Fonterra interim profit takes hit

TIM HUNTER
Last updated 05:00 27/03/2014

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Fonterra is blaming short-term market factors for a big hit on its half-year profit, saying it will not be diverted from its long-term direction.

"It's short-term volatility, not a long-term thing," said chief executive Theo Spierings.

Fonterra's half-year net profit plunged 54 per cent as a record high payout to farmers led to soaring costs, despite healthy sales gains.

The net profit to shareholders for the six months to January 31 was $206 million, down from $449m a year earlier.

Fonterra's milk costs are tied to global prices for milk powders and high market levels boosted interim revenue by 21 per cent to $11.3 billion.

That has fed into big gains for farmers supplying the co-op with milk - a record payout for the full year is expected to funnel $13.8b into the local economy.

However, Fonterra's factories were not able to process the record high milk flow during the October/November peak season into the most valuable products, so the business lost money on some of the milk it had to buy.

Spierings said Fonterra had expected demand to outstrip supply, but not until 2017 or 2018.

"The world has moved much faster . . . so you need to review," he said.

"It doesn't mean the strategy changes, it's still very much applicable, but we need to make sure we deal with volatility."

Alongside its interim result, Fonterra said it would fast-track its capital investment plans to improve its production capacity and flexibility in New Zealand.

"This will result in additional capital expenditure of $400m to $500m over the next three to four years," Spierings said.

Analyst Arie Decker of Craigs Investment Partners said the effect of the market conditions on Fonterra's profit had been well flagged in December and the investment was a natural response.

"One of the things the business has been doing is taking a calculated risk on running near zero flexibility [on its milk processing]," he said.

"It's been stung pretty badly by that this year so they're looking at addressing that."

Fonterra chairman John Wilson confirmed the forecast farmer payout for the year of $8.65 a kilogram of milk solids, up from $5.84 last year.

The interim dividend would be cut from 16 cents a share to 5c payable on April 17, as previously signalled.

Meanwhile, a lawsuit against Fonterra by French food giant Danone could cost the co-op $11m, it said, a figure well short of the losses claimed by Danone.

Fonterra said it had provided for that sum as "the maximum contractual liability to Danone" after a botulism scare caused it to recall whey protein concentrate it supplied to customers last year.

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The $11m provision follows a $14m provision made in Fonterra's full-year accounts for "costs associated with the replacement of recalled products".

In Danone's full year results statement last month, it said it had lost € 370m (NZ$600m) of sales because of the botulism scare, while the cash impact was € 291m.

Danone chief financial officer Pierre-Andre Terisse said the cash impact was made up from € 200m of non-recurring costs and a 30 per cent margin on the lost sales.

"And now of course we are completely turning to the reconstruction of the elements of this business which needs to be reconstructed," he said.

Danone's lawsuit has been reported to involve a claim for reparation of € 200m.

Fonterra's statement yesterday said it was working through the detail of Danone's claims.

"Based on current information available and the claims made to date, Fonterra will vigorously defend its position. Uncertainty exists regarding the outcome of the proceedings."

Last August Fonterra sparked a worldwide product recall and global food-safety scare when it admitted there could be a bacteria in one of its products which could cause botulism, a severe form of food poisoning.

Several countries blocked dairy products from New Zealand in the wake of the scare, which turned out to be a false alarm.

Prime Minister John Key and Wilson went to China last week on a trip firmly aimed at winning back the media and mothers of New Zealand's largest trading partner.

This month, Fonterra indicated it would plead guilty to charges laid by the Ministry for Primary Industries over the scare. The charges include failing to meet export standards and failing to alert the regulator that exported product was unfit for purpose.

Units in NZX-listed Fonterra Shareholders Fund, which track Fonterra's share price, eased 7c yesterday to close at $6.15.

- BusinessDay

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