Fonterra back in profit, on track to reduce debt

Dairy co-op Fonterra is back in the black, announcing an after-tax profit of $80 million in its 2019 interim results.

The results show that while the dairy giant has returned to profitability, normalised 'Earnings Before Interest and Tax' (EBIT) are down 29 percent on the same period last year to $323 million.

Fonterra CEO Miles Hurrell said that it was good to see the co-operative back in the black, however its earnings performance were not where it should be and this was the reason for revising the full year earnings guidance down to 15-25 cents per share in February.

"The steady performance from New Zealand Ingredients in the first half of FY19 has been offset by challenges in Australia Ingredients and this has seen our total Ingredients EBIT decline by 17 percent to $461 million," he said.

He said the co-op's Australian ingredients business continues to feel the impact of the drought. 

"We can see it in the decline of Australian milk collections and aggressive price competition for milk, which is resulting in the underutilisation of manufacturing assets and tightening margins," Hurrell said.

"Consumer and Foodservice is tracking behind last year with an EBIT of $134 million. This part of the business has been held back by disruptive political and economic conditions as well as high input costs in Latin America. In addition, in our China Foodservice business, demand slowed due to higher prices and in-market inventory levels growing for butter at the end of FY18. In Sri Lanka, our performance was impacted by price constraints."

Outlook for the second half of the year

In talking about priorities for the co-operative in the second half of the year, Mr Hurrell said the focus was to meet the earnings guidance, deliver the three-point plan and fundamentally reset the business so it can deliver sustainable earnings.

"We have a forecast Farmgate Milk Price of $6.30-$6.60 per kgMS but we also have to meet our earnings guidance range of 15-25 cents per share. This range builds in an expectation of a slightly softer second half for our Ingredients business, but a meaningful increase in consumer and foodservice earning."

"Our forecast increase in our consumer and foodservice performance is based on a few key factors. It needs a strong improvement in our Foodservice business in Greater China, stronger consumer demand for Soprole in Chile and chilled dairy in Brazil, and an improvement in our Sri Lankan business."

Portfolio review update

Fonterra has also announced that the third asset it has identified in its portfolio review is DFE Pharma, a 50/50 joint venture established in 2006 between Fonterra and FrieslandCampina.

DFE Pharma is one of the largest suppliers of pharmaceutical excipients which are used as a carrier agent in medicines such as tablets and powder inhalers.

Mr Hurrell said Fonterra had let FrieslandCampina know that it has started a sales process for its 50 percent share of DFE Pharma.

Miles Hurrell said the co-op was on track to reduce debt.
Miles Hurrell said the co-op was on track to reduce debt. Photo credit: Supplied

"At the same time, we have confirmed that we are committed to maintaining our lactose service and supply agreements from Fonterra's Kapuni operation in Taranaki and supporting the ongoing operations of the DFE Pharma business."

In addition to the sale, Fonterra said it had received strong interest in Tip Top and is actively considering its options for its shareholding in Beingmate.

"We are well on track to meet our target to reduce end of year debt by $800 million."

Mr Hurrell also advised that Fonterra has sold its interest in its Venezuelan consumer joint venture, Corporacion Inlaca, to Mirona, an international food business.

"The decision to sell Inlaca is the result of ongoing instability in Venezuela which has led to challenging operating conditions."

Fonterra received $16 million cash for the Inlaca sale.


Key numbers in Interim Results

Sales volumes 10.7 billion liquid milk equivalents (LME), up 2 percent

Revenue $9.7 billion, down 1 percent

Normalised EBIT: $323 million, down 29 percent

NPAT: $80 million, up 123 percent

Total normalised gross margin: $1.5 billion

Ingredients Gross Margin: $791 million, down 9 percent

Consumer and Foodservice Gross Margin: $766 million, down 7 percent

Full year forecast earnings: 15-25 cents per share

Forecast Farmgate Milk Price: $6.30-$6.60 per kgMS

Sales process started for Fonterra's 50 percent share of DFE Pharma

Completed the sale of Corporacion Inlaca to Mirona