Lion dairy business facing tough conditions, while Bega sees growth

Posted by AFN Staff Writers on 24th February 2014
Australian-based dairy businesses have coped differently with 'difficult' market conditions

Food and beverage company Lion has announced its Dairy and Drinks business experienced “significant margin pressure” in the 2013 year, while dairy business Bega Cheese has reported a positive start to the 2014 financial year, showing growth in its half yearly results.

Bega’s ‘strong business model’ sees growth in difficult trading environment

New South Wales based dairy company Bega Cheese has reported 4 per cent rise in revenue, 10 per cent lift in EBITA, 18 per cent increase in PAT and a 14 per cent increase in the interim dividend to 4 cents per share fully franked in its half yearly 2014 financial results.

Since listing in 2011, Bega Cheese said it had “consistently delivered both top line and bottom line growth, increased dividends and successfully responded to volatile trading environment in the dairy sector.

A significant rise in global commodity prices and a more favourable exchange rate saw suppliers across all dairy companies receive a welcome increase in farm gate milk prices in the first half of the 2014 financial year. The improved international trading position saw increased competition for milk and farm gate prices increase by some 23 per cent in the first half of the 2014 financial year compared to the same period last year.

“Bega Cheese’s consistent performance is reflective of the strength of our business model,” said Aidan Coleman, Bega Cheese CEO. “We have been very pleased to see continued strong demand and improved global pricing for dairy commodities and a more favourable currency position drive an optimistic outlook for the industry,” he said.

“Improved farm gate milk prices, which will encourage production increases, combined with consistent business performance and investment at Bega Cheese positions the company well to respond to growth opportunities in the medium term,” Mr Coleman said.

Bega Cheese said its business and product range of cheddar, mozzarella, processed and cream cheese, infant formula, dairy nutritional powders, milk powders and lactoferrin continued to position the company well to respond to demand in both the Australian and international market.

In the first half of the 2014 financial year Bega Cheese initiated what was to become a strongly contested bid process for WCB. Bega Cheese said the competition for control of WCB “resulted in a re-rating of the value of Australian dairy companies and created significant value for both WCB and Bega Cheese shareholders”. The conclusion of the bid saw Bega Cheese sell its shareholding in WCB to Saputo, with Bega Cheese receiving $99 million, with a net profit after tax of approximately $44 million.

“We are pleased with the outcome of the Warrnambool bid,” said Barry Irvin, Executive Chairman of Bega Cheese.

“Bega Cheese has a number of business development and corporate opportunities that we are currently evaluating,” Mr Irvin said. “The Board continues to hold the view that further consolidation of the Australian dairy industry will create greater value across the supply chain and Bega Cheese has the balance sheet strength, business profile and performance that positions it well to pursue that value creation,” he said.

Bega Cheese said its Board would continue to review the capital requirements, investment and corporate opportunities available to the business and in the event that the capital is not required the Board would “consider options for a capital return to shareholders”.

Lion sees growth, but reports volume decline in ‘tough’ market conditions

Lion has also announced a revenue increase of 4.7 per cent to $5,093 million, but said the result came from a one-time benefit from the addition of Little World Beverages and distribution contracts for new international premium brands to its Australian beer portfolio.

Lion, which is a subsidiary of Japanese beverage company Kirin Holdings, said that while it had benefited from the addition of new brands to its beer portfolio in Australia, the underlying conditions in the beer market remained “tough”, with like-for-like volumes in decline.

“There are, however, some positive signs that conditions may be on the cusp of improving, with the beer market returning to growth in the last quarter,” said Stuart Irvine, Lion CEO. “Australians are increasingly choosing quality of quantity in alcohol beverages, which is benefiting our long-term strategy of marketing and innovation investment to encourage consumers to trade up to higher equity brands,” he said.

Lion said it also continued to invest it its assets and since the conclusion of the 2013 financial year had opened its new Little Creatures Brewery in Geelong, Victoria, following a $60 million investment. Mr Irvine said the new brewery “will improve distribution across the Eastern seaboard”.

With the one-time addition of new beer brands to its portfolio and a continued focus on efficiency programs across the business, Lion’s operating earnings before interest and tax increased 11.7 per cent to $698 million.

Australian Dairy and Drinks

Lion’s Dairy and Drinks business experienced “significant margin pressure” as subdued consumer confidence and a deflationary retail environment depressed volumes and milk input costs increased sharply in the last quarter, with volumes declining 4.3 per cent.

During the last quarter of the 2013 financial year, and since, Lion said margin pressure had intensified as milk prices increased — up to 27 per cent in some States on the previous year’s average price — and Lion’s ability to pass costs through remained highly constrained. In response, Lion said it accelerated its long-term efficiency and effectiveness program, aligning its business structure behind refreshed category and channel strategies and significantly reducing overheads and complexity.

“Our Dairy and Drinks business is undergoing transformational change in an operating environment that is evolving rapidly,” Mr Irvine said. “As the dairy industry consolidates we are firmly focused on executing our plans to stabilise and optimise our business over the medium term,” he said.

Lion said it was committed to delivering lowest cost manufacturing to support growth across its portfolio.

“Since 2010 we have invested approximately $550 million to drive efficiency in our Dairy and Drinks business, including the rationalisation and consolidation of volume in our milk and cheese manufacturing sites and investment in state-of-the-art operations in specialty cheese and yoghurt to fuel growth in higher value categories,” Mr Irvine said.

Lion said it was also innovating and “taking a strategic category approach” to lift profitability in high-value segments such as dairy beverages, yoghurt and specialty cheese.

“Lion is the market leader in specialty cheese and in dairy beverages, with Dare now the number one iced coffee in Australia and the number four non-alcoholic beverage behind Coke, Red Bull and V,” Mr Irvine said.

Lion said that as it continued to transform its local dairy operations, it was positioning itself to “tap growing demand” for branded dairy products domestically and internationally, particularly in Asia. The Company said it also remained focused on growth in higher value categories, such as dairy beverages and specialty cheese, and invested in targeted innovations to grow the profit pool available to all in the supply chain.

“Our recent investment in Warrnambool Cheese and Butter (WCB) further strengthens the close relationship we have enjoyed with WCB in our domestic cheese business over many years,” Mr Irving said.

Australian Food News reported in January 2014 that Lion had announced it had no current intention of selling its 9.99 per cent stake in WCB to Canadian dairy company Saputo, which gained a majority share in WCB after a takeover battle began in late 2013.

In dairy beverages, flavoured milk brand Dare posted double digit volume and value growth and was ranked number one in the category and was continuing to grow in all States, while Masters ‘Kakao’ flavoured milk performed well since its launch. In yoghurt, the Yoplait brand continued to grow share and new launches Dairy Farmers Thick and Creamy and Forme gained good traction in the market.

“Internationally we are pursuing an evolution not a revolution — our assets are domestically focused and our emphasis will be on higher margin products, rather than a fundamental change in business model to compete in commodity markets,” Mr Irvine said.

Australian beer, spirits and wine

Towards the end of the 2012 financial year, Lion added the Little World Beverages brands to its portfolio in a deal that valued the company at $381.6 million. Lion also added distribution contracts for new international premium brands such as Corona Extra, Stella Artois, Guinness and Kilkenny in the latter half the 2012 financial year and during the 2013 financial year. As a consequence, Lion experienced a one-time benefit, growing volumes 10 per cent. However, underlying conditions in the beer market “remained tough”, with volumes on a like-for-like basis declining 1.3 per cent.

Within this challenging environment, Lion said the mid-strength segment grew volumes 1.9 per cent off a large base, with XXXX Gold outperforming the segment at 3.2 per cent growth. Contemporary mid-strength brands also thrived, with Hahn Super Dry 3.5 posting growth over 24 per cent. In the last quarter, Lion said the total beer market showed signs of recovery, moving back into growth.

Lion reported that its premium wine business performed “solidly” in challenging market conditions, with particularly strong performances from Villa Maria and St Hallet. St Hallet recorded strong growth in both domestic and international markets.

New Zealand beer, spirits and wine

Lion’s Beer, Spirits and Wine division in New Zealand saw total volumes decline 2.8 per cent in a highly competitive market. However, Lion reported that revenues held steady through a sustainable balance of volume, pricing and mix. While the total beer market moved into growth and cider continued to grow steadily off a small base, the total wine, spirits and ready-to-drink (RTD) markets continued to decline.

The positive momentum in the beer market and an early onset summer helped Lion end the year with positive volume and value growth in beer, with particularly strong performances from Corona Extra, Speight’s Summit and Beck’s4. Lion said its  ‘Made to Match’ marketing campaign also contributed to the beer rebound by “improving consumer appreciation of beer, how to match it with food and by debunking common beer myths”.

While the total spirits market remained challenging, Lion said it saw positive growth in the final quarter, encouraged by strong performances from Smirnoff and Johnnie Walker and the addition of Wild Turkey to the portfolio from April. While aggressive competitor activity continued in wine, Lion reported standout performances from Lindauer, Wither Hills and Huntaway4.

Asset revaluations

Despite substantial efficiency gains to date, Lion said its Dairy and Drinks business faces “considerable headwinds” in the 2014 financial year. Based on the impact of the increased milk price, now well above historical levels, the loss of the Coles retailer-own-brand contract from June 2014 (representing a sixth of annual milk volumes currently procured by Lion) and a sustained competitive and deflationary retail environment, Lion will record an impairment charge of $338.8 million against goodwill, milk plants, equipment and brands.

Due to the long term decline in total alcohol volumes in New Zealand Lion will also record an impairment charge of A$143.4million against goodwill and brands in its Beer, Spirits and Wine New Zealand business.

These impairments have been recorded in Lion’s accounts at a local level based on Australian accounting standards.