The recession in the global dairy industry punched a big hole in the half year earnings of Australia’s biggest milk processor, Murray Goulburn.
The company said yesterday that net profit fell to $10 million in the six months to December 31, compared with $15.2 million in the same period the previous year.
And the company warned that some parts of the business would do it tough in the current half year thanks to the continuing sluggishness in global dairy demand and over production (sounds like the iron ore, coal, copper and oil industries).
The shares slid more than 10% over the day’s trading yesterday after being down more than 12% at one stage. They ended at $1.88.
Despite the weak outlook, Murray Goulburn (which owns the Devondale brand) will pay an interim divided of 3.5 cents a share, fully franked, even though the outlook remains mixed with global prices down more than 11% in the first two months of 2016.
In comments in yesterday’s announcement CEO, Gary Helou attribute the drop to subdued global dairy prices.
Its a comment that would be familiar to the board and management of the company’s giant NZ rival, Fonterra, whose business has been whacked as well by the global price slide.
"The first half has seen the continuation of the decline in Chinese imports of commodity dairy ingredients and the ongoing Russian embargo on dairy imports," he said.
"This has been compounded by increased European milk supply, resulting in a period of significant oversupply in global dairy commodity markets, driving commodity prices to record lows."
But Mr Helou was confident Murray Goulburn’s strategy of moving into more value-added products would help cushion the company against the continuing global volatility.
He said the co-operative increased sales of its higher margin dairy foods business by 28.1% during the first half of the 2016 financial year.
That more than offset a slide in revenue from the company’s ingredients and nuritionals and left total revenues up a tiny 3.7% at $1.38 billion.
“Against this backdrop, Murray Goulburn has continued to perform well, with substantial further progress made in moving product mix from commodity products towards higher-margin, value-added or ready-to-consume dairy foods," Mr Helou said.
"Our ability to drive strong revenue growth in these tough markets demonstrates that Murray Goulburn’s growth and value-creation strategy is supporting our ability to deliver higher returns, particularly with farmgate milk prices significantly above those achieved when global commodity prices were last at these low levels."
That weakness in the ingredients and nutritional business will weigh on Murray Goulburn in coming months and Mr Helou said the continued weakness in global prices would lead to its ingredients and nutritionals business “materially underperforming against” its prospectus forecasts.
"This underperformance is expected to be partially offset by growth in the dairy foods segment resulting from the acceleration of production mix shift and the expected strong performance of domestic and international ready-to-consume dairy foods product sales"
Mr Helou said the co-operative expected to maintain its farm gate price of $5.60 per kilogram of milk solids.
This would generate full year net profit of $63 million, under the co-operative profit sharing mechanism between farmers and investors in its non-voting listed trust.
