Volatile global dairy prices drove a 16 percent slide in first-half profit at New Zealand dairy processor Fonterra (FSF.NZ), prompting the co-operative to shave its full-year dividend guidance as it struggles to capitalize on lower input costs.
Net profit after tax at the world’s largest dairy exporter, whose products range from bulk milk powder to cheese slices, fell to NZ$183 million ($140.03 million), as last year’s fall in global dairy prices pressured inventory margins.
Shares in Fonterra’s sharetrading fund fell 4 percent to a six-week low NZ$5.75 as the results raised concerns about profitability as the company expands aggressively to capitalize on a growing appetite for dairy products in China and emerging countries.
“Our half-year results are a snapshot of tough conditions in dairy with variable production, demand and pricing,” Fonterra Chairman John Wilson said in a statement.
DIVIDEND F’CAST CUT
Fonterra said it would pay an interim dividend of 10 NZ cents per share, while shaving its full-year dividend guidance to 20-30 NZ cents per share from 25-35 NZ cents. Despite the cut the guidance is an improvement on last year’s 10 NZ cents.
Analysts said the guidance cut would be tough to swallow for investors and farmer shareholders, the latter of which are already struggling with a farmgate milk price of NZ$4.70 per kilograms milk solids, the lowest in eight years and nearly half that of last year’s record high payout.
“That will disappoint a lot of people, and dairy farmers in particular, given that every cent counts in this season (when farmgate prices are low),” ANZ dairy economist Con Williams said.
While lower dairy prices have eased input costs, earnings were stung as milk powder produced at record high dairy prices were sold when prices were falling.
This pushed normalized earnings before interest and taxes 7 percent lower to NZ$376 million ($287.75 million), on revenues of NZ$9.7 billion, down 14 percent.
Profits fell further from a year ago, when record high dairy prices had ramped up Fonterra’s input costs while its factories struggled to process enough higher-value products during a bumper season.
The price of milk eventually dropped, shedding 50 percent in 2014 as falling demand from China, import bans in Russia and a global lift in production.
Global prices have clawed back 16 percent since the start of the year, but many industry participants anticipate a limited, further recovery in the coming months, given that an end to EU production quotas later this month is likely to boost global supply even as Chinese demand remains sluggish.
Fonterra has been expanding aggressively with offshore acquisitions and supply and distribution agreements while boosting its domestic milk processing capacity, raising concerns about whether these investments will raise profits down the line.
($1 = 1.3068 New Zealand dollars)
Source: Reuters
