Fonterra reports profit recovery in 2020 interim results

Fonterra Co-operative Group has released its 2020 Interim Results, revealing that the co-operative’s financial performance has improved with increased underlying earnings and reduced debt. The company built on the work done in 2019, and has introduced a new strategy, and reorganised and resized its teams to enable greater focus on its customers.

“We are now a very different co-op to this time last year — we’re prioritising New Zealand milk and staying focused on what we know we’re good at and what makes a difference to our farmer owners, unit holders, employees and communities,” said Miles Hurrell, Fonterra CEO.

Fonterra’s key financial targets for 2020 include meeting its earnings guidance of 15–25 cents per share, achieving a gross margin in excess of $3 billion, reducing debt so it is no more than 3.75 times its earnings and ensuring capital expenditure is no more than $500 million.

“While there’s no doubt the world is experiencing an almost unprecedented situation and response to COVID-19, I’m pleased with the progress we’ve made so far against our four priorities for 2020. These are to hit our financial targets, reduce our environmental footprint, build a great team and support regional New Zealand. By achieving these, we will take strides towards our long-term goals of Healthy People, Healthy Environment and Healthy Business,” Hurrell said.

Fonterra’s total group normalised earnings for the first six months of the 2020 financial year have increased by $272 million to $584 million; Hurrell attributes this to stable underlying earnings from the company’s ingredients business, improving gross margins in Foodservice and reductions in operating expenses.

“Our Foodservice business has definitely been our stand-out performer in the first half as we’ve grown our sales to bakeries and coffee and tea houses across Greater China and Asia. We continue to reduce our debt. We completed the sale of DFE Pharma and foodspring in the first half of the year with cash proceeds of $624 million and this has helped reduce net debt by 22% or $1.6 billion, compared to this time last year,” Hurrell said.

The interim results reveal that Fonterra has contributed approximately $11.1 billion to the New Zealand economy through the milk price, with farmers spending nearly half of this in their local communities. The company also plans to work with a further 1000 farms in 2020 through The Co-operative Difference to put in place Farm Environment Plans and provide individualised greenhouse gas emissions reports to all supplying farms at the end of the year. Fonterra has also made a decision to stop using coal at its Te Awamutu site next season, thereby reducing its total coal usage by 10%. The company also plans to support farms and communities impacted by floods in the South Island and deliver water to towns in drought-affected North Island.

“Our strategy and the importance we place on financial discipline means we are continuously reviewing our asset portfolio. We have also reduced the value of our China Farming joint venture by $65 million and we continue to look for opportunities to improve the ongoing performance of the business,” Hurrell said.

Fonterra has completed strategic reviews on China Farms and DPA Brazil, with sales processes for both underway. Through this, the company has gained additional information and further insights, and as a result, has revised down the valuation of China Farms and DPA Brazil by a total of $134 billion.

“Our teams continue to carefully manage costs and we’ve reduced our operating expenditure by $140 million on the same period last year. At the same time, we are not cutting costs in areas that are aligned to our strategy and will deliver additional long-term value from our farmer owners’ milk. While lifting our financial performance, we’ve also kept sustainability and communities at our heart,” Hurrell said.

For the second half of the financial year, the report reaffirms the forecast farmgate milk price range of $7.00–$7.60 per kgMS, and forecast normalised earnings guidance of 15–25 cents per share.

“Our underlying earnings are tracking well at the half year, but there is no doubt that we have a number of risks that are outside our control in the second half — in particular, the potential impact of COVID-19 on global demand, geo-political risks in key markets such as Hong Kong and Chile, and ongoing dry weather conditions here in New Zealand which could impact collections and potentially input costs. As a result, we have held our forecast earnings range at 15–25 cents per share. It gives me great pride to lead a team who genuinely care and recognise the importance of out farmers and local communities,” Hurrell said.

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