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.
“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”.