* EBIT falls 41 pct, on track for lower FY earnings
* Co-op hit as high dairy prices raise input costs
* Fonterra sticks to strategy to expand branded products
(Recasts throughout, adds CEO comments, details)
By Naomi Tajitsu
WELLINGTON, March 26 Fonterra, the world's
largest dairy exporter, on Wednesday said a steep hit to its
first-half earnings won't stop it from marketing more of its
own-brand milk products in China and expand its food services
business in the fast-growing market.
The New Zealand dairy co-operative on Wednesday reported a
41 percent fall in first-half earnings after higher input costs
from soaring global dairy prices and a lack of capacity to
process record-high milk volumes into higher-yielding products
hit its margins.
But the farmer-owned co-operative is pushing on with plans
to capitalise on increasing dairy demand from China and other
countries, where growing middle classes are developing a
voracious appetite for cheese, milk formula and other products.
Fonterra has the cash to fund its expansion plans in China
after it raised 1.25 billion yuan ($201.53 million) in five-year
"dim sum" bonds in January.
In an interview with Reuters, Fonterra CEO Theo Spierings
said plans to build a UHT milk processing plant in China, which
would be its first manufacturing plant in the company's largest
export market, would likely be announced in 2014 or 2015.
"There's definitely plans to go into UHT in China because
that's the way forward. Those plans you will see announced and
coming to the table in the next financial year," he said.
Fonterra collected roughly 12 billion litres of milk from
its farmers in the six months to Jan. 31, around 60 percent of
which was processed into milk powder, mainly for wholesale
export. Much of this goes to China to form the base of infant
The company has been expanding its presence in the consumer
brands and food services space, where it can earn fatter
margins. Fonterra entered the Chinese market last year with
Anchor-branded UHT milk and its Anmum infant formula products.
Spierings said the company is also expanding its food
services operations in China, where more than half of all the
pizza sold in the country are topped with Fonterra cheese.
The company supplies cream and butter to restaurants, hotels
and fast-food restaurants in Beijing, Shanghai, and 18 other
cities, doubling from two years ago.
Beyond China, it has begun construction of a $31 million
plant in Indonesia that will package its Anmum, Anchor and
Anlene products to sell in the southeast Asian country, a major
importer of New Zealand milk powder.
MILK POWDER VS CHEESE
Controlling about a third of global dairy exports, Fonterra
should be flying high on the back of the "white gold" rush as it
earns its best returns from milk powder, but all-time high world
dairy prices have ramped up its input costs while it has
struggled to meet demand due a lack of factory capacity.
It maintained its forecast for the price it pays to its
farmer shareholders of NZ$8.65 per kilo of milk solids for the
year to July.
While this represents a record high farm-gate milk price, it
is a discount of 70 NZ cents to its reference price calculated
from global dairy prices, as the company cannot afford to pay
such a high price given that a bumper dairy season has resulted
in all-time high volumes.
Fonterra is obliged to buy milk collected by its farmer
shareholders at historically high milk prices. What cannot be
made into milk powder has been used for cheese products, which
Fonterra said lost money over the period.
To ramp up production capabilities at home, the company is
investing an additional NZ$400 million-NZ$500 million to its
capital expenditure plans over three years, which it said it
would raise through borrowings.
On Wednesday, the company announced that normalised earnings
before interest and taxes (EBIT) fell to NZ$403 million ($345
million) for the first half, while net profit after tax fell 53
percent to NZ$217 million.
The company cut its interim dividend to 5 NZ cents per
share, and reaffirmed that it expected to pay a full-year
dividend of 10 NZ cents per share, down from 32 NZ cents last
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 global operations.
"They reported the higher input costs, or the milk price,
through margin compression across their different businesses,"
ANZ rural economist Con Williams said.
The company faces a lawsuit from France's Danone,
which is seeking compensation following last year's product
recall. Fonterra said it had set aside an NZ$11 million
provision for the issue as a legal obligation in its contracts
($1 = 1.1688 New Zealand dollars)
($1 = 6.2024 Chinese yuan)
(Reporting by Naomi Tajitsu; Editing by Anthony Barker and Matt