July 21, 2004

 

 

New Zealand Milk Performance Slump Belies Potential
 

Fonterra chief executive Andrew Ferrier says a $945 million slump in revenue for the company's consumer business, New Zealand Milk, is not an accurate indicator of performance.

 

The company's revenues dropped to $3.8 billion in the year to May 31 2004, but Mr Ferrier said comparisons with the prior year were not an accurate indicator of performance.

 

NZ Milk had sold Fonterra businesses in Britain and Latin America into joint ventures, the net effect of which was a reduction of $719 million in revenue.

 

Mr Ferrier said that on a like-for-like basis, taking into account the reduced revenues from the businesses which had been sold off, New Zealand Milk's revenue of $3.8 billion was actually "$225 million down, primarily as a result of currency movements".

 

The volume of products sold increased by 4 per cent, but New Zealand Milk experienced a difficult year in many of its key markets, as margins came under pressure from a sharp increase in commodity costs.

 

Not all of these increased costs could be recovered in the short term by boosting prices to retailers and consumers, because that would have made products less competitive.

 

The operating result for New Zealand Milk fell 28 per cent over the past year, partly because of higher commodity prices paid to obtain raw material.

 

"Recovering all those increases quickly in a competitive marketplace is difficult," said Mr Ferrier.

 

The cost of goods sold reduced by $554 million to $2.6 billion mainly because of the sell-off of businesses, and the effect of the stronger New Zealand dollar on the company's international costs, partially negated by increased commodity prices.

 

Operating expenses fell by $279 million to $866 million, not only as a result of the divestments, but also through tight controls in the business, which helped offset the impact of higher commodity prices.

 

Mr Ferrier said while performance was flat, overall, the business had considerable potential.

 

"We are budgeting for an improved operating performance in the current season and we are addressing the areas that have dragged down performance," he said.

 

Good performances in the Philippines, Saudi Arabia and Chile only partially offset lower-than-expected performances by the Dairy Partners Americas (DPA) joint venture businesses in Venezuela, Brazil and Argentina and New Zealand Milk's operations in Mexico.

 

Mr Ferrier said the company was forecasting a recovery in performance with DPA as the economic outlook improved in Brazil and Argentina.

 

"However, our Mexico business has not lived up to expectations and a new management team is addressing this performance," he said.

 

New Zealand Milk's global foodservice business increased both volumes and revenues in the 2004 year, with good performances recorded in Australasia, Asia and the Middle East.