October 28, 2019 / 10:48 PM / 19 days ago

Australia's Bega Cheese shares melt as hot weather prompts profit warning

(Reuters) - Australia’s Bega Cheese Ltd (BGA.AX) warned on Tuesday that increased competition for milk supplies due to a prolonged drought would hit its 2020 earnings, sending the dairy product maker’s shares to a six-year low.

FILE PHOTO: The remaining cattle on farmer May McKeown's drought-affected property, located on the outskirts of the northwestern New South Wales town of Walgett in Australia, eat hay July 20, 2018. REUTERS/David Gray

Bega said that competition had escalated quicker than it had anticipated, leading to a higher ongoing cost of milk across the industry. It added that a softening in demand for its products in some export markets would also adversely impact earnings.

Bega forecast normalized core earnings of A$95 million to A$105 million ($65 million to $71.8 million) for fiscal 2020, down from the A$115 million in reported in fiscal 2019.

“We have previously advised that conditions impacting FY2019 would continue into FY2020,” Chairman Max Roberts said in a statement shortly before the market opened. “This has proven to be the case, but at a faster and deeper rate.”

Bega’s shares dropped as much as 17% to A$3.760 within the first half hour of trading, reaching their lowest since October 2013. They were also the worst intraday performers on the ASX 200 benchmark , as the drop marked the stock’s worst intraday loss since October 2016.

Australia is suffering from a third straight year of drought, with low irrigation levels severely impacting the country’s once booming agricultural sector.

Fonterra (FCG.NZ) (FSF.NZ), the world’s largest dairy producer, has marked weaker milk production in Australia for several months now, with the continuing dry weather resulting in higher input costs.

Agriculture companies such as Graincorp Ltd (GNC.AX) and Nufarm Ltd (NUF.AX) have also seen their margins eroded by the dry weather conditions.

To combat the increasing competition for dwindling milk supplies, Bega said it was increasing its Southern Region milk price, a move that would also directly impact its 2020 earnings.

The company, which also manufactures products including Vegemite and peanut butter, said it was “well advanced” in its plans to restructure its manufacturing capacity, including the development of third party relationships.

“We will continue to manage our supply chain for domestic and international trade to mitigate further downside risk,” Chief Executive Paul van Heerwaarden said. “We are also well advanced with internal reviews within our business to

ensure our cost structure is correctly aligned to current and medium-term market conditions.”

Reporting by Ambar Warrick in Bengaluru; Editing by Sandra Maler and Jane Wardell

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