Fonterra first-half profit falls 22% as asset sales boost previous year

Wednesday, 17 March 2021

Fonterra chief executive Miles Hurrell says the cooperative will sell its joint venture farms in China.

Fonterra’s first-half profit fell as the previous year’s earnings were inflated by one-off asset sales, however an improvement in its underlying performance means it has resumed paying dividends.

Fonterra factors in fat and protein levels in milk when buying it off farmers.

The cooperative posted a 22 per cent fall in net profit to $391 million in the six months to the end of January, with the previous period’s profits boosted by the sale of its half share in pharmaceutical supplier DFE Pharma and nutrition business Foodspring.

Fonterra’s normalised profit, which excludes one-time items and better reflects the underlying performance of the business, rose 43 per cent to $418m. The improvement enabled the board to resume the payment of a first-half dividend of 5 cents a share on April 15.

Chief executive Miles Hurrell said the Greater China business was the “standout performer” in the first half, with pre-tax earnings up 38 per cent to $339m helped by its strong foodservice business, improvements in its consumer business, and China’s strong economic recovery following the initial impact of Covid-19. The Greater China gross margin jumped to 17.7 per cent from 14.3 per cent.

* Fonterra sells China farms for $555 million to pay down debt

* Fonterra posts $659m full year profit, an increase of $1.3b on the previous year

Fonterra’s foodservice business was the biggest contributor to Greater China’s earnings, with its gross margin rising to 28.2 per cent from 20.3 per cent as it shifted milk into higher value products.

It developed more than 120 new ways of using its products for the Chinese market over the last six months including fruit tea macchiato with whipping cream, baked cheese rice with mozzarella cheese, and cream cheese Chinese pastry. It’s released its first ambient cream that will enable it to supply cities that don’t have extensive cool supply chains, and added 22 cities to its foodservice network, taking the total to 372.

Fonterra is experiencing disruption to its supply chains as a result of the Covid-19 pandemic.

Consumption of dairy products is growing in China, stoking demand for imports and underpinning Fonterra’s business. Greater China is the largest of Fonterra’s three geographic markets, accounting for 46 per cent of pre-tax profit in the first half, up from 35 per cent in the previous period.

“Greater China continues to be one of our most important strategic markets,” Hurrell said. “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.”

Since Hurrell took over in 2018, initially in an interim capacity, the cooperative owned by its 10,000 farmer shareholders has retreated from global expansion, and honed its focus on its core New Zealand milk business, selling overseas assets and underperforming plants, and reducing costs and debt, to improve its earnings. Its debt fell 3 per cent to $5.6 billion in the first half.

“There’s still more work to do, but our improved performance and reduced debt levels are helping us build the financial strength of the co-op,” he said.

The cooperative will sell its joint venture farms in China this calendar year, and its China farms and remaining investment in Chinese infant formula maker Beingmate by the end of the financial year.

In the Asia Pacific market, pre-tax profit rose 9 per cent to $190m. Its Africa, Middle East, Europe, North Asia and America’s market posted a 7 per cent fall to $201m on reduced sales volumes and margins, which prompted it to move product into other more lucrative markets.

Fonterra has been impacted by disruption to supply chains as a result of Covid-19, with its measurement of product being delivered on time falling to 71 per cent in the first half, from 90 per cent before the pandemic, resulting in it holding more inventory than normal. It has brought in extra shipping containers and freight vessels and expects levels to return to normal in the second half.

Hurrell reaffirmed the cooperative’s forecast milk price for farmers of between $7.30 and $7.90 per kilogram of milk solids, putting it on track for its second highest milk price to date, which would contribute an estimated $11.5b to the economy.

He also reiterated the cooperative’s full-year guidance for normalised earnings of between 25 and 35 cents per share.

“The focus for management now is to deliver on the earnings guidance,” said chief financial officer Marc Rivers. “If we do that, I think we will be in a good position for the board to be able to decide on a final dividend.”

Fonterra has warned that its profits will come under significant pressure in the second half of the financial year as higher milk prices squeeze margins.

While the higher milk prices will likely weigh on Fonterra’s earnings in the second half, the cooperative’s improved business model and debt reduction provides it with greater versatility to withstand these headwinds, said Sam Playfair, an analyst at S&P Global Ratings in Melbourne.

“Fonterra's balance sheet strength supports the cooperative's decision to resume payment of a modest interim dividend,” Playfair said.

Units in the Fonterra Shareholders’ Fund, which gives holders access to Fonterra’s dividends, slipped 0.2 per cent to $5.08 on Wednesday.