Fonterra’s interim results up in an uncertain market

Fonterra Co-operative Group has announced its 2020 interim results, which show the co-operative’s financial performance has improved with increased underlying earnings and reduced debt.

Fonterra CEO Miles Hurrell said Fonterra has built on the work done in 2019 and has continued to reset its business, introducing a new strategy, reorganising and resizing its teams so there is greater focus on customers, and at the same time, significantly lifting its financial performance.

“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.

“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.”

Fonterra’s key financial targets for 2020 are to meet its earnings guidance of 15-25 cents per share, achieve a gross margin in excess of NZ$3 billion (€1.5bn), reduce debt so it is no more than 3.75x its earnings, and ensure capital expenditure is no more than $500 million (€150m).

Commenting on these targets, Hurrell said he is pleased with the progress and momentum Fonterra has achieved in the first six months of the financial year, but Fonterra is now operating in a very different global context as a result of Covid-19. “Our total group normalised earnings for the first six months of the 2020 financial year are up $272 million on last year to $584 million. We’ve delivered this through stable underlying earnings from our ingredients business, improving gross margins in foodservice and reducing our 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.

“Our strategy and the importance we place on financial discipline means we are continuously reviewing our asset portfolio. We’ve completed strategic reviews on China Farms and DPA Brazil, and sales processes for both assets are well under way.

“Through these sale processes and strategic reviews, we have gained additional information and further insights and, as a result, we have revised down the valuation of China Farms and DPA Brazil by a total of $134 million.

“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.

“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.”

Despite the strong earnings performance so far, the board decided not to declare an interim dividend. Chairman John Monaghan said, “after considering the current uncertainty of the impact Covid-19 could have on earnings in the second half of the year, the board has elected to not pay an interim dividend. At the end of the financial year the board will reassess the co-op’s financial position and review the decision to pay a dividend.”

In talking about the second half of the financial year, Hurrell reaffirmed the forecast farmgate milk price, but noted, “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.”

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