Dairy giant faces fierce competition in Australia

Fonterra will cut costs by $60 million this year, including from its struggling Australian business.

The dairy giant's annual result, released today, says there was a 20% drop in earnings across its Australia/New Zealand business mainly reflects fierce competition across the Tasman for sales of branded consumer products such as yoghurt and cheese.

Chief executive Theo Spierings says the company wants to increase Australian volumes, reversing the downward trend, as well as the possible consolidation of brands and cost-cutting.

Fonterra says it wants to reduce costs by $90 million - including $60 million this financial year.

Chief financial officer Jonathan Mason describes it as "good housekeeping".

Mr Mason says with the forecast milk payout of $5.25 for 2013, the company wants to be careful with its costs.

The company is considering staff restructuring, a travel review and use of consultants.

"Consultants have a very valuable role as specialists, but over time if you don't look at the spend, the specialists can sometimes get embedded more than we really want to in the organisation."

Earlier this month, NBR ONLINE broke the story of Fonterra's PR restructuring involving consultants Baldwin Boyle.

News of the cost-cutting comes the same day the company announced an $8.2 million final payment to former ceo Andrew Ferrier, and increased the number of staff paid more than $100,000 to almost 4000.

Branded volume declines

Fonterra, the world's largest exporter of dairy products, posted normalised earnings before net finance costs and tax in the ANZ division $204 million in the 12 months ended July 31, down from $256 million the previous year, as sales fell to $3.1 billion from $3.5 billion.

Volume fell 4% after adjusting for the sale of its Western Australian businesses.

The ANZ unit includes fast-moving consumer goods in Australia and New Zealand, Australian ingredients including milk supply and manufacturing, and most food service sales in the region.

Chief executive Theo Spierings says the Auckland-based company is holding its market share of milk production in Australia, but in the past few years the volume share of branded operations has declined.

"The retail scene is causing more pressure," he said on a conference call. "We were optimistic we were seeing a reverse of that trend [but] that's not happening."

Fonterra cites "weakening consumer spending" in Australia "which resulted in increased pressure on pricing and increased competition in the cheese and yoghurt categories".

Earnings fell as the company increased its trade spending to restore market share in Australia, where its rivals for consumer products include Nestle. By contrast, New Zealand earnings before interest and tax grew slightly in the latest year, reflecting the company's "market leading competitive position".

"The trading environment in Australia remains challenging with a continued downturn in consumer spending and aggressive competition," Fonterra says.

Performance 'reasonable'

The ANZ division is the second-biggest generator of earnings after the company's powerhouse division, New Zealand Milk Products, which collects, processes and exports milk from its New Zealand farmers. External revenue for NZ Milk climbed to $14 billion from $13.8 billion, and generated $515 million of normalised earnings, up from $420 million.

Fonterra's total payout to farmers fell 19% in the latest year to $6.40 per kilo of milk solids, missing the company's May forecast, which reflected lower prices for milk and a stronger kiwi dollar, offset by record milk production.

Fonterra Shareholders Council president Ian Brown describes the performance as "reasonable" but expresses concern about the ANZ business again failing to provide adequate returns.

"Unfortunately, ANZ has not delivered to target. We are aware that market conditions are particularly tough at present and understand plans are in place to ensure the business improves," he says.

Sales in the financial year ended July 31 fell 0.5%to $19.77 billion, even as volumes increased 2% to 3.94 million tonnes. Pretax earnings climbed 9%, while net profit fell 19% to $624 million, mainly reflecting year-earlier tax credits of $202 million.

"All around the world we saw record dairy production, which was mirrored back here in New Zealand," outgoing chairman Sir Henry van der Heyden says. "Global dairy demand held up reasonably well but this ocean of milk obviously impacted on global commodity prices."

Based on auctions on the GlobalDairyTrade platform, prices of dairy products sank to a 34-month low in May, though there have been gains in the past four fortnightly sales. Today Fonterra said some recovery had been expected in prices and was "partly offset by further appreciation of the New Zealand dollar".

Sir Henry was fronting his last annual results as chairman before retirement. On the conference call he went on the front foot to discuss the former CEO Andrew Ferrier's final payment from the company, which amounted to $8.2 million.

"I know it is a lot of money but the absolute core of the payment is based on performance," he said.

The company declined to update its forecasts, saying it is now in the "blackout" period ahead of the prospectus for its Trading Among Farmers fund. The prospectus is expected toward the end of October, with the launch of TAF slated for the end of November.

Fonterra towers over other corporates in New Zealand, generating almost four times more revenue than Telecom, the nation's largest listed company, with about $4.5 billion of sales last year. Dairy products are New Zealand's biggest export.

Normalised earnings for Asia/Africa, Middle East rose 1% to $194 million while for Latin America earnings gained to $129 million from $119 million.

- with additional reporting from BusinessDesk

dwilliams@nbr.co.nz