A cheering result from Fonterra, but there are challenges ahead

Fonterra CEO Miles Hurrell says 2019/20 was a good year for the co-op, with profit up, debt down and a strong milk price.  The  result,  a profit   of  $659m, may have  brought a  cheer   from the  co-op’s  farmer-suppliers and  Hurrell  deserves  a cheer, too, for   succeeding  in  turning around  the  fortunes of the  co-op,  after two  years  of  losses.

“We increased our profit after tax by more than $1bn, reduced our debt by more than $1 billion and this has put us in a position to start paying dividends again,” he says.

“I’m proud of how farmers and employees have come together to deliver these strong results in a challenging environment. They have had to juggle the extra demands and stress of COVID-19 and have gone above and beyond. I would like to thank them for their hard work and support.”

Fonterra  settled  on a  milk price for the  season  just  past  of  of  $7.14kg/MS—-one of the  highest on record—and  is  maintaining the current forecast  for the  current  season  within  the  range of  $5.90-$6.90.

Turnover  was up 5%  at  $21bn, equating  to 6.8%  of  NZ’s  GDP—with  $11bn returned  to  suppliers.

Not  a  word  out of the  Beehive,  despite the  result  underlining   the  importance  of  the  dairy  industry  to the  national   economy.

But  Federated  Farmers’  Andrew  Hoggard  speaks for  the rural  community  when he says  “There’s good, positive  momentum going  forward…it  will  lift   a lot of people’s spirits”.  

Yet  not   all  those 10,500  Fonterra  farmer-suppliers  may  be  satisfied  with the  co-op’s  performance.   They  may  note   Hurrell  took  a  cut in his  salary  (down to $2.008m).  well down from  what  his predecessor  Theo Spierings  received  in 2016  and  2017,   but  still  wonder  why,  of  the Fonterra  staff  of 21,400,  a  total  of  6364  receive  more than  $100,000 a  year.

Then    again  they  may  look  at  Fonterra’s  normalised  earnings  per share   of  24c  in  what was a  “good  year”  and  question  why  an  outfit   like  A2 Milk  could  report earnings per share of 52.39c.

Even  though  Fonterra   is  now  in  better  shape  than  it  was,  thanks  to   the  Hurrell  strategy, there  are  still  challenges  ahead,   and  individual  farmers   will be  focussed  on  how   they can produce more  from their  herds as  they  have  been doing  in   recent seasons.  The  industry’s  annual  production  is running at  more  than  21bn litres  of  milk,  with the total  cow population down 0.9%.

Those  seeking  efficiency  gains  are  using technology  increasingly  on the farm, particularly to keep a  check on the  health  of individual animals  in their herd.

Meanwhile  Fonterra  chairman  John  Monaghan   is  warning  the impact of Covid-19 is still playing out globally.

“From a milk price perspective, the supply and demand picture remains finely balanced and for that reason we are maintaining our previous forecast range for this season.

“In terms of our earnings, we are forecasting a full year normalised earnings per share range of 20-35 cents per share.

“There continues to be significant uncertainties – including how the global recession and new waves of Covid-19 will impact demand globally, and what will happen to the price relativities between the products that determine our milk price and the rest of our product range.

“As a result of these uncertainties and given that financial year has just begun, we are giving a forecast earnings range wider than we usually would.

“We will be monitoring the situation throughout the season and as the year progresses, we would expect the earnings range to narrow.

“The best way of coping with uncertainty is to stay on strategy and focus on what is within our control – delivering for our farmers, unit holders and customers, and maintaining our financial discipline.

“We need to stay agile and draw on our strengths across the supply chain to manage and adapt to the changing global situation.”

So far, demand for dairy has proved resilient and Fonterra’s diverse customer base and ability to change the product mix and move products between markets has meant it can continue to drive value.

Hurrell  believes:

“We’re at our best when we’re clear on what we need to do, why and how, and the whole Co-op is focused on it. When I look back on last year, it’s great to see how this clarity has helped us respond to challenges, adapt and deliver results.”

Total group normalised EBIT was significantly up on last year from a loss of $17 million to earnings of $1.1 billion. This includes gains from asset sales, and impairments and costs relating to the strategic review.

Once these are taken out, the total group normalised EBIT, which the co-operative uses to show its underlying business performance, was also up from $812m to $879m, despite the financial impact of Covid-19 in many of its markets.

Hurrell says the main drivers of the underlying business performance was a strong normalised gross profit in the ingredients business and, although there was the disruption from Covid-19, the strong sales and gross margins from the Greater China Foodservice business in the first half of the year.

Ingredients’ normalised EBIT improved from $790m last year to $827m this year, with normalised gross profit up $165m to $1.6bn.

Hurrell says that at the co-op’s interim results, the normalised gross profit in ingredients was relatively steady.

As we moved through the second half, we saw restaurants, cafes and bakeries close and intermittent spikes in supermarket sales, creating uncertainty across the global dairy market. This uncertainty resulted in softening milk prices, which helped improve the gross margin and gross profit in Ingredients.

Greater China Foodservice’s normalised EBIT increased from $114m last year to $169m this year.

Hurrell says the business achieved strong year-on-year sales growth in the first half of the year but was then hit hard by Covid-19 when many food outlets were closed.  Normalised gross profit started to quickly rebound in the third quarter – although he also points out it is still not at 100%.

We have seen significant growth across the Anchor food professional product range in China. We have entered 50 new cities across China, taking our total to 350, and our products are now not only being used in Western style restaurants and bakeries but also those serving local cuisine.

“However, as in  our guidance in our third quarter business update, our foodservice businesses across Asia, Oceania and Latin America were impacted by Covid-19 in the fourth quarter. All three markets reported losses in the second half.

Despite this, normalised EBIT for foodservice overall was up 14% on last year to $209m, which is a result of the strong performance by the Greater China business in the first half”.

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