Jamie Gray

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

It's been a testing year, says Fonterra

Dairy giant says it's too early to gauge cost of botulism false alarm but it has made progress with its strategy.

Fonterra chief executive Theo Spierings (left) and chairman John Wilson. Photo / Richard Robinson
Fonterra chief executive Theo Spierings (left) and chairman John Wilson. Photo / Richard Robinson

Fonterra said it was too early to say what the impact of last month's contamination scare would have on its earnings for the 2013/14 year.

The co-operative dairy giant said its normalised earnings before interest and tax for 2012/13 came to $1 billion, down 3 per cent on the previous year and 7.3 per cent short of the Fonterra Shareholders Fund prospectus forecast, mostly because of lost production resulting from last summer's drought.

The drought caused unprecedented volatility - and prompted a 64 per cent spike in whole milk prices from January 2 to April 16. This had a significant impact on the cost of milk bought by Fonterra's NZ Milk Products division and meant the high returns achieved in the first half were eroded in the second, Fonterra said.

See Fonterra's investor presentation here. Its financial statements are here.

Chief executive Theo Spierings said the company had made a $14 million loss provision in accounts for the 2012/13 financial year to take into account the impact of the botulism scare, which turned out to be a false alarm after being re-tested.

The co-operative said its net profit after tax for 2012/13 was $736 million, up 18 per cent on the previous year.

On Tuesday, Fonterra said it had again raised its farmgate milk price for the 2013-14 season, this time by 50c to a record $8.30 per kg of milk solids, but warned that its financial performance over the first half would be "significantly lower" than the first half of the previous year.

Chairman John Wilson said the 2012/13 year had tested the co-op's resilience.

"After a superb first six months for both production and performance, our farmer shareholders endured a drought which in some regions was the worst in nearly 70 years," he said.

Spierings said Fonterra had made progress with its strategy during the year, particularly in food service, everyday nutrition and advanced nutrition but that climatic and market conditions had frustrated efforts to achieve higher earnings.

He said the co-operative's normalised earnings were down because of the combined impact of the drought and the "reshaping" of Fonterra's Australian business. The business achieved strong earnings growth in Asia, Africa, the Middle East and in its Soprole business in Chile.

However, this was offset by a weaker second half from NZ Milk Products and a 37 per cent decline in normalised earning before interest and tax in Australia and New Zealand (ANZ) as changes were made to the Australian business.

First NZ Capital analyst John Norling said the forecast milk price increase would put more pressure on the consumer business earnings.

"In time this higher cost is expected to be reflected in higher consumer product prices," he said.

Wilson said investors were coming around to the fact that Fonterra does have volatility in its earnings. "We believe that volatility is here to stay," he said.

Fonterra's NZX traded units ended up 3c at $7.10.

Top management firm for brand rebuild

Fonterra has enlisted the services of heavyweight New York management consultants McKinsey to help rebuild its brand after the whey product contamination scare in August.

Chairman John Wilson said the prestigious firm had experience working with significant global companies - including food businesses - and would assist Fonterra in its efforts to "rebuild and enhance" its reputation.

"We are reaching out around the world to ensure that we are really challenging ourselves on what we can do better," he told APNZ.

Wilson said Fonterra had taken a $14 million loss provision as a result of the incident for the year ended July 31 and declined to comment on the likely follow-on costs arising from it in the current year.

While progress had been made, relations with key customers and countries around the world were not yet back to normal, he said.

In China, Fonterra was moving product through the wharves to customers.

"It has a long way to go before that is running totally back to normal but we still have a way to go to get some normalisation there."

Wilson said Fonterra needed to ensure that customers had "absolute certainty" around its brands.

In Sri Lanka Fonterra had faced a separate problem of an alleged dicyandiamide (DCD) contamination in two batches of milk powder, also in August.

Subsequent street protests led to Fonterra temporarily shutting down in Sri Lanka.

- APNZ

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