Fonterra's annual earnings look set to fall short of its
prospectus forecasts when the company reports its result for
the July 31 financial year on Wednesday.
The result, which will not capture the costs involved in
August botulism scare and subsequent product recall, is
expected to reflect the combined effect of last summer's
drought and difficult trading conditions in Australia.
Mark Lister, head of private wealth research at Craigs
Investment Partners, said attention would most likely centre
on the costs to production and the financial follow-on
effects from the botulism scare, which turned out to be
"It's hard to see a scenario where there is no financial
impact in that regard," he said. Fonterra's unit price, after
initially being sold down to $6.50 on the back of the scare,
quickly rebounded, trading today at $7.20.
Fonterra, the world's biggest dairy exporter and its fourth
biggest dairy company by turnover, said in July that its
normalised earnings before interest and tax were likely to be
around $1 billion, down 7.3 per cent from the forecast
contained in last year's offer documents for the Fonterra
The co-operative's New Zealand Milk Products (NZMP) division
delivered a strong performance on the back of price premiums,
product mix, cost savings and productivity gains but the
second half was more challenging.
Fonterra has said the drought contributed to a 64 per cent
rise in whole milk powder prices on GlobalDairyTrade since
early 2013, and that this had a temporary, but significant,
negative impact on NZMP's margins.
At the same time, the co-operative's Australian business
remained under pressure, with changes to the business there
resulting in a number of additional write-offs.
Brokerages Forsyth Barr said it expected the company to
report underlying net profit after tax of $718m, up 18 per
cent on the previous year's profit.
"The result will be characterised by significant
period-to-period profit volatility," it said in a research
"A very weak second half of the year follows an extremely
strong first half," it said. Forsyth Barr said NZMP was
"barely profitable" in the second half.
Fonterra said in August that it had raised its forecast
farm-gate milk price for the 2014 season by 30c a kg of milk
solids to $7.80 per kg - which would be a record if it comes
High milk prices are good for farmers at the farm gate but
they affect Fonterra's margins on the manufacturing side of
The key "hit" to margins from the advance of global dairy
prices over the past nine months will be in the first half of
the current financial year, Forsyth Barr said. It expects
some margin pressure to be evident in the second half of the
year just finished.
The sustained downturn in the Australian milk processing
business will impact performance yet again. Forsyth Barr
expects ANZ to report a 29 per cent decline earnings before
interest and tax.
"Also be wary of write-downs in the Australian brands
business as the coop executes its brand consolidation
strategy," Forsyth Barr said.