Comforting news for dairy farmers as companies report results and the world price rises again

Encouraging signs emerged this week that key elements in the structure of NZ’s largest export industry are whipping themselves back into the shape they should be.

The giant  co-op  Fonterra  has  gone back  into the  black  with a net profit of $80 million in the  first half,  after previously recording  a  net  loss of  $186m.

Meanwhile Westland Milk Products, NZ’s second biggest dairy co-op, is in line to be  sold  to China’s biggest  dairy company,  Yili,  in  a $588m  transaction that would inject nearly half a million  dollars into the operations of  each  of its  suppliers.

Alongside these co-ops, the Canterbury-based Synlait has underlined its strength in the  industry with a  solid result in  its half-year after  achieving   higher sales  volumes.  It reported a half-year net profit of $37.3m,  9.6%  lower  than   the  $41.3m  in the previous first   half,  but  with the  focus  on investing for  growth,  with a  second processing  plant due  to come on stream for  the  2019-20 season.

Fonterra’s farmer-suppliers will take heart   from the signs  the  co-op—NZ’s  largest   company — is  getting  itself  back into the game,  even though  CEO   Miles Hurrell says the dairy giant is still not performing as well as it should.   It is on track to trim its debt by $800m.

Fonterra chairman John Monaghan said the co-op was undergoing fundamental change.

We are taking a hard look at our end-to-end business, where we can win in the world and the products where we have a real competitive advantage,”.

Monaghan said the co-operative’s strategy would focus on sustainability and provenance throughout the value chain.

We are a NZ dairy farmers’ co-op. Maximising the value of our home milk supply will always be our number one priority. We believe there’s a premium to be earned from products backed by our co-operative heritage and provenance.Our future will be built on our owners’ farming businesses that use advancements in technology and innovation, including adaptations from other industries, to help protect or enhance the premium qualities and reputation of our milk.

Fonterra’s portfolio review will simplify its business and concentrate on getting the basics right. It is changing its portfolio of investments to achieve higher return on capital.

Achievement of our ambition will rely on us maintaining premium quality right across the supply chain – starting on-farm and flowing through to the products we make, and the customers we sell to. It will need the support and commitment of all our people – our farmer owners and our employees.

 “It sounds simple. The best strategies often are”.

In an update on its strategic review, Fonterra identified a third asset that’s up for sale – its investment in DFE Pharma, a 50/50 joint venture established in 2006 between Fonterra and FrieslandCampina.DFE Pharma.  The jointly owned company is one of the largest suppliers of pharmaceutical excipients, which are used as a carrier agent in medicines such as tablets and powder inhalers.

Hurrell says Fonterra has received strong interest in Tip Top and is considering its options for its 18.8% shareholding in China’s Beingmate. Fonterra has sold its interest in its Venezuelan consumer joint venture, Corporacion Inlaca to Mirona, an international food business, for $16m.

Fonterra said the steady performance from New Zealand Ingredients in the first half had been offset by challenges in Australia Ingredients, which had seen its total Ingredients EBIT decline by 17 per cent to $461m.

“Our Australia 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 under-utilisation of manufacturing assets and tightening margins,” Hurrell said.

Fonterra’s consumer and foodservice was tracking behind last year with an EBIT of $134m.

Hurrell said this part of the business had 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,” he said.

Talking about priorities for the co-op in the second half of the year,  Hurrell says the focus is 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 earnings.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.

 “Our three-point plan involves taking stock of our business and conducting a portfolio review, getting the basics right and improving our forecasting. We’ve made good progress so far and we will continue to take these steps in the second half to firm up our foundations and strengthen our balance sheet.

The second half will also see us continuing the work on developing a new strategy to support a much-needed change in direction. We are doing the right things but it’s clear more is needed to lift our performance. We need to simplify and improve the co-op so we can grow value.

Meanwhile  Synlait – in its half-year report – says the first half of FY19 has been characterised by the significant investments made to its manufacturing base across all its key categories.

This is part of our focus on supporting the growth of our customers and diversifying our business. Nearly $200 million of capital expenditure was invested in the six months to 31 January 2019 as we progressed our four major growth projects.

 “The build of our new infant-capable manufacturing facility in Pokeno continues to be on track for commissioning for the 2019 / 2020 milk season. This is a $280m investment which will allow us to meet customer demand, whilst also eliminating our single-site risk.At the same time, we are recruiting new milk suppliers in the area. We remain on track for the start of the 2019 / 2020 milk season and are encouraged by the warm welcome we’ve received from Waikato dairy farmers”.

Synlait mentioned the build of the Advanced Liquid Dairy Packaging facility in Dunsandel. announced in early FY18 in conjunction with the Foodstuffs South Island (FSSI) supply agreement. The facility will cost $125m and gives Synlait the foundation to explore other liquid milk product opportunities which will utilise the innovation and flexibility offered by the plant.

The company is on track for completing the new facility.

At the end of 2018 Synlait entered into a conditional agreement to acquire selected Talbot Forest Cheese assets. The acquisition, which is expected to be in the range of $35 – $40m, will help optimise the value chain and supports the growth strategy.

Synlait has just completed a $18m expansion to the Dunsandel lactoferrin facility which has doubled  lactoferrin manufacturing capacity.  The company reports growing demand for lactoferrin through external sales and in formulations with  infant formula customers

We have made a large investment in staffing which will support our next phase of growth. At the end of HY19 we had 748 employees compared to 597 at the same point in FY18. In particular, we have invested in the capability required to fill the growing number of roles at our new Pokeno facility and support our move into the liquid milk market. We’ve also invested in our technical expertise to enable product and customer development, including at our Research and Development Centre at Palmerston North”.

Fair to say, investors were disappointed. Fonterra shareholders fund units dipped from $4.37 to $4.35 this morning but the price has been picking up from the $4.20 to which it fell three weeks ago when the company slashed its forecast earnings and canned its dividend.

Synlait shares fell from $9.85 to $9.30 in early trading this morning but just after noon had rallied to $9.95.

Farmers would have taken comfort from other news – a further rise in dairy product prices at the Global Dairy Trade auction, the eighth consecutive increase as dry weather conditions are weighing on supply.

The GDT price index gained 1.9% from the previous auction two weeks ago.





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