Fonterra reports a positive half year result

Fonterra Co-operative Group Limited has announced its 2021 Interim Results which show the co-operative has had a positive first half, resulting in a Total Group normalised EBIT of $684 million, normalised Profit After Tax of $418 million and a decision to pay an interim dividend of 5 cents alongside a strong forecast Farmgate Milk Price.

Fonterra CEO Miles Hurrell says Fonterra is pleased with its Reported Profit After Tax of $391 million.

“I would like to thank our team for delivering this result. While we’ve been fortunate here in New Zealand, many of our people overseas are still in lockdown and have now been working from home for 12 months. Our farmer owners have shared words of support for our teams and this has provided a sense of purpose and encouragement when it’s been needed the most. It’s during these times you really can see what makes our co-op special.”

From a performance perspective, Hurrell says the Co-op has had a great first six months of the 2021 financial year with Total Group normalised EBIT up $100 million to $684 million, a Total Group normalised Gross Margin of 17.4% (up from 16%) and Total Group normalised operating expenditure down $37 million.

“Our standout performer continues to be Greater China. The team has delivered a 38% increase in normalised EBIT to $339 million, reflecting the strength of our Foodservice business in this region, improvements in our Consumer business and China’s strong economic recovery following the initial impact of Covid-19.

“Asia Pacific’s normalised EBIT is up 9% to $190 million as a result of improvements in Foodservice and Consumer. Consumer has benefitted from more people staying at home and cooking with dairy and a renewed focus on our brands of Anchor, Anmum and Anlene.

“AMENA’s normalised EBIT is down 7% because of lower sales volumes in Ingredients as we made the most of our ability to move milk into higher returning markets and products. However, we did see some good improvements in Foodservice and Consumer across AMENA.”

Commenting on the global supply chain challenges, Hurrell says while it’s tough going out there, the Co-op is proactively managing the situation and working with its ocean freight partnership Kotahi to keep product moving.

Divestment update

As part of Fonterra’s continuous review of its asset portfolio, today Fonterra can advise farmers and unit holders that, along with the joint venture partner, it has decided to undertake a sales process for the JV farms in China.

Hurrell says as with Fonterra’s own China farms, the decision to sell the JV farms is in line with the Co-op’s strategy to focus on New Zealand milk.

“We expect the sales of our farms to be completed this financial year and the sale of the JV farms to be completed this calendar year.”

Fonterra has also continued to reduce its shareholding in Beingmate, which on 31 January 2021 was sitting at 3.94 % and is now 2.82%.

Hurrell says Fonterra will continue to sell down its remaining shareholding and expects to have fully exited this investment before the end of this financial year.

“As shown through our results today, Greater China continues to be one of our most important strategic markets. We remain committed to growing the value of our Greater China business, which we’ll do by bringing the goodness of New Zealand milk to Chinese customers in innovative ways and partnering with local Chinese companies to do so.”

Social and environmental progress

Commenting on Fonterra’s social and environmental progress, Hurrell says at the same time as driving financial performance, the Co-op knows this goes hand-in-hand with being there for farmers, employees and customers, contributing to local communities and reducing our environmental footprint.

“We can’t have one without the others if we want to be here for generations to come – and we’re making some good progress in these areas too.

“Some examples include:

• Taking proactive steps to help keep our people well through COVID-19, at the same time as keeping the business operating during our busiest time of the year.
• Helping feed 15,000 Kiwi families through the Anchor Christmas Appeal in partnership with the NZ Food Network.
• Expanding a promising plantain trial to improve waterways, in partnership with Nestlé and DairyNZ, and also working with Royal DSM to test whether a feed additive called Bovaer® can reduce methane emissions in New Zealand’s pasture-based farms.
• Working with more farmers in New Zealand to develop Farm Environment Plans and, with 42% of supplying farms now having one, we’re well on our way to our target of 100% by 2025.”

Outlook for the second half

In talking about the second half of the financial year, Hurrell reaffirms the forecast Farmgate Milk Price range of $7.30 – $7.90 per kgMS and forecast normalised earnings guidance of 25-35 cents per share.

“Fortunately, we are in a position, where so far, New Zealand dairy is proving to be resilient in a COVID-19 world. It’s a staple in people’s diets around the world and demand is strong.

“Despite a strong first half, we are expecting our earnings performance to come under significant pressure in the second half.

“The strong milk price is great for farmers. It’s good for New Zealand too – with a mid-point of $7.60 per kgMS, it would see us contribute more than $11.5 billion to the New Zealand economy.

“However, the increasing raw milk prices through the first half and now into the second half puts a lot of pressure on our sales margins and this will be seen through the second half of the year.

“We will face into this challenge in the same way we are with others – that’s focusing on what’s in our control and staying on strategy.”