Shares in Bega Cheese swallowed what would normally be bad news about big cost increases quite well in the wake of the company’s AGM yesterday.
Bega is now by far the largest Australian-owned food group but has been hit by a string of problems – especially cost rises for milk, energy, packaging, transport and other items. In the past couple of week’s its dairy processing operations in northern Victoria have had to battle heavy rain and near record floods – which it seems to have done with the help of rival companies.
The AGM was told by chair Barry Irvine that a “material spike in input costs did provide further challenges and has impacted us in the short term but doesn’t lessen the opportunity for future growth”.
And CEO Paul van Heerwaarden (who is stepping down shortly after six years in the job, to be replaced by chief operating officer Pete Findlay) told the meeting that despite the cost rises of $30 to $35 million a month, Bega was “reconfirming earlier earnings guidance for 2022-23 of “normalised EBITDA in the range of $160 million to $190 million.”
“As outlined in the guidance note, we had initially expected Victorian farm gate milk prices to increase in the range of 15% to 20% over FY2022 closing prices” but he told the meeting that prices had risen further to be up around 30% from the closing levels of 2021-22.
“Strong competition for milk through June and July resulted in further increases in pricing, which were approximately 30% higher than the closing FY2022 farm gate milk price.
“Coupled with other cost increases, for example, oil, resin, packaging, coffee and sugar, we have seen a significant year on year increase in costs that will be partly offset by accelerating some of our cost out and efficiency programs and increased returns from international dairy commodities.
“The overall net increase in costs is circa $350 million to $400 million or about $30 million to $35 million per month.
“During the first quarter we have phased in price increases in market to cover these increased costs.
“In this very competitive farm gate milk procurement environment, I am pleased to report that we have been able to secure the milk that we require for the year ahead and are confident about securing milk beyond the year ahead. I think that the reality is our long-term relationship with our farmers and our deep understanding of the issues that our dairy farmer suppliers manage assists us greatly in securing that supply.
“The timing of this phasing of pricing in the first quarter was impacted by a number of factors however I am pleased to report that we have been successful in achieving price realisation in the market and this is now being reflected in the monthly financial performance of the business.
“While we have had both staff members and farmers directly impacted by the floods I am pleased to say they are all safe and from a business perspective our processing facility at Tatura has been able to manage the impacts of multiple day power outages and the logistics challenge of collecting milk off farm and having it processed… We do not expect the impact from the floods to have a material financial impact on our business performance in 2023.”
Bega shares ended up 1.8% at $3.30.
