By Jonathan Underhill
Fonterra found its first-half earnings growth by selling dairy ingredients to rivals rather than competing with them in branded consumer products.
The dairy cooperative divides its sales of consumer products among three regional divisions. In the first half, earnings fell in each region, led by Australia/New Zealand. Normalised EBITDA fell about 17 percent in its home territories. Asia/Africa/Middle East earnings dropped 13 percent and Latin America earnings growth stalled (though they were down at the EBIT level).
Its largest division, Standard & Premium Ingredients, lifted earnings by 23 percent. It collects milk for processing into commodities such as milk powder and more specialised ingredients to manufacturers including Nestle, the world’s largest food company, and Danone.
Demand for ingredients was strong enough that it overwhelmed the headwinds of the strong New Zealand dollar in the first half. Earnings soared 44 percent to $273 million as sales rose 10 percent to $8 billion. The volume of sales climbed 7 percent to 1.2 million metric tonnes in the first half, with average prices in US dollars rising 10 percent.
That led to an 18 percent rise overall in first-half earnings on sales growth of 7.2 percent.
In the ANZ region, Fonterra faces a “competitive and challenging” retail market for what are called fast-moving consumer goods. The so-called milk price wars between Australian supermarket chains has been squeezing margins for dairy suppliers, while New Zealand’s domestic dairy market is “flat-to-declining” while competition “continues to intensify.”
The reasons for the downturn in consumer brand earnings differs in the other two regions, said Chris Caldwell, Fonterra’s general manager for finance.
Asia/AME – the broadest geographic division – contains the world’s fastest-growing markets for branded dairy products and that’s pushed Fonterra in to ramp up investment in gaining market share, especially in China, Caldwell said.
“We’ve invested more of our margin back into the future growth of the business,” Caldwell said. “We’re very, very positive for the future of that business.”
The strong kiwi dollar against a basket of Asian currencies shaved about $6 million to $7 million off Asia/AME earnings in the first half, he said.
Earnings from Latin America fell 3.1 percent at an EBIT level. That included an impairment charge against a Venezuelan investment.
A strong kiwi dollar against local currencies such as the Chilean peso ate up earnings from the region in the first half. Earnings at its main Soprole business actually rose 15 percent in constant currency terms, Caldwell said.