Wednesday, February 27, 2008

Goodman Fielder hit by high commodity prices

Goodman Fielder's profit, after abnormals, was down
by 26% in the half year to Dec 31 2008 due mostly to
high commodity prices, especially wheat.

Like every business in New Zealand, Goodman Fielder Ltd [GFF.NZ] last half year has been about managing business costs.

Key Indicators

* revenue of $1316.8 million, an increase of 8.3% over 2007
* Normalised net profit after tax was $108.7 million, up by 7.2% (excluding one-off factory
closing costs)
* Operating cash flow increased by 20.9% to $95.3 million
* Dairy revenues exceptionally strong

Full NZX GFF profit announcement

Commodity prices for the Australasian food giant have increased with monotonous regularity and have tested all important margins for the company.

This has been largely ameliorated by production efficiencies, absorbing some costs and as all us consumers are well aware, passing on raw ingredient prices to consumers.

Goodman will continue to focus on cost management as commodity prices are likely to continue to increase, at least in the short to medium term. The Australian drought has impacted wheat prices especially, my favourite Goodman bread Vogels now retailing above 4 bucks, and it isn't clear whether there will be any slow down in that staple any time soon. The drought and consumption by India and China have sent wheat prices to all time highs.

Sustained rain across the wheat belts in OZ recently may bring hope for the next crop however.

The test of future performance for Goodman Fielder will be managing retail price increases so as not to annoy consumers too much and hand market share to competitors.

Having said that, management should be careful not to fall into the trap of gaining market share at the expense of margins and therefore profit.

Management have given a measured indication of future performance and an out clause of increases in the aforementioned commodity prices for indicative profit:

The company confirms previous guidance that it expects to deliver NPAT (pre significant items) for the F08 financial year of around the same level as for the previous financial year, with a sensitivity of plus or minus 5% reflecting the extreme volatility of commodity costs.

Like Goodman Fielder, foreign food makers are
under pressure on two fronts. With record
commodity costs forcing them to raise prices,
consumers are opting for cheaper products
while critics insist that the industry is milking
the situation.

According to the Sydney Morning Herald, Goodman may be interested in the cheese,yogurt and milk maker, Dairy Farmers.

"Clearly Dairy Farmers is of strategic value to us,'' Chief Executive Officer Peter Margin said today on a conference call. "We might take a look".

The company would be a good fit with Goodman's dairy division.

Profit was also hit by factory closing costs, which took NPAT down to $88 million.

The share price recently hit an all-time low of NZ$1.78 due to general market volatility and fears from investors that commodity prices would hit profit hard. It listed 22 December 2005 for approx $2.10 and it has manged to claw its way back to $2.16 today on small volume.

Related Share Investor reading

Goodman Fielder a Hedge against an economic slump
Goodman Fielder pie gets bigger

Related Links

Goodman Fielder Financial Data

Related Amazon Reading

The Business of Food: Encyclopedia of the Food and Drink Industries
The Business of Food: Encyclopedia of the Food and Drink Industries by Kenneth Albala
Buy new: $68.00 / Used from: $48.95
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c Share Investor 2008

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