Goodman Fielder won't see full year profit gains, hurt by dairy prices, grocery wars

Goodman Fielder [ASX: GFF], Australasia's largest food company, says the rebound predicted for the second half won't be enough to lift full-year earnings as it grapples with soaring milk prices and rivalry in baking goods. The shares dropped 7.4 percent.

Normalised earnings before interest and tax in 2014 will be "broadly in line" with the previous year's A$185.6 million, assuming no change in market conditions, the Sydney based company said in a statement. First half EBIT on that basis fell 8 percent to A$77.2 million, suggesting a second half result of about A$108 million.

"The impact of yet another increase in the farmgate milk price in the first quarter, continuing high A$ wheat prices and a challenging trading environment means that the level of earnings improvement we previously expected this financial year has been delayed," said chief executive Chris Delaney.

Farmgate milk prices soared more than 40 percent in Goodman Fielder's first half, almost halving the profit margin at its dairy unit to 4.6 percent and slashing EBIT by 39 percent, even as sales rose. The company couldn't pass on the cost increase because of "continued aggressive competitor pricing".

The maker of household brands including Vogel's bread, Meadowfresh milk and yoghurt, and Meadowlea butter and margarine has been cost cutting, restructuring and divesting over the past three years, to focus on its core brands and reduce debt.

It posted a net loss of A$64.8 million in the first half, from a year-earlier profit, after taking one-time charges on asset sales and for restructuring. Revenue from continuing operations rose

4.8 percent to A$1.1 billion.

On the ASX, its shares dropped 5 cents to 62.7 Australian cents, and are down 3.6 percent in the past 12 months, against the Australian benchmark index's gain of about 6 percent in the same period. The stock is rated an average 'hold' based on the consensus of 11 analysts compiled by Reuters, with an average price target of 75 cents.

"The outlook remains really challenging. Sure the management says it was within expectation, but it was below the market expectations," Brian Han, senior research analyst at Fat Prophets in Sydney, told BusinessDesk. "The cost side remains high with commodity prices, but it's also the revenue side - they have no pricing power."

"In order to get to that guidance they're going to have a really big second half, and just how realistic is that?" he said. "That's the market's reaction."

Gains were made in the baking unit as EBIT rose 22 percent to A$19.9 million, and its baking margin widened by nearly a fifth to 4.3 percent. In Australia its premium Helga's brand increased market share by 5 percent, while locally Freya's share increased by 4 percent. The company said high wheat prices and ongoing price competition within the supermarkets continued to be challenging.

EBIT at its grocery unit, which includes spreads, mayonnaises and dressings, fell 8 percent to A$27.7 million, as its margin contracted to 11 percent from 11.5 percent. Revenue fell 4 percent to A$251.5, as spreads faced competition from new supermarket brand products and ongoing discounting from dairy competitors.

The company's biggest earner was its Asia-Pacific unit, which includes a Fijian poultry business and other food staples. EBIT was A$31.million, down 3 percent on the previous year, as its EBIT margin shrank to 17.2 percent from 19 percent, in part impacted by higher costs in its Fiji operations.

(BusinessDesk)