Fonterra reports interim results

Fonterra CEO Miles Hurrell said the results for the first half of the financial year show it is performing well and creating the momentum needed to achieve its 2030 targets.

“Our earnings have been achieved at a time when our input costs have been significantly higher with the average cost of milk up almost 30% on the same time last year. This shows we’re performing well even with a high Farmgate Milk Price,”​ Hurrell said.

“The Board’s decision to pay an interim dividend will be welcome news for our unit holders and farmer owners. ​

“The milk price is also good news for our farmer owners and the New Zealand economy - a midpoint of NZ$9.60 (US$6.58) would see the coop inject over NZ$14bn (US$9.6bn) into our local communities through milk price payments alone. ​

“Covid-19 continues to be a challenge in our markets and here at home. We’re seeing more of our employees having to isolate and continued disruptions in our supply chain. However, by caring for our people and good management and planning, our manufacturing plants have continued to operate and we are getting products to our customers.”​

Performance​

From a performance perspective, Hurrell said Fonterra delivered a profit after tax of NZ$364m, down NZ$27m (US$18.5m) on the same time last year, and a total group normalized EBIT of NZ$607m, down NZ$77m (US$52.8m), reflecting the significantly higher milk price.

“Margins in our Ingredients channel improved in the first half. However, the higher milk price put pressure on our margins in Foodservice and Consumer, and we also felt the impact of Covid-19 in many of our markets. Lower New Zealand milk collections reduced our total production and this impacted our overall sales volumes,”​ he said. 

“Despite these challenges, AMENA had a stronger start to the year. Our teams across AMENA delivered a 25% increase in normalized EBIT to NZ$250m (US$171m). This was driven by improved performance in our Chile business and increased sales of higher value ingredients, used in products such as high protein snack bars and ready-to-drink medical nutrition beverages. ​

“In Greater China, we have continued to see firm demand for dairy as our team finds new ways to drive demand. Ingredients benefited from strong demand and good margins. However, normalized EBIT is down 20% to NZ$236m (US$162m), particularly in Foodservice where, despite steady volumes, the higher milk price impacted gross margins. ​

“APAC’s normalized EBIT decreased by 33% to NZ$158m (US$108m). While gross margins in our Ingredients channel improved, this was more than offset by the higher cost of milk which impacted gross margins in both Consumer and Foodservice, particularly in our South East Asia and New Zealand businesses.” ​

Hurrell says the coop has continued its focus on financial discipline and reducing debt.

“Our net debt is down 8% on the same period to NZ$5.6bn (US$3.8bn) and our gearing ratio is now 44.1% versus 47.3% last year. As is usual at this time of the year, these figures reflect the seasonal peak. We expect further reductions in debt and gearing by the end of the financial year. ​

“At NZ$1.062bn (US$730m), our total group operating expenses are tracking more or less in line with last year, despite inflationary pressures and on-going disruption from Covid-19.” ​

The record date for the payment of the 5 cent dividend is 24 March 2022, and the payment date is 14 April 2022.

Focus on New Zealand milk ​

Hurrell said Fonterra is continuing to make progress on the divestment of its Chilean business and the ownership review of its Australian business as it focuses on New Zealand milk.

“Both Soprole and Fonterra Australia are performing well and our priority is to maximise the value of both businesses to the Co-op.​

“We will take our time to ensure the best outcomes from these processes and remain confident on delivering on our intention to return around NZ$1bn of capital to our shareholders and unit holders by FY24.” ​

Hurrell said the forecast Farmgate Milk Price range of NZ$9.30 - NZ$9.90 (US$6.37-6.79) per kgMS and forecast normalized earnings guidance of 25 – 35 cents per share remain unchanged.

“While the milk price is at a record high, pricing in our Ingredients business, for both reference and non-reference products, has been supportive of both milk price and earnings and we expect this to continue in the second half.​

“In the medium term, we expect the supply and demand outlook to go some way towards underpinning a strong milk price next season.​

“There are a number of risks we are continuing to watch closely. The conflict in Ukraine has added to an already complex Covid-19 operating environment, impacting global supply chains, oil prices and the global supply of grain. However, our lower debt levels mean we are in a stronger position to weather the heightened levels of uncertainty and market volatility the world faces right now.​

“We will also continue to use our coop’s scale to ensure we are putting our coop’s milk into the products and places where we can deliver the most value under the circumstances.” ​

CFO Rivers to leave​

The coop also announced its chief financial officer (CFO) Marc Rivers will be leaving the coop at the end of 2022 following its annual meeting.

Hurrell said Rivers joined Fonterra in 2018 and has “played a critical role in resetting the financial health of the cooperative.”

“It’s been clear from day one that Marc felt a great sense of responsibility to our farmer owners, unit holders and also New Zealand’s economy.​

“Our balance sheet is now in a strong position. We have a long-term strategy with clear targets out to 2030 and our farmer owners have given the green light on our Flexible Shareholding capital structure. Marc has been instrumental in all of these areas.​

“We are moving from reset to a new phase of creating value, and Marc has decided that this is a natural point in time for a move.  I would like to thank Marc for his contribution to Fonterra and for his counsel and advice to me, the Fonterra Management Team and our Board.​

“Marc has agreed to stay until our annual meeting at the end of the year which will also allow for him to support me in identifying his successor and ensuring a smooth transition and handover.”​

A search for a new CFO will begin shortly.