The Bega Cheese Ltd (ASX: BGA) share price is sliding today as the dairy manufacturer released its half-year results this morning. Bega shares have fallen more than 4% at the time of writing and are currently trading at $3.87. Profits fell with milk supply as farm door prices increased.
Bega's 1H20 results
Bega reported revenue of $741.2 million, up 14% on 1H19, with the Bega Cheese segment generating a significant increase in earnings. Statutory earnings before interest, tax, depreciation and amortisation (EBITDA) was down 1% to $39.3 million. Normalised EBITDA, however, fell by 16% to $48.5 million from $57.9 million in the prior corresponding period (pcp).
Underlying earnings were impacted by reduced milk supply and margins in the dairy industry, particularly in Northern Victoria. A softening in Chinese infant formula demand resulted in a reduction in volumes at Tatura, further reducing earnings during the half.
These issues resulted in a significant decrease in earnings from the Tatura Milk segment. This was somewhat offset, however, by strong earnings from Bega Cheese. Bega reports that the branded consumer food and service business is continuing to grow both domestically and internationally.
Normalised profit after tax fell 21% to $15 million from $18.9 million in the pcp, while statutory profit after tax rose 71% to $8.5 million from $5 million. One-off costs totaling $9.2 million before tax for legal fees and management information system upgrade activities were normalised in the result for the period.
Bega declared a 5 cent per share interim dividend, a reduction of 0.5 cents over the prior period.
Diversification strategy
Since FY17, Bega has been progressing a diversification strategy to reduce overall exposure to third-party manufacturing contracts, dairy commodities, and a concentration of milk supply in Northern Victoria. The strategy continued to progress in FY19 with the acquisition of the Koroit dairy facility in Western Victoria and the closure of the Coburg cheese facility.
The strategy aims to position Bega Cheese with increased flexibility to respond to challenging conditions across the dairy industry which have impacted the company in the first half. Severe drought across many dairy production regions has resulted in an increased cost of farm inputs and national milk production has continued to decline. This has put sustained pressure on farm gate prices and the availability of milk for processing.
Outlook
Bega has maintained its full year FY20 guidance of normalised EBITDA in the range of $95 million to $105 million. The company has been accelerating the development of new product ranges and format extensions across the spreads, snacking, and dairy portfolio. The international branded food business has continued its strong sales growth with strong demand for Australian dairy products, particularly in Asia.
