25 Sep 2013

Drought behind Fonterra earnings drop

7:03 pm on 25 September 2013

Fonterra has lifted its bottom line annual profit 18% to $736 million but is blaming the drought and a reshaping of its Australian business for its lower operating earnings.

The $1 billion operating profit for the 12 months to the end of July is 3% lower than last year and in line with expectations.

The co-operative of 10,500 farmer shareholders also announced a final payout to farmers for the 2013 year of $6.16 per kilogram of milk solids - 4% lower than last year, although higher than the forecast at the beginning of the year.

Fonterra chief executive Theo Spierings says the push to achieve higher earnings has been frustrated by the weather and market conditions.

He says volumes overall were flat, although they were strong in the emerging markets.

The New Zealand consumer business grew but Australia faced higher competition for lower milk volumes, putting a squeeze on margins.

Mr Spierings says Fonterra has addressed that by cutting the number of brands in Australia by 17, to four key brands.

Sales volumes fell 6% overall to $18.6 billion. The company had a strong first half but was hit hard in the second half by the drought.

Mr Spierings says the drought caused unprecedented volatility in international milk prices, with a 64% spike in the benchmark whole milk powder price from January to April alone.

The impact on the cost of milk has been huge, he says, meaning returns for the first half of the year were eroded in the second half.

Fonterra says that volatility will continue in the short term but eventually the high whole milk powder prices will level out.

Mr Spierings says the company has taken a small hit from the botulism scare, which triggered a precautionary product recall.

It has made a provision of $14 million but Mr Spierings says it is too soon to say how much it will cost the company altogether.

Units in the Fonterra Shareholders Fund, which anybody can own, rose 3 cents to $7.10 on Wednesday while Fonterra shares, which only farmers can own, gained 4 cents to $7.10.