UPDATE 1-Fonterra H1 earnings drop, high dairy prices shrink margins

Tue Mar 25, 2014 5:20pm EDT

* Normalised EBIT falls 41 pct to NZ$403 mln on rising costs

* Net profit down 53 pct at NZ$217 mln

* Dividend 5 NZ CPS, company on track for lower FY earnings (Adds comment, details)

By Naomi Tajitsu

WELLINGTON, March 26 (Reuters) - New Zealand's Fonterra reported a 41 percent fall in first-half earnings on Wednesday as the farmer-owned co-operative's margins were hit by higher costs, too much milk, and a lack of capacity to process higher-yielding products.

The world's largest dairy exporter, which controls about a third of global dairy exports, said normalised earnings before interest and taxes (EBIT) fell to NZ$403 million ($345 million) for the six months to Jan. 31, compared with NZ$693 million a year ago.

It said net profit after tax fell 53 percent to NZ$217 million even as revenues climbed 21 percent to NZ$11.3 billion, as the company has struggled to capitalise on record-high world dairy prices.

Dairy prices have been rising due to surging demand for milk powder from China and other emerging countries, where growing middle classes are developing a voracious appetite for infant formula and other products.

Fonterra should be flying high on the back of the "white gold" rush as it earns its best returns from milk powder, but higher prices have ramped up its input costs, while it has struggled to meet demand due a lack of factory capacity.

At the same time a bumper dairy season in New Zealand has resulted in all-time high volumes, which Fonterra is obliged to buy at historically high milk prices. What cannot be made into milk powder has been used for cheese products, which Fonterra said earned negative returns over the period.

"Higher dairy commodity prices have put increasing pressure on margins in our consumer and foodservice businesses," Fonterra Chief Executive Officer Theo Spierings said in a statement.

"We had to strike a balance between passing on rising costs immediately or continuing to build our market presence to secure long term growth ... Taking the longer term view has constrained profitability during this run of strong commodity pricing."

The company cut its interim dividend to five NZ cents per share compared with 16 cents last year, and reaffirmed that it expected to pay a full-year dividend of 10 cents per share, down from 32 cents last year.

It also maintained is farmgate milk price forecast of NZ$8.65 per kg of milk solids for the year to July, less than its official reference price of NZ$9.35 calculated from global dairy prices set at the co-op's fortnightly auctions.

In December, Fonterra warned that it expected full-year earnings to fall to around NZ$500 million-NZ$600 million from last year's NZ$1 billion.

Analysts said that the earnings fall reported on Wednesday showed that high dairy prices were hitting its global operations.

"The results were what we were expecting. They reported the higher input costs, or the milk price through margin compression across their different businesses," ANZ rural economist Con Williams said.

He added that the first-half results suggested that Fonterra could achieve its full-year earnings forecast, while adding that ongoing high milk prices "could cloud the long-term picture a bit."

The company faces a lawsuit from France's Danone, which is seeking compensation following a product recall of infant milk formula in Asia last year due to a dairy contamination scare which turned out to be a false alarm.

($1 = 1.1688 New Zealand Dollars) (Reporting by Naomi Tajitsu; Editing by Anthony Barker)

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