27 Mar 2014

Fonterra moves to prop up profits

7:10 am on 27 March 2014

Fonterra says planned additional investment of $400 - $500 million a year will be aimed at avoiding a repeat of the sharp drop in this year's profits.

The country's largest company's net profit fell to $217 million in the six months to January, compared with $459 million dollars in the same period a year earlier.

Despite this, Fonterra remains on track to make a record payout to farmer shareholders of $8.75 per kilo of milk solids.

At the announcement, from left, Lukas Paravicini, Theo Speirings, John Wilson, Kerry Underhill.

At the announcement, from left, Lukas Paravicini, Theo Speirings, John Wilson, Kerry Underhill. Photo: RNZ / Kim Baker -Wilson

Fonterra says it has been an exceptional six months as record global demand for milk powders has caused high volatility and boosted revenue by 21 percent.

But its profit margins have been hit because its operations manufacturing fast-moving consumer goods has to buy the milk ingredients at market prices before turning it into consumer products.

The cooperative says it has not passed on all the costs to customers, because it wants to keep prices lower as it builds its presence in key markets such as Asia.

Its second-half result is likely to be even lower because of the milk price trend.

Chief executive Theo Spierings says Fonterra currently has no flexibility at all at the peak of the season when all its milk powder facilities are running at full capacity so it has to invest more.

Fonterra's half-year profit has slumped by more than half because of high raw material costs.

The Sri Lanka contamination scare also dented earnings.

The company was targetted by protesters and 130 tonnes of milk powder was quarantined and destroyed there last year.

Mr Spierings says sales in Sri Lanka were down 33 percent but there was growth elsewhere in Asia, with the China operation going very well.

"Do we need to build our relationship to become a real citizen, a true citizen, of the Sir Lankan community or of Sri Lanka as a country? Yes, we still need to do work," Mr Spierings said.

Overall, volatility in commodity prices was expected to continue, and the company's second half result was likely to be lower than the 2014 first half, he said.

Fonterra chairman John Wilson says it was important farmers realised the company was in a strong position.

"There's high powder prices globally, high commodity prices, we're able to hold our farm gate milk price at this stage at $8.65. We're still holding our forecast a full year dividend of 10c per share so that's an $8.75 forecast.

"The reality is though with these very strong commodity prices that has put pressure on our margins.

"But what's really important from a Fonterra perspective is that we're staying on strategy. We're driving volume into these value added business in Asia, in South America and across Oceania. So in the short term we are taking a little bit of pain in our earnings but it's all about staying on strategy and driving volume in value for our co-operative."