Goodman Fielder’s results reflecting ‘difficult trading conditions’
Australian food manufacturer Goodman Fielder has reported continuing troubles amidst “difficult trading conditions” in its Baking and Grocery businesses, with overall revenue decreasing by 6 per cent.
The Company said the decreased revenue reflected the fact that the prior period included $56 million in revenue from divested businesses (Biscuits, Meats, Pizza), as well as lower dairy pricing related to the lower farmgate milk price in New Zealand. Goodman Fielder reported that normalised net profit after tax of $29.7 million was 1 per cent lower than the prior period (1HFY14: $30.1m).
Goodman Fielder’s brands include Meadow Lea, Praise, White Wings, Pampas, Mighty Soft, Wonder White, Helga’s, Vogel’s (under license), Meadow Fresh and Irvines.
The result came during a period in which the Goodman Fielder business was the subject of a proposed acquisition of its business by Wilmar International Limited (Wilmar) and First Pacific Company Limited (First Pacific) via a Scheme of Arrangement. Australian Food News reported in November 2014 that the acquisition of Goodman Fielder by Asian agribusiness company Wilmar and Hong Kong-based investment management and holding company First Pacific had been approved by the Australian Foreign Investment Board.
Goodman Fielder has reported that independent expert Deloitte Corporate Finance Pty Limited has analysed the 2015 financial year half yearly results and indicated that the results do not change its recommendation that the acquisition of Goodman Fielder by Wilmar and First Pacific is in the best interests of Goodman Fielder shareholders.
CEO pleased with earnings recovery
Goodman Fielder’s Chief Executive Officer, Chris Delaney, said while it was pleasing to see earnings recovery in the New Zealand Dairy business and continued growth in the Asia Pacific business, the half year result reflected the ongoing challenging retail trading environment in Australia and New Zealand.
“Trading conditions, particularly in the Baking and Grocery segments continue to be challenged by significant pricing pressure across several of our core categories,” Mr Delaney said.
Normalised EBITDA was 2 per cent lower than the previous corresponding period, which Goodman Fielder said reflected the impact of “difficult trading conditions” in Grocery and Baking, mostly offset by improved earnings in Dairy and Asia Pacific and lower corporate costs following restructuring initiatives implemented in the fourth quarter of FY14. Normalised EBIT of $77.3m was steady compared to 1HFY14 EBIT of $77.2 million. On a “like for like” basis (excluding EBIT from divested businesses), underlying EBIT for the first half was 5 per cent higher than the prior corresponding period.
Net interest expense was 2.5 per cent higher than the prior period due in part to one-off costs associated with the successful refinancing of the company‟s New Zealand retail bonds in October 2014.
The normalised effective tax rate was 25.9 per cent, consistent with the prior period of 26.0 per cent.
Baking division’s promotional pricing
Goodman Fielder said the Baking segment in Australia and New Zealand remained “challenged by significant pricing pressure” in the fresh loaf segment leading to reduced net average selling prices during the period.
According to the Australian Bureau of Statistics Consumer Price Index data, average bread prices in Australia decreased by 3.5 per cent from June to December 2014. Goodman Fielder continued to increase its market share across the fresh loaf category in Australia and New Zealand from strengthened brand equity and successful demand creation initiatives such as product reformulation and innovation for its power brands in Australia and New Zealand (Helga’s, Wonder White, Freya’s and Vogel’s).
Despite these share gains, Goodman Fielder said net average selling prices were lower than the previous corresponding period from increased promotional pricing in response to significant price competition in the fresh loaf category (private label and proprietary). In New Zealand, major supermarket shelf prices for private label fresh loaf reduced from NZ$1.48 to NZ$1.00, while more recently in Australia, private label fresh loaf was reduced in major supermarkets from $1 to 85 cents.
As a result, Goodman Fielder reported that its revenue declined by 1 per cent to $456.8 million, following the 3 per cent decrease in net average selling prices across Australia and New Zealand.
Normalised EBIT was $9.1 million compared to $19.9 million in the previous corresponding period, reflecting the decline in revenue and slightly higher commodity, labour and freight/logistics costs. Reliability across the Company’s Baking manufacturing network progressed during the period with no major disruptions to operations following the implementation of the continuous improvement plan targeting increased production efficiency and run rates.
In response to the impact of increased promotional pricing in the fresh loaf category in Australia, Goodman Fielder has collaborated with its major retail customers to move its Australian power brands from “high/low” promotional pricing to “everyday low pricing”. Goodman Fielder said it believes this strategy will be value accretive by “restoring the integrity of shelf pricing” to consumers and reducing the level of promotional price funding in the category. It said the strategy also better aligns the delivery of fresh product to store with consumption patterns and moves the focus from price/discounts to product, marketing and brand equity.
“In Baking, we significantly increased market share in our power brands in Australia and New Zealand from strengthened brand equity, product reformulation and innovation,” Mr Delaney said. “However, net average selling prices were lower due to the very competitive pricing environment, particularly from increased promotional pricing in the fresh loaf category,” he said.
“In response, we are working with our major retail customers to move our major brands in Australia from high/low promotional pricing to everyday low pricing which we believe will provide a better longer term value proposition by restoring consumer confidence in branded pricing, better align demand with production and enhance value in the category,” Mr Delaney said.
Grocery division revenue decline
Goodman Fielder said retail trading conditions in the Grocery division, particularly in Australia, continued to be difficult, and this impacted earnings compared to the prior corresponding period.
While Grocery revenue declined by 20 per cent, to $201.8 million, the previous corresponding period included revenue from the Biscuits business which was sold in February 2014. On a “like for like” basis (excluding Biscuits), Goodman Fielder said its Grocery revenue was 6 per cent lower than the prior corresponding period.
Volumes in spreads, edible oils and cake mix were lower from ongoing price competition from both private label and branded competitors in Australia. In dressings and mayonnaise, the Praise brand in Australia continued to lead the category and recorded its highest ever market share, driven primarily by growth in whole egg mayonnaise and aioli campaigns. Volumes in New Zealand were slightly below the prior period.
Despite lower revenue, gross margin as a percentage of sales improved on the previous corresponding period from continued focus on cost discipline across Australia and New Zealand. Normalised EBIT declined by 13 per cent on the prior period, impacted by the continued poor performance of the spreads business in Australia, only partially offset by the improved performance in dressings and mayonnaise. On a “like for like” basis (excluding Biscuits) EBIT was 7 per cent lower than the prior corresponding period.
EBIT margin improved by 8 per cent, following the divestment of the lower-margin Biscuits business.
“Our Grocery business continues to be impacted by strong price competition in the spreads, flour and cake mix categories, which more than off-set the improved result in dressings and mayonnaise where our Praise brand continued to lead the category by recording its highest ever market share during the period,” Mr Delaney said.
Dairy improvement, spreads relaunched
Goodman Fielder’s Dairy business in New Zealand recorded an improved result as margins started to recover from lower input costs compared to the record high farmgate milk price in FY14.
Volumes were slightly lower than the prior period, which included volumes from the Meats business which was divested in March 2014. The published farmgate milk price, which is a key determinant of Goodman Fielder’s product cost, reduced from its record highs of the prior year. As a result, the Company said margins in its Dairy business started to recover in the first half of FY15 which assisted in an improved financial performance.
Normalised EBIT increased from $10.8 million to $18.8 million, despite a decrease in revenue of 5 per cent, reflecting lower retail milk pricing relating to the reduced farmgate milk price. However, Goodman Fielder said this increase in EBIT recovered less than half of the earnings reduction in the prior year due to the higher farmgate milk price in FY14.
Direct Marketing Expenditure increased slightly supporting the re-launch of the Meadow Fresh brand in New Zealand. Capital expenditure increased by 41 per cent, primarily related to the expansion and upgrade of the company’s UHT milk plant in Christchurch, New Zealand, increasing capacity to meet expected growth opportunities across the Asia Pacific region.
“While we continued to face challenging headwinds in Baking and Grocery, our margins in New Zealand Dairy recovered from the lower farmgate milk price following the record increase which significantly depressed earnings last year,” Mr Delaney said.
Goodman Fielder reported that its Asia Pacific business continued to deliver earnings growth from improved operational metrics in Fiji poultry and increased contribution from Papua New Guinea.
While overall volume declined 10 per cent, volumes in the core categories of poultry (Fiji) and flour (PNG) increased on the prior corresponding period. Despite lower overall volume, revenue increased by 1 per cent to $185.9 million from improved net average selling price and mix in Fiji and increased pricing in Papua New Guinea.
In Fiji, the Company has successfully addressed the capacity issue which impacted prior year performance of the poultry business. Key operational metrics (mortality rates and processing yield) have improved significantly on the prior period, assisting in overall earnings improvement. Normalised EBIT was 12 per cent above the prior corresponding period, reflecting improved revenue and gross margin and continued cost discipline across all regions. Direct Marketing Expenditure was slightly higher than the prior period while capital expenditure in the first half was lower, reflecting phasing of some projects into the second half.
Goodman Fielder said the outlook for retail trading conditions, particularly in the Baking and Grocery segments in Australia and New Zealand, remained challenging with continuing competitive pressure on pricing and volumes.
“In response, our initial priority is to address the impact that increased promotional pricing has had on the fresh loaf segment by moving our power brands in Australia to everyday low pricing,” said Mr Delaney. “We are continuing to work with our major retail customers to implement a value accretive mechanism which reduces the level of promotional pricing to restore the integrity of on-shelf pricing for consumers,” he said.
“Additionally, we continue to collaborate with the trade on implementing a supply chain solution to capture greater cost efficiencies and improve on-shelf availability in the daily fresh delivery model in Australian Baking,” Mr Delaney said. “We believe the everyday low pricing strategy will maximise the benefits of this more efficient delivery mode,” he said.
“In an overall sense, we continue to refine our strategy to meet the current market conditions while continuing to invest to build the Company’s competitive position for the longer term,” Mr Delaney said.
Update on Scheme of Arrangement
Goodman Fielder advised on 12 December 2014 that the Australian Securities and Investments Commission had registered the scheme booklet in relation to the proposed acquisition of Goodman Fielder by Wilmar International Limited and First Pacific Company Limited via a Scheme of Arrangement (“Scheme”). A copy of the scheme booklet, which includes an independent expert‟s report and a notice of Scheme meeting, was sent to Goodman Fielder shareholders on 22 December 2014.
If the Scheme is approved by Goodman Fielder shareholders (other than certain excluded shareholders) at the Scheme meeting on 26 February 2015 and all other conditions precedent are satisfied or waived (as applicable), Goodman Fielder shareholders will receive a payment of A$0.675 cash per share.
Goodman Fielder said the independent expert, Deloitte Corporate Finance Pty Limited, has concluded that the Scheme is fair and reasonable and therefore in the best interests of Goodman Fielder shareholders (other than certain excluded shareholders).
Goodman Fielder advises that the independent expert has reviewed the 2015 half year financial results. Following this review, Deloitte has confirmed that the results have not affected its conclusion that the scheme of arrangement between Goodman Fielder and a class of its shareholders (“Scheme Shareholders”) is in the best interests of Goodman Fielder’s shareholders.
In making this confirmation, Deloitte has not reviewed any other additional information nor has it updated its report contained in Annexure 2 to the scheme booklet dated 12 December 2014 in relation to the scheme of arrangement which has been dispatched to Scheme Shareholders.
The Board of Goodman Fielder believes that the Scheme is in the best interests of Goodman Fielder Shareholders (not including Excluded shareholders) and unanimously recommends that shareholders vote in favour of the Scheme (in the absence of a superior proposal) at the Scheme meeting on 26 February 2015.
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