Freedom Foods carries substantial trading decline and puts price on A2

Posted by AFN Staff Writers on 4th March 2015

Freedom Foods

Freedom Foods has reported a Net profit of $55.2 million for the first half of the 2015 financial year. However, the Net Profit figure was boosted by the inclusion of a post-tax fair value gain of $52.2 million from the gain on reclassification of the A2 Milk Company investment.

The Company achieved an Operating EBDITA of $6.3 million (including interest from Associates), a marginal decrease of 1.4 per cent on the previous corresponding period.

Freedom Foods is the largest single shareholder in the A2 Milk Company, which owns and commercialises unique and comprehensive intellectual property rights relating to A2 brand milk and related dairy products in a range of international markets including Australia. Freedom Foods has now “reclassified” its shares in the A2 Milk Company as “Available for Sale”. Commentators have suggested that Freedom Foods might be hoping to sell off some or all of its shares in the A2 Milk Company to offset profit losses.

The Company said its profit loss result reflected the impact of commissioning of the new nutritional snack equipment reducing manufacturing recoveries and gross margin during the half, although there were increased sales in all business units.

UHT operations and Specialty Seafood performed ahead of the prior year. The Company said it considered the operating EBDITA result satisfactory considering the significant investment and commissioning of plant being undertaken and adjustments required to the operating structure of the business in this phase.

“Reclassification” of investment in A2 Milk Company

Freedom Foods acquired additional shares in the A2 Milk Company in the first half, for a total net consideration of $538,000.

During the first half of the 2015 financial year, Freedom Foods reclassified how it accounts for investment in the A2 Milk Company to an Available for Sale investment.

A2 branded milk is the fastest growing milk brand in the Australian market and the major driver of category growth nationally, accounting for approximately 9.3 per cent of grocery channel market share by value. The A2 Milk Company also market A2 Platinum infant formula to consumers in Australia and China, with infant formula being ranged nationally in Coles, Woolworths, independent supermarkets and pharmacies.

Australian Food News reported in February 2015 that the A2 Milk Company had reported a drop in profits for the first half of the 2015 financial year, which it attributed to costs associated with listing on the ASX.

Cereals and Cereal Snacks

Freedom Foods commissioned a Cereal based Nutritional Snack line 3 months ahead of plan, with the launch of Nut Free snacks into major supermarkets in January 2015.

The business delivered overall gross sales growth of 10 per cent compared to the previous corresponding period. With a focus on its core product portfolio for future growth, the business is progressively reducing its presence in non-core categories including biscuits. The reduction in non-core products impacted sales in the period, with some resulting impact on margins and manufacturing recoveries.

Alongside its continued investment in sales and marketing, Freedom Foods said the business is investing heavily in R&D capability to drive growth in retail and other channels in the medium term. As well as increased marketing investment in building awareness of the brand, the Company said it is focussed on driving its innovation pipeline to meet the broader consumer market. A significant achievement to date from its R&D focus has been its range of products achieving 3.5 to 5 star ratings within the Australian Government’s Health Star Rating system.

As part of ensuring best quality and growth in supply of key grains, the business developed its Freedom Farmer platform, with a number of key farmer groups engaged to build the Group’s grains supply platform over the coming years. The Company said this would guarantee its strategy of being an integrated ‘paddock to plate’ provider. Freedom Foods said Australian sourcing of all ingredients was a “key source of competitive advantage” for the Company.

Freedom Foods also reported that it saw sales growth in its Cereals business in North America, reflecting growth in the category and increased distribution. The Company said, having established a strong consumer profile within the Allergen Free and Non GMO categories, the business would look to significantly expand distribution over the medium term.

UHT Liquids business group
Non Dairy business

Freedom Foods said its non-dairy production volumes increased during the period to support the growth of the Australia’s Own and Blue Diamond brands, as well as private label requirements.

Non-dairy beverage sales continued the strong upward trend from the 2014 financial year, with strong volume growth compared to the previous corresponding period, reflecting increased market share of Australia’s Own Organic and Blue Diamond Almond Breeze brands within a category which itself grew significantly.

As at February 2014, the Almond Milk category accounted for 33 per cent of the retail non-dairy category, compared to 28 per cent at February 2014. Other alternative categories including Almond Coconut blends and Macadamia milk, which also increased share, will see Freedom Foods continue to sell and develop products to increase its participation in these emerging categories.

Possible launch of almond milk into Asian markets

The Company and Blue Diamond Almond Growers are examining the launch of Almond Milk into Asian markets based on the Group’s Australian production base. Freedom Foods said this leverages both the free trade agreements made between Australia and Asia as well as the Company’s relationship and distribution base within these markets. The Company said it sees further opportunity to develop non-dairy UHT products from an Australian manufacturing base into China and SE Asia.

Other dairy businesses
Pactum Dairy Group

During the first half of the 2015 financial year, the PDG delivered sales of approximately $30 million and achievement of profitability during the later months of its first full half. The business is expected to process over 100 million litres in calendar year 2015. Pactum Dairy Group (PDG) commenced operations in April 2014 to provide UHT dairy milk for customers in Australian and export markets. The group is a joint venture between Freedom Foods and Australian Consolidated Milk, a major Australian dairy milk supply group.

Freedom Foods said commencing volumes were tracking ahead of the 3 year business plan, with strong demand from customers for portion pack and 1 litre volume from China and SE Asia. These requirements are expected to grow.

Australia’s Own brand partnership and China expansion

Freedom Foods reported commencement of production during the half of its Australia’s Own branded “kid’s milk”, to support its launch in China in February 2015. The milk brand is being marketed and distributed through a long-term 50 year partnership with Guangzhou-based Shenzhen JiaLiLe Food Co, which is owned and led by parties associated with the establishment of the largest selling ready to drink beverage in China.

Australian Food News reported in November 2014 that Freedom Foods and its major shareholder the Perich Group had announced the signing of a Memorandum of Understanding with China’s agricultural industry giant the New Hope Group.

Freedom Foods has announced it will establish a China representative office in the second half of the 2015 financial year to provide for growth in its sales, marketing and supply chain requirements.

Specialty Foods business

Freedom Foods reported that its Brunswick sardines brand maintained its number one brand leadership position in Australia and New Zealand during the first half. The business introduced new packaging and website content for the brand.

The Paramount Salmon brand performed well during the period, increasing its share of category in its major retail trading partners.