Record ingredient sales at Fonterra after good milk year

The company said volumes of its ingredients, largely milk powders that are used in various processed foods and in countries with little fresh milk, reached 2.5 million tonnes, 9 per cent up on the 2004/05 season, thanks to higher milk production by its farmers during a milder than usual autumn.

Fonterra's farmers achieved record production of 1,210 million kg of milk solids, 4.3 per cent higher than the previous season and nearly 1 per cent up on the previous production record set in 2003/04.

Some of the higher output also came from a rising number of third-party producers outside of New Zealand.

The autumn milk was turned into commodity ingredients during the first months of 2006, resulting in a surge of sales in the last quarter of the year.

Chairman Henry van der Heyden said the strong sales, including a record output in the month of May of 300,000 tonnes, demonstrated the "strength and flexibility of our supply chain and how we can now respond a lot quicker to changes in supply and market conditions" .

Over the year, ingredient sales were up NZ$663 million to $9.2 billion thanks to good growth across almost all markets, said chief executive Andrew Ferrier.

He said there were "higher sales in core commodity markets like South East Asia, Latin America and the Middle East and in value add markets like US, Japan , Korea and Europe" .

The company also benefited from an average 2.4 per cent higher selling price across the full range of products, driven mainly by protein and milk powders.

Earnings from the ingredients division, which makes up more than 70 per cent of Fonterra's total sales, were up 21 per cent during the year, to NZ$725 million, thanks to higher sales volumes and cost-cutting measures during the year.

Guy Cowan, the group's chief financial officer, said it had made savings of NZ$130 million due to changes in manufacturing, IT procurement and freight.

The firm has cut jobs during the year and also reduced energy usage in its plants by 10 per cent.

"Our energy costs are significant, particularly for running our driers and our truck fleet.

We expect energy costs to be up NZ$70 million over last year but the restructuring should more than offset those," he said.

Additional savings are forecast for the new season following a business-wide improvement review, according to the group.

Fonterra's branded business made operating revenue of NZ$3.7 billion excluding intersegment sales, gains on the sale of investments and other one-off items.

The increase of $192 million came from increased sales, improved selling prices and benefits of brand acquisitions such as Anchor and Fresh 'n Fruity in New Zealand, according to the company.

It also achieved net growth of 15 per cent in Fonterra Foodservices sales, and an overall operating surplus (essentially its EBIT) up 9 per cent to NZ$288 million.

"That's a good result with Brands exceeding their sales and profit targets at the same time as paying their highest prices for commodities in five years," said van der Heyden.

Ferrier added that the acquisition of the Anchor and Fresh 'n Fruity brands in New Zealand and the acquisition of Kapiti Fine Foods would start to be seen on the bottom line from this year.