News

Fonterra doubles profits

24 Mar 2016

Fonterra has announced what it describes as a good performance in the first half of the current financial year, with EBIT of $NZ665 million up 77% and net profit after tax of $409 million up 123%.

Fonterra has announced what it describes as a good performance in the first half of the current financial year, with normalised earnings before interest and tax (EBIT) of $NZ665 million up 77% on the comparable period, and net profit after tax of $409 million up 123%.

Chairman John Wilson said that the supply and demand imbalance in the globally traded dairy market has brought prices down to unsustainable levels for farmers around the world, and particularly in New Zealand. The strong New Zealand dollar has also had a negative impact on the Milk Price.

“The low prices have placed a great deal of pressure on incomes, farm budgets, and our farming families.”

“Our priority is to generate more value out of every drop of our farmers’ milk by focusing on the areas within our control. We aim to efficiently convert as much milk as possible into the highest-returning products.”

“Our management is aware of the need for strong performance to ensure that we get every possible cent back into farmers’ hands during a very tough year.”

“We have lifted profitability from last season to this season, resulting in higher earnings per share to help offset low global dairy prices. As a result, we have delivered an interim dividend of 20 cents per share, up from an interim dividend for last year of 10 cents per share.”

“Our forecast Farmgate Milk Price of $3.90 per kgMS reflects low global dairy prices, with Whole Milk Powder decreasing around 17 per cent this season to date. Forecast total available for payout of $4.35-$4.45 per kgMS currently equates to a forecast cash payout of $4.30 per kgMS after retentions for a fully shared up farmer.”

“Our forecast total dividend for the current financial year is 40 cents per share. The Board has today declared a 20 cent dividend which will be paid in April. We intend declaring the remaining 20 cents per share in two dividends of 10 cents in May and 10 cents in August to help support farmers at a time when cash flows are extremely tight.”

These two dividends in May and August are subject to the Board’s approval at the time and Fonterra’s financial performance continuing to support its forecast earnings per share of not less than the current 45 to 55 cents forecast range per share.

The timing of these payments is a specific response to the current, very challenging, financial conditions farmers are facing and does not signal any intention to move away from Fonterra’s normal practice of twice-yearly dividends paid in April and October.

Chief Executive Theo Spierings said the co-operative’s strong performance reflected a sustained effort in three main areas.

“We focused on the efficiency of our ingredients business and capturing demand for ingredients in a wide range of markets.”

“We aimed to make the most of global consumption growth by building demand for higher-value products in our consumer and foodservice markets.”

“Our working capital has improved significantly, and our inventory levels are lower than in recent periods for this time of year – down 9 per cent in volume terms due to strong sales.”

Free cash flow for the six months to 31 January 2016 was $2.1 billion higher than the first half last year, with gearing at 49 per cent, down from 51 per cent in the previous year.

“Finally, we maintained strict financial discipline to keep lifting our return on capital and our strong cash flow has enabled us to strengthen the Co-operative and reduce gearing,” said Spierings. “Ingredients achieved normalised EBIT of $617 million, up 27 per cent compared to the first half last year. This resulted from improved product mix returns, and the increased production and cost efficiencies coming from our investments in plant capacity in New Zealand.”

“In consumer and foodservice we have delivered very good growth, with normalised EBIT increasing 108 per cent to $241 million. We remain focused on growing demand, especially in the eight markets where we currently hold or want to gain leadership or a very strong position: New Zealand, Australia, Sri Lanka, Malaysia, Chile, China, Indonesia and Brazil. These are well established markets for Fonterra, so we are working off a strong base.”

“The additional 235 million litres of milk we converted into higher-returning consumer and foodservice products in this six month period built on the additional 600 million litres last year.”

“Our farms in China are a key part of our integrated dairy business. We are achieving operational efficiencies on the farms which are helping offset the current low domestic milk price in China.”

Current global economic conditions remain challenging and are impacting dairy demand and prices, said Spierings. “The balance between available dairy exports and imports has been unfavourable for 18 months following European production increasing more than expected and lower imports into China and Russia. This imbalance is likely to continue in the short term, with prices expected to lift later this calendar year.”

“The long term fundamentals for global dairy are positive with demand expected to increase by two to three per cent a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.”

Wilson said the co-operative’s solid performance was set to continue.

“The business will continue to work on capturing demand and margins in the second half of the year, just as it did in the first half, by focusing on our consumer and foodservice volumes and those of specialty ingredients.”

“We remain firmly on track to achieve our forecast earnings of 45-55 cents per share, ahead of the 40-50 cents per share we indicated at the commencement of the season.”

“Our net debt is $6.9 billion and we are expecting this to reduce significantly in the second half of the year. We are on track to reduce gearing to 40-45 per cent by the end of the current financial year.”