Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency

Profit soars at Fonterra

Interim earnings up 33 per cent to $459 million but drought expected to hit second half of year.

Chairman John Wilson (left) with CEO Theo Spierings, says global dairy prices have risen. Photo / Bruce Jarvis
Chairman John Wilson (left) with CEO Theo Spierings, says global dairy prices have risen. Photo / Bruce Jarvis

Fonterra enjoyed strong earnings in the first half and has raised its payout forecast to farmers for the current year, but executives say the second half will be hit by the drought that is gripping much of the country.

The co-operative said a robust performance from its NZ Milk Products division and strong sales in Asia and Latin America helped to drive its net profit for the first half to January 31 up 33 per cent to $459 million, compared with the previous corresponding period.

Fonterra also raised its forecast cash payout for the 2012/13 season to $6.12 a kg of milk solids for a fully "shared-up" farmer, based on a higher forecast farmgate milk price of $5.80 a kg and a forecast dividend of 32c a share.

The previous payout forecast - issued in February - was $5.90 to $6 a kg. Fonterra raised its interim dividend to 16c from 12c.

The only blemish was Fonterra's Australian operations, which suffered from difficult market conditions.

The Australia-New Zealand business' earnings dropped, with normalised earnings before interest and tax falling 32 per cent to $98 million.

The consumer business performance in New Zealand was slightly better than last year, but Australia's consumer business had to contend with a very competitive retail environment, Fonterra said.

Chief executive Theo Spierings said there was heavy competition at the milk supply end of the Australian market.

"At the other end of the spectrum, retailers are fighting each other and fighting for the private labels," he said. "We are in the middle."

He doubted market dynamics in Australia were going to change, so it was up to Fonterra to alter its business model to suit.

"That means higher efficiency and lower costs."

Difficulties across the Tasman did not mean Fonterra was contemplating pulling out of Australia to focus on other, more lucrative, parts of the world, he said.

"For me, New Zealand is not the home market alone. It is New Zealand and Australia."

Spierings said that the latest GlobalDairyTrade auction meant the company had entered a new period of volatility.

Prices have increased in seven of the last fortnightly auctions and the GDT-Trade Weighted Index is now 26.7 per cent above where it stood in February.

"Milk powder was the lowest-returning product in the portfolio two months ago and now it is the highest. So to align our sales force to the new reality will take a bit of time but the biggest issue is volume.

"Is the milk available - yes or no? If there is no milk in the system, then you can't do anything, so it is going to be a tough second half."

Chairman John Wilson said the new payout forecast reflected a recovery in global dairy commodity prices over the past two months.

World dairy trade growth was being led by powders - combined whole milk and skim - reflecting strong demand at a time when global supply was constrained, he said.

"The drought in the third quarter has been more severe and lasted longer than anyone might have predicted, and means we are currently forecasting total milk collection volumes for the full season to finish in line with last season."

Units in the Fonterra Shareholders' Fund rallied by 45c or 6.4 per cent to $7.50. Shane Solly, portfolio manager at Mint Asset Management, said the market's reaction reflected better-than-expected productivity.

Mathew Goodson at BT Asset Management said the key question was if the result could be repeated.

- APNZ

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