIT from $NZ475 – $NZ525 million to $NZ400 – $NZ430 million for this part of the Co-op.

“Our China Foodservice recovered as demand for butter bounced back. This helped pricing and in-market inventory return to more normal levels. There was good demand for Anchor Food Professionals UHT culinary cream and the team at our Waitoa UHT factory have been working hard to get shipments up to our China foodservice customers.

“Our Oceania Consumer and Foodservice business continued to perform well with Australia’s spreads category, including Western Star butter, contributing significantly to gross margin.”

Mr. Hurrell said that there are some increased risks in the fourth quarter to the Co-op’s previous forecast earnings – in particular, the recovery in key markets is slower than expected and there are tightening price relativities between non-reference and reference products along with the on-going challenges in Australia Ingredients.

As a result, Fonterra is revising its earnings guidance range from 15 – 25 cents per share to 10 – 15 cents per share.

Those problems in Australia has seen an immediate fallout.

Dennington plans to shut its oldest dairy factor in Australia at Dennington in Western Victoria with 98 jobs lost.

The Dennington plant opened in 1911 but Fonterra said it was “not viable” in current market conditions, and would be shut down later this year.

“This is not a one-off for this season, it’s the new norm for the Australian dairy industry and we need to adapt,” chief executive Miles Hurrell said in a statement.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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