26 Sep 2013

Fonterra expects lower first half result next year

7:07 am on 26 September 2013

Fonterra is warning its first half result for the 2014 financial year will be significantly lower than last year's, which it is putting down to fluctuations in prices for its products.

The dairy giant reported a fall of 3% in operating earnings to $1 billion for the 12 months to the end of July, which was in line with what was expected because of the drought and a reshaping of its Australian business.

Net profit was up nearly 18% to more than $736 million.

The second half negated a strong first half, which is when the company made the bulk of its results - operating profit was $693 million and net profit was $459 million in the six months to the end of January.

Fonterra has this week increased its forecast farmgate payout to a record $8.30 per kilogram of milk solids, putting further pressure on its profit margins.

It's estimating a dividend of 32 cents and says it can draw on its balance sheet and cashflow to support the dividend if it needs to.

The company points to the negative impact its product mix has, with milk powder prices outpacing other products.

Fonterra chief executive Theo Spierings says the company is facing headwinds.

He says the high milk price drives the cost of goods sold up, but Fonterra does not want to translate all of that to the markets where the company has good volume growth, because that would mean a 50 - 60% price increase for consumers.

Mr Spierings says they want to keep volume growth up and if there are massive price increases in emerging markets it leads to negative volume growth.

The first half of 2014 will include the botulism scare which hit last month.

Fonterra says it's too early to work out the impact of that but it has put aside a $14 million provision against the 2013 result to deal with any fallout.

Mr Spierings says he plans to go back to China next month and Fonterra has hired the international business consultants, McKinsey, to do damage control.

He says a plan has been developed in which Fonterra not only wants to restore its reputation but move up to the next level.

Mr Spierings says there is a focus on all the stakeholders including food safety, consumers and the New Zealand public and Government.

He says the plan has been delivered to the board and everyone is confident about it.