Bega value-add strategy helps combat drought impact

Bega value-add strategy helps combat drought impact

Agribusiness
KOROIT DELIVERS: Bega CEO Paul van Heerwaarden and Bega Cheese chair Barry Irvin outside Bega's Koroit plant that has helped deliver returns to the business. Picture: Morgan Hancock

KOROIT DELIVERS: Bega CEO Paul van Heerwaarden and Bega Cheese chair Barry Irvin outside Bega's Koroit plant that has helped deliver returns to the business. Picture: Morgan Hancock

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Bega's milk intake has fallen 13 per cent on the back of drought and increased competition for milk supply, hitting the company's earnings.

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Bega's milk intake has fallen 13 per cent on the back of drought and increased competition for milk supply, hitting the company's earnings.

But the half-year statutory profit of NSW-based dairy and grocery business lifted 3.5pc to $8.5 million, due to growth in its branded consumer and food-service business.

The company also pointed to improved performance at the former Murray Goulburn Koroit, Vic, milk-processing plant, which it acquired last year, the improvement in milk returns following the closure of its Coburg, Vic, factory and new toll-processing arrangements as contributing positively to the result.

Bega chairman Barry Irvin said the company's diversification strategy, launched in 2017, which saw it acquire the Vegemite-producing Mondelez Grocery business at the start of 2018, had positioned it to respond to the challenging conditions across the dairy industry.

But severe drought, farm closures and competition had hit milk supply, particularly to the Tatura plant in northern Victoria.

"We've had significant drought impact in northern Victoria and in the Bega regions and the Gippsland regions," Mr Irvin said.

"Fortunately, we had less harsh farming conditions in western Victoria, where our Koroit facility is."

Total milk intake was down 13pc - mostly at Tatura with other regions relatively stable.

Tatura had also been hit by softening demand for infant milk formula in China.

But the company was now doing more toll processing on behalf of other dairy manufacturers, which had allowed it to process just 4.6pc less milk through its plants than in the previous year.

"We continue to align our milk supply with our manufacturing input and we continue to make sure we are innovative in the way in which we think about doing business," Mr Irvin said.

"And that includes things like bringing in toll processing - both us having some of our product toll processed and in us toll processing for others.

"All those things mean we are trying to maximise the utilisation of our infrastructure and avoid capital where we can."

Milk price

Chief executive officer Paul van Heerwaarden said global dairy commodity prices were now up to the same level as their peak in 2014, following the significant softening since 2015.

"We've started to see that recovery over the last four years and it remains strong," he said.

The key factor looking forward was global supply growth - because that was driving the dairy market.

But at this stage, growth was soft in the three key export regions: New Zealand, which had drought and flood issues, Europe, which was under environmental pressure, and the United States, which was facing other pressures.

"So we are not seeing the sort of supply growth that we would normally see with these prices," he said.

"Global supply growth is below 0.5pc year on year, whereas demand is growing at slightly stronger than those rates."

The Australian dollar had also been sitting at a good level for exports.

But Mr van Heerwaarden would not be drawn on whether the company would increase the farmgate price before the end of the financial year.

"It is something we keep a very keen and constant eye on," he said.

"We need to be very careful in terms of what we say in response to that.

"But we are seeing the remainder of the year will be competitive and we may need to respond to that."

There had been some softening in global markets, due to coronavirus, but it did not have a material impact.

Mr Irvin said the company saw it still being highly competitive for milk into next year.

"We would need a genuine increase in supply to start seeing some of that competition ease a little," he said

"And while there is good opportunity in Victoria, I am not sure that those same opportunities exist in say central or northern NSW and Queensland, where there is still a strong demand for milk to satisfy those markets.

"If things keep rolling this way, you might expect to see some increase in the milk pool next year.

"Is it substantial enough to make a difference? I think we would want to see another year or two out there to feel confident the supply dynamics had changed."

Mr Irvin said farmgate pricing at this stage was looking quite strong for the industry for next year.

Value add

Mr Irvin said the company's transformation from a business-to-business company to a business-to-consumer company was delivering returns.

There had been strong revenue growth for its branded spreads and dairy categories.

Product innovation including the Simply Nuts peanut butter range and gluten-free Vegemite was also delivering greater returns.

The strategy also included value adding to all dairy ingredients wherever possible to maximise returns.

"That strategy gives us confidence about this business into the future," Mr Irvin said.

A new lactoferrin plant will be commissioned at Koroit in April.

"It will in fact make us one of the largest producers of lactoferrin globallly," Mr Irvin said.

Trading halt

The company, which went into a trading halt on Thursday, said it had discovered an error in its financial statements for 2018-19.

An incorrect calculation of cost of sales had resulted in an understatement of trade and an overstatement of inventories.

This was all related to the acquisition of Koroit and transitional arrangements in place when it was initially running that facility.

Mr Irvin said the board took this issue seriously and had launched an independent investigation.

The error affected only the 2019 results, and the company was confident in its 2020 half-year outlook.

Financial results

For the half-year, the company reported revenues were up 14pc to $741 million and export revenue was up 17.3pc to $230 million.

Statutory Earnings Before Interest, Tax, Depreciation and Amortisation decreased 1pc to $39.3 million, while normalised EBITDA was down 16pc to $48.5 million.

The company also flagged it was undertaking an organisational and process review.

"We need to make sure we have a simplified management structure and processes that allow us to monitor and grow business and make sure we are getting maximum value out of acquisitions and how they are integrated into the business," Mr Irvin said.

The story Bega value-add strategy helps combat drought impact first appeared on Farm Online.

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