Lion Nathan National Foods Revenues Down 11%

While premiumisation and improvements in mix lifted revenue per litre by around 4% on the prior period, lower volumes lead Lion Nathan Australia (LNA) to deliver revenues of $430.2 million, down 11%.

5/10/2011 --- Lion Nathan National Foods (LNNF) announced its trading update for the quarter ended 31 December 2010 in conjunction with Kirin Holdings first quarter announcement.

LNNF’s overarching strategy is to invest in its people and a focussed portfolio of high potential brands to drive sustainable results in the long term. Business integration is progressing to plan.

Like most operations in the retail and consumer goods sectors, LNNF’s key business units experienced tough market conditions in the December quarter.

LNNF CEO Rob Murray said: “Rising interest rates and power costs, increased saving and the ongoing economic uncertainty have impacted consumer spending in the FMCG and retail sectors in both Australia and New Zealand. Conditions in the December quarter were particularly challenging. For LNNF, this flowed into early 2011 where circumstances were compounded by two external shocks, the earthquake in Christchurch and floods in Queensland.”

While premiumisation and improvements in mix lifted revenue per litre by around 4% on the prior period, lower volumes lead Lion Nathan Australia (LNA) to deliver revenues of $430.2 million, down 11%.

Overall market share fell slightly; with the majority of the decline due to a contraction in the Queensland market with the floods a key contributor. Queensland is LNA’s highest share market.

LNA’s master brand portfolio grew its share of portfolio mix. The XXXX trademark extended its impressive growth with new variant XXXX Summer Bright Lager delivering the biggest incremental sales growth of any brand in Australia.

Australia’s leading craft beer trademark James Squire delivered impressive growth of 23%1 following a focus on innovation and marketing initiatives.

During the quarter, the Australian beer business conducted a recall on select batches of key brand Boag’s due to a packaging fault. While significant effort was made to minimise impact on supply, there was a one-time volume impact in the quarter.

The New Zealand market continued to be challenging due to tough economic conditions and ongoing cautiousness among consumers.

Lion Nathan New Zealand (LNNZ) delivered revenues up 9% at NZ$204.7 million assisted by the first time inclusion of revenue from wine brands acquired from Pernod Ricard, in particular the Lindauer trademark.

While the quarter saw a decline in beer volumes, particularly on packaged beer, this was broadly in line with the decline in the total beer market. Spirits volumes increased by 5%, while ready-to-drink volumes reduced 3%.

Despite the sluggish market conditions, revenue per litre growth was encouraging with solid value performances from mainstream brands and volume growth in key premium brands, particularly Steinlager Pure and Corona.

Conditions in the wine industry are very challenging with the global slowdown combined with an oversupply of grapes maintaining downward pressure on pricing in domestic and international markets. The strong Australian dollar is undermining returns from key export markets. However, despite this, the Lion Nathan Wine Group saw only moderate volume and revenue declines in the quarter. Wine remains a very small part of LNNF’s business.

As previously communicated, conditions in both the dairy and juice sectors remain very difficult for farmers and processors alike.

The combined business has quality brands that require investment to reach their full potential. LNNF is committed to patient investment in NF’s core strategic assets – its people, brands and production assets – to deliver sustainable growth over the long term.

NF is still a long way from achieving an acceptable return on invested capital and faces some considerable headwinds. NF is experiencing significant margin pressures in both dairy and juice. Since the end of the year, the white milk market has seen deep discounting on private label and control brands which threatens to further dilute the profit pool available to all players in the supply chain. In the current year, National Foods return on invested capital is now expected to be well below an acceptable level.

Against this backdrop, the NF business is making good progress in integrating the former NF and Dairy Farmers businesses. The Company recently announced the results of a review of its cheese manufacturing assets as part of the ongoing integration with the former Dairy Farmers business.

As expected, revenue declined 11% to $729.8 million in the first quarter. The white milk market is very challenging, with NF’s white milk volume declining 11%.

There were some noteworthy successes during the December quarter. Dare Iced Coffee again performed well and is growing into a national brand, while the South Cape cheese brand has responded well to increased marketing and sales focus.

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