Livestock Improvement Corporation’s profit was reduced while PGG Wrightson and Skellerup reported their revenues being bruised by exposure to the effects of the dairy industry downturn. The a2 Milk Company, in contrast, reported a bumper half-year.
Farmer-owned LIC signalled reduced earnings last October as a result of the lower forecast milk payout and reduced spending onfarm.
In the upshot, its $145 million revenue for the six months to November 30, 2015, was 9% down on the corresponding period the previous year. Net profit after tax was $15.9m, down 46%.
Chairman Murray King said the season’s lower forecast milk price had created financial challenges for many dairy farmers “and as a co-op we are closely linked to that”.
The half-year result was a reflection of this, he said. Because the company was continuing its essential capital expenditure programme “we now expect the year-end result to be closer to a break-even position,” he said.
LIC significantly reduced its operating costs without reducing its service to farmers, King said. “It’s times like this when service becomes even more important, so we are hugely focused on that.”
PGG Wrightson reported operating earnings before interest, taxes, depreciation and amortisation (EBITDA) of $30.9m for the six months to December 31. This was $2.9m down from the result in the corresponding period the previous year.
However, the previous half-year result was a record and the company presented its latest result as its second-strongest interim performance for eight years.
Chief executive Mark Dewdney called it “a very strong result given the challenging trading conditions in many agricultural markets”.
Low dairy prices, and the perceived risk of drought from El Niño conditions, resulted in more conservative spending by the company’s NZ farming customers. Group revenue decreased 5% and net profit after tax decreased $3.7m to $16.1m, compared with the previous corresponding period.
Among the company’s various divisions, a lack of live cattle exporting had led to Livestock’s operating EBITDA decreasing by $800,000. Domestically, cattle and sheep tallies were higher, but sheep prices were lower. Dairy volumes were also lower than in the previous year.
Seed and Grain’s operating EBITDA decreased $1.8m but the company’s NZ seed business recorded another strong result.
Farmers were shifting to higher-performing forage and crop seeds, and spring-sown forage options such as brassicas and fodder beet were increasingly regarded as a key part of animal winter plans, Dewdney said. Demand for the company’s dairy summer feed options such as chicory were also growing as farmers reduced their reliance on imported supplementary feed in response to the lower dairy payout.
While sentiment in the dairy and sheep meat sector had deteriorated in recent months, Dewdney said, strong confidence in the horticulture-based sectors would provide further opportunities for growth.
PGG Wrightson accordingly is maintaining its 2016 full-year operating EBITDA forecast range of $61-67m.
Skellerup reported mixed performances within the group. Its half-year revenue of $107m was up 9% but its $9.6m net profit after tax was similar to the previous corresponding period.
Skellerup’s Agri Division revenue was up 4% but chief executive David Mair said the drop in forecast payout had resulted in some deferral of spending. This had slowed sales of dairy rubberware and footwear.
Many Skellerup products were essential consumables, Mair said, “so we expect a recovery”. But the exact timing was difficult to forecast.
In contrast, overseas sales during the first half of the year had been strong, enabling the Agri Division to record a slight increase in revenue. But the higher costs of sales in delivering to these markets had reduced the division’s earnings before interest and tax compared to the previous year.
Work is continuing on Skellerup’s new integrated dairy rubberware development and manufacturing facility at Wigram.
Chairman Sir Selwyn Cushing said the outlook for the Agri Division was difficult to project.
Low global milk prices were likely to have some impact on the timing and amounts farmers would spend between May and July, the off-season for most NZ dairy farmers.
The a2 Milk Company had the best story to tell. Its Australian and NZ business reported substantial growth in revenue and operating earnings in the six months to December 31 thanks to the exceptional growth of sales in a2 Platinum infant formula. The China and Other Asia business also recorded significant revenue growth from infant formula and for the first time returned positive operating earnings.
Growth initiatives in the United States are focused on establishing the broad distribution of a2 Milk in California while in the United Kingdom the company’s fresh milk business improved after repositioning into the specialty milk segment.
The unaudited group half-year profit of $10.1m included:
- Total revenue of $139.1m, an increase of 86% over the previous corresponding period;
- Group operating EBITDA of $18.7m, a whopping 472% increase.
The result includes $8.1m establishment costs in the US and UK markets.
The company is forecasting a significantly improved operating cash flow for the second half of its financial year.
Chief executive Geoffrey Babidge said revenue from infant formula in Australia, NZ and China had grown to $73.9m, an increase of 340%, and accounted for 53% of total group turnover.
Most sales were made through Australian grocery and pharmacy outlets but direct sales into China increased significantly, with strong growth in e-commerce channels and mother-and-baby retail stores.
Synlait Milk, a2 Milk’s manufacturing partner in NZ, is benefiting from this growth. Babidge said a2 Milk had experienced stock shortages, particularly during the first four months of the half, but “we have increased our production schedule with Synlait to meet increased demand”.
The company is building milk supply in NZ, to facilitate increases in infant formula production next year.
The infant formula regulatory environment in China was continuing to evolve, Babidge said, but a2 Milk considered itself well-placed to respond to any changes in the regulations in conjunction with its manufacturing partner.
Fonterra’s latest half-year results were scheduled to be announced on March 23 and Synlait’s on March 31, both after the deadline for this article.
