Fonterra profits slumps, blames downturn on a US$294m China write-down

NEW ZEALAND – Fonterra, the New Zealand dairy giant, posted s loss of US$252m after poor performance of Beingmate, the Chinese baby food in which it has a stake,  which led to massive write downs of upto US$294 million for the half year ending January 31.

However, the dairy reported that overall sales revenue was up 6% to US$7.09 billion compared to the same period last year, mainly due to the improved global prices for dairy products.

Global prices particularly for whole milk powder category were supported by ongoing strong global demand for dairy and stable global supply.

In the ingredients business, it achieved strong results with 9% growth to US$403.80m despite lower sales volumes, mainly driven by higher stream returns in the first half.

Strong competition in the Co-operative’s strategic markets, especially in Foodservice resulted to poor performance in Fonterra’s Consumer and Foodservice business, limiting the short-term options to pass through the higher costs.

Volumes fell 11%, margins contracted by 6% and earnings before interest and tax dropped by 25%.

The company said that the Beingmate impairment, together with a US$132.43m payment to Danone impacted a big deal on its net profit of US$179.45million, which it said was a better reflection of underlying operating performance.

Fonterra was ordered by an arbitration tribunal to pay Danone for recall costs over a whey protein recall in 2013 after a botulism scare.

Fonterra paid US$553 million for a near 20% stake in China’s Beingmate Baby and Child Food Co. Ltd in 2014 but in 2017, the carrying value was reduced to US$446.46m after it took an impairment loss of US$25.32m.

The company lifted its forecast farmgate milk price to US$4.74 per kilogram of milk solids from the US$4.63 it projected in December, reflecting an improvement in global dairy prices.

It says that work is under way to improve the performance of Hangzhou-based Beingmate Group, which Fonterra bought in 2014 in the hope of tapping into burgeoning Chinese demand for baby formula.

“The opportunity in the Chinese infant formula market remains, as does the potential for our Beingmate partnership – but an immediate business transformation is needed for Beingmate to benefit from the ongoing changes in the market,” said Wilson.

To achieve its forecast, the company said it is putting a strong commitment to the V3 strategy of shifting more volume into higher value products at velocity.

“We will continue to put as much milk as possible into higher value products, particularly into our Advanced Ingredients business, and Consumer and Foodservice business where we are still targeting an additional 400 million litres of volume this year.”

Earlier this month, Synlait Milk, milk powder and infant formula maker announced a first-half profit of US$29.22m, as sales jumped 50% to US$317.31 million.

It’s not the only dairy company in New Zealand that posted spectacular performance.

Another company a2 Milk reported a 150% gain in first-half profit as sales surged 70%.

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