Bega Cheese is the latest business to issue a profit warning regarding its 2020 earnings, saying its performance would be affected by what it called “unprecedented” competition among processors for milk and softer demand for exports.
That competition, it said was the impact of the spreading drought. And there was also a warning of cost-cutting to come across the group.
The downgrade was issued to the company’s annual meeting yesterday and saw Bega shares sold down sharply.
The shares fell to a day’s low of $3.76 during trading (in fact the lowest they have been for more than three years) and closed the day off 1.28% at $3.95.
Bega is now forecasting full-year normalised EBITDA (earnings before interest, tax, depreciation and amortisation) of $95 million to $105 million. This is down from last financial year’s $115 million figure.
The drought has slashed Australia’s total milk production significantly. This has forced dairy processors like Bega to compete harder and pay more for milk to secure supply from farmers for its dairy processing factories. Fonterra and other producers have made similar comments.
“We have previously advised that conditions impacting financial year 2019 would continue into financial year 2020. This has proven to be the case, but at a faster and deeper rate,” Bega chairman Max Roberts told the meeting (his retirement was also revealed this week).
“To remain competitive Bega Cheese today announced an increase in its Southern Region milk price and other initiatives to sustain and grow milk supply. This higher milk price will directly impact Bega Cheese’s earnings in financial year 2020,” he said.
Bega said in yesterday’s statement that it is “well advanced in its plans to restructure its manufacturing capacity to meet the changing supply environment including the development of toll and third-party manufacture relationships to ensure our efficient use of capital within the dairy industry. Bega Cheese continues to review its supply chain and overhead cost to remain competitive.”
Chief executive Paul van Heerwaarden said while Bega’s branded food business was growing, “we are seeing softening in demand for products destined for certain export markets which will adversely impact earnings in financial year 2020”.
Bega joins Sims Metal, Costa Group and forestry group, Midway in downgrading 2019-20 earnings this week.