Despite attracting a record 1.06 billion litres of milk last year, Bega Cheese has warned the drought has made it very expensive to buy, prompting a forecast earnings slide of as much as 17.4 per cent this financial year.
Bega blamed the big dry's "unprecedented competitive milk supply conditions", plus poorer demand for cheeses it makes on behalf of other processors and retailers, for its expected $95 million to $105m drop in normalised 2019-20 earnings before interest tax depreciation and amortisation .
That's down from last financial year's record $115m EBITDA result.
Bega's drought-driven profit warning followed close behind fruit and vegetable producer and marketer, Costa Group, also cutting its profit expectations for the fourth time this year because of dry pressures, particularly water costs.
This higher milk price will directly impact Bega Cheese's earnings in FY2020
It said seasonal challenges "continued to crystallise".
After a voluntary trading suspension last week Costa's EBITDA outlook for the 2019 calendar year fell to about $98m - was well down from a previously anticipated $140m to $153m.
Softening export demand for Bega products in some markets has not helped the dairy company's forward projections either,.
Chief executive officer Paul van Heerwaarden predicting these, too, would have "an adverse impact on earnings in financial year 2020".
At June 30 Bega was holding $63m more unsold inventory than it had a year earlier, although much of this was associated with production from its big newly-acquired Koroit factory in south western Victoria.
However, Mr van Heerwaarden said Bega's branded food business was growing and strong profit growth in the nutritional, bio-nutrient and organic infant formula business was continuing.
The company was working with domestic and overseas customers on new formulations and supply to be launched during 2019-20.
Acting chairman, Max Roberts, reminded this week's annual general meeting the NSW-Victorian milk processor and spreads maker had told shareholders two months ago how drought costs had eroded 2018-19 results and were likely to continue into 2019-20.
"This has proven to be the case, but at a faster and deeper rate," he said.
Farmgate price boost
"To remain competitive Bega Cheese today announced an increase in its southern region milk price and other initiatives to sustain and grow milk supply.
"This higher milk price will directly impact Bega Cheese's earnings in FY2020."
Mr van Heerwarden, tipped milk markets would stay competitive following record season-opening milk prices from all processors and milk supplies continuing to dry up.
He said, fortunately Bega's new Koroit factory, which drew an extra 300m litres to the processor's pool last financial year, gave the company much more manufacturing flexibility and potential to consolidate butter and powder production efficiency.
Also, by closing the company's Coburg plant in Melbourne early this year and outsourcing some cheese processing activities to third party operators, the NSW South Coast-based business was able to cut costs and avoid capital expenditure
It was also expanding its export and domestic cheddar and mozzarella cheese business.
Share price bruised
However, Bega's sober AGM earnings news stung the share market, sending its share price to its lowest point in six years for a short while on Tuesday.
It then recovered some ground to end the day down 13 per cent at $3.95.
Agribusiness analyst with stock brokers, Morgans, Belinda Moore, noted fierce competition for milk was forcing dairy processors to offer farmgate prices "well in excess of what it should be under more normal circumstances".
Bega's 2020 earnings estimate was subsequently "well below consensus estimates".
"We have also been concerned about its stretched balance sheet," she said.
However, Mr van Heerwaarden told the AGM the balance sheet at June 30 was "in good shape", with total assets at 1.48 billion and liabilities of $663m.
The Simply Nuts range has strong momentum heading into 2020
He said the spreads and sauces business was starting to see the benefit of investments in new product development, including 41 new branded lines or product variations, and new brands, Simply Nuts, Farmers Table and Modern Cher, a line developed for Woolworths supermarkets.
"Simply nuts was launched into the high-growth all-natural peanut butter segment, made from 100pc Australian peanuts sourced from our Kingaroy facility," he said.
"The range has strong momentum heading into 2020 and Kingaroy continues to play an important strategic role in providing high quality Australian peanuts for our peanut butter and snacking products."
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