One of Australia’s dominant dairy processors, Fonterra Co-operative Group Limited, has announced a drop of 32 per cent in earnings in the Australian arm of its business, although the Company saw a stronger-than-expected overall half yearly result.

Fonterra is based in New Zealand but is a major player in the $5 billion dairy products industry in Australia. According to the Nielsen 2012 ‘Retail World Grocery Guide’ for Australia, Fonterra holds a 27 per cent value share and a 24.2 per cent volume share of Australia’s $1.84 billion cheese market; a 29.7 per cent value share and 32.4 per cent volume share of the $1.17 billion chilled dairy (yoghurts and desserts) market; and a 21.3 per cent value share and a 14.2 per cent volume share of the $703.8 million butter and blends market.

Fonterra’s half-yearly results were announced last week and its financial report said the Company’s Australian consumer brands were impacted by a very competitive retail environment, and its Australian milk processing business was impacted by intensifying competition for milk supply.

The Company also an important player in the fresh and powdered milk markets in Australia. Based on Nielsen’s market analysis, Fonterra holds a 2.3 per cent value share and a 1.5 per cent volume share of the $1.9 billion fresh milk market in Australia, and a 19.9 per cent value share and a 14.9 per cent volume share of the $28.6 million milk powder market in Australia.

The Company is reshaping its Australian business, and has a taskforce developing a ‘prioritised view of markets, products and brands’. Future plans include expanding its foodservice operations, focusing more on ‘everyday nutrition’ and new innovations and a higher utilisation of ‘value-add plants’ at the expense of commodity exports.

“A recovery plan is now in place,” said Theo Spierings, Fonterra CEO.

Fonterra’s total net profit after tax for the six months increased by 33 per cent to $459 million, after a “particularly robust” performance by NZ milk products and significant increase in sales volumes in the Company’s Asian and Latin American brands. Fonterra said these achievements were partly offset by continuing challenges affecting the performance of the Australian arm of the business.

The dairy giant said excellent spring and early summer growing conditions across most of the New Zealand led to strong growth in New Zealand dairy production and record volumes in the first half. But dry conditions and an ongoing drought in New Zealand, and ongoing difficulties in the Australian market mean Fonterra is not expecting its strong first half earnings to be repeated in the second half.

“For the full year, we expect to see total milk volumes for the current season to be in line with last season,” said Theo Spierings, Fonterra’s CEO. “The ongoing volatility in commodity markets could have a negative impact on product mix profitability,” he said.

“In many of our consumer markets, we are expecting intensified competition in the second half – particularly in Australia – and in Asia we are seeing signs of demand slowing,” Mr Sprierings added.

Highlights from Fonterra’s half yearly results, compared to the same period last year, included:

• Record milk volumes collected up 6 per cent;
• Total external sales volume growth of 8 per cent to 2.1 million metric tonnes;
• Normalised Earnings Before Interest and Tax (EBIT) of $693 million was up 26 per cent (adjusted for the $24 million cost associated with the planned closure of the Cororooke plant);
• Net Profit After Tax of $459 million, up 33 per cent;
• Economic Debt to equity of 40 per cent, an improvement from 47 per cent last year;
• Earnings per share up 21 per cent;
• An interim dividend of 16 cents per share, up 4 cents per share.

Fonterra’s half yearly results in 2013 follow a similar pattern to last year’s results. Australian Food News reported in March 2012 that Fonterra had seen a drop from NZ$2.1 billion to NZ$2 billion in its Australian and New Zealand businesses because of the challenging retail environment.

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