Goodman Fielder expects H1 profit to fall 15%, looks at consolidation opportunities

Posted by Editorial on 20th November 2008

Australia’s largest publicly listed food manufacturer, Goodman Fielder, has warned that first-half profit is likely to be down 15% on last year with private label pressure and commodity costs impacting on the business.

The company booked a 10.2% increase in revenue to $2675.4 million in the fiancial year 07/08 and net profit, on a normalised basis, rose marginally to $220.7 million.

“Today in our region we are operating in a climate of considerable uncertainty. We are in the midst of a world wide financial crisis following the collapse of the US sub-prime mortgage market and the ensuing impact on almost all national economies, including in those countries in which we operate,” Max Ould, Goodman Fielder Chairman explained. “As well the company has had to contend with major cost volatility and record increases in the costs of the primary raw materials that we use in the  manufacture of our products.”

“Sustained record pricing on agricultural commodities such as wheat, edible oils and milk has resulted in a substantial cost impost on the company,” Mr Ould stated. “Commodities have been impacted by the effects of drought, booming Asian demand for protein and the diversion of some commodities into biofuel production. These increases resulted in an increased cost burden to the company of around $204 million in the year, on the back of a $70 million increase in the previous year.”

Logistics and packaging costs rose $30 million due to record crude oil prices early in the year.

The higher costs had affected the business but Mr Ould advised that they had managed to recoup many of the increases. “However we have been largely successful in recovering these cost increases, albeit with some time lags, through a combination of internal efficiency savings and price increases,” he said. “As we go forward we will continue to actively seek cost recovery in the marketplace and through operational improvements.”

Mr Ould said the company was still well placed for future growth and was seeking to streamline their operations. “We have continued the process of rationalising and consolidating our manufacturing base by closing inefficient plants and re-investing in existing core facilities,” he advised. “We have committed to build two new state-of-the-art manufacturing plants in Sydney and Brisbane and we are moving to optimise our extensive distribution system to increase efficiency and reduce costs.”

Goodman Fielder will also endeavour to increase their support to their brands despite the economic conditions. “We continue to invest in our brands and during the last financial year we increased brand support by 60%,” Mr Ould added. “Our emphasis on new product development has been maintained and we launched new product lines in all our businesses last year. We see innovation as a fundamental strength of the company and a key driver of success in the fast moving consumer goods market.

Mr Ould suggested that their strategy for the future would revolve around three sectors: daily fresh products, food ingredients and general grocery products. In the daily fresh category they noted that there was recently the potential to enter into the Australian dairy market, hinting that they may have considered a purchase of Dairy Farmers. However, “recent acquisition opportunities would not have added value at the prices paid”, Mr Ould claimed.

The grocery category is “moving into a period of rationalisation” and Goodman Fielder is hoping to capitalise on consolidation opportunities. They are also monitoring the ingredients sector and will evaluate any “scaleable opportunities” that present themselves.

Sustainability is a major issue for the company, Mr Ould reported, with climate change a concern for their future. The company is also working to eliminate genetically modified raw materials from their retail branded products and looking to identify many of their products as ‘non-GM’ on the packaging, as they believe consumers are concerned about GM food.

“We are now four months into the current financial year. Sales are up 12% but we anticipate that our first half profit results will be around 15% lower than the prior corresponding period due to time lags in the recovery of an additional $100 million of increased commodity costs and the impact of increased private label volumes,” Mr Ould concluded.