Mergers on Fonterra radar as profits drop

22:22, Mar 26 2014
Fonterra's chief financial officer Lukas Paravicini
MONEY MAN: Fonterra's chief financial officer Lukas Paravicini.

Fonterra chief financial officer Lukas Paravicini said the New Zealand dairy giant is "actively monitoring" consolidation opportunities in Australia just months after Canada's Saputo snapped up Warrnambool Cheese & Butter in a $500 million-plus takeover battle.

"There is clearly consolidation happening in Australia and I don't think its the last that we will see. We will participate in consolidation if there is a good opportunity and we are actively monitoring that," Mr Paravicini told Fairfax Media.

ASX-listed Bega Cheese and Australia's biggest dairy exporter Murray Goulburn conceded defeat to Saputo in the WCB takeover in January. But the two local players reaped A$100 million (NZ$107m) and A$92 million (NZ$98.7m) respectively before costs from the sale of their WCB shares.

Murray Goulburn boss Gary Helou and Bega chairman Barry Irvin have both said they want to drive consolidation in the overcrowded sector and they now have cash to do it.

Fonterra has not been sitting on the sidelines. Last year the farmer co-operative forked out A$56 million for a 9 per cent stake in Bega Cheese during the WCB takeover war and acquired yoghurt business Tamar Valley.

Fonterra licenses the Bega brand and is the biggest customer through Bega's Ridge Street cut and wrap plant. Fonterra is Australia's second biggest dairy processor collecting 1.8 billion litres of Australian milk a year. But the co-op has struggled in the fiercely competitive Australian environment.

"We have an interest in Australia.

"Our investment in Bega is part of our interest in the market and our­relationship with Bega. We have no further intention at this stage," Mr Paravicini said.

His comments come as Fonterra, the world's biggest dairy exporter, reported a 53 per cent slump in net profit for the six months ended January 31 to NZ$217 million.

Soaring dairy commodity prices have wreaked havoc on Fonterra's margins, dragging profits down even as revenue during the half-year surged 21 per cent to $NZ11.3 billion. The milk price Fonterra pays its farmer-suppliers is based on prices of dairy commodities like milk powders, which comprise about 70 per cent of its product mix.

Fonterra expects to pay farmers a record NZ$8.65 per kilogram of milk solids this season, compared with NZ$5.84 per kilogram in 2013.

As a co-operative, Fonterra is mandated to maximise farmer returns. The problem is the strong milk prices are crimping margins on the other 30 per cent of Fonterra's product mix, like cheeses and casein, which are not reflected in the milk price payment.

"Short term it's about how we manage peak milk [intake], increase efficiencies in existing plants, process more product a the same time and increase capacity," Mr Paravicini said.

Fonterra chief executive Theo Spierings said he is fast-tracking NZ$400 million to NZ$500 million of investment to improve product flexibility.

"The world is turning much faster than we expected two years ago," Mr Spierings said. "There's pressure on our consumer business around the globe. "

The increased flexibility is about being able to shift milk to the highest value products and avoiding the margin squeeze the company is now facing.

Fonterra slashed its interim dividend to NZ5c per share compared with 16c last year. It expects to pay a full-year dividend of 10¢ per share, down from 32¢ last year.

Units in the Fonterra Shareholders' Fund, which is listed in Australia and New Zealand, shed 9c to $5.75.

"The second half of the year is likely to be slightly lower. We are still driving revenue," Mr Spierings said. "In any part of the world if you put the price up in line with volatility you will lose volume share and what we will not accept is negative [share] growth."

In December, Fonterra warned that it expected full-year earnings to fall to around NZ$500 million-NZ$600 million from last year's NZ$1 billion.

Fonterra is also embroiled in a legal battle with French behemoth Danone, a former Fonterra customer.

Danone is seeing compensation following a Fonterra product recall in Asia last year due to a botulism contamination scare which turned out to be a false alarm.