Auckland-based Fonterra (ASX: FSF) saw net profit grow to NZ$736 million for the financial year ending 31 July 2013, up 18% on the prior year. The business said drought conditions in New Zealand impacted earnings, which were down 37% on a normalised basis across Australia and New Zealand.

As a whole company earnings were down just 3%, thanks to strong growth in Asia, Africa and the Middle East. The Australian business is undergoing an overhaul to cut costs and develop brands, as it faces up to squeezed margins and an ultra-competitive retail environment.

The company was hit by controversy in August after being forced to globally recall up to 1,000 tonnes of dairy products over contamination fears. Subsequent tests provided the all clear, after New Zealand’s worst drought in nearly 70 years, the issue was not what the company needed and its share price suffered.

Total sales fell 6% to NZ$18 billion and the company declared a dividend of NZ 32 cents per share, down 4% on the prior year. Improved climatic conditions over the last few months means milk volumes are currently forecast to grow 5% over the season to 31 May.

Foolish takeaway

Global demand for dairy continues to grow — the milk rush driven by robust demand from Asia, particularly China. With around 85% of its milk output exported, increasing international prices for its product are a strong tailwind. Fonterra is looking to put a testing 2013 behind it and improving prospects make it an attractive investment proposition.

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Motley Fool contributor Tom Richardson does not own shares in any of the companies mentioned in this article.

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