NEW ZEALAND – New Zealand farmer-owned dairy co-operative, Fonterra lifted its half year net profit after tax to NZD501 million (US$298.5m), up from NZD72 million (US$42.2m), representing a 595.8% growth in reported profit as the company continues to reset its business.
Fonterra reported a normalised net profit after tax of NZD293 million (US$171.68m), up from NZD72 million (US$42.2m) while the total group normalised Earnings Before Interest and Tax (EBIT) grew 87% to NZD584 million (US$342.2m).
During the period, the company also managed to reduce its net debt to NZD5.8 billion (US$3.4bn), down from NZD7.4 billion(US$4.34bn) and further increasing its free cash flow to NZD369 million (US$216.2m), up from NZD(782) million (US$458.2m) that was reported last year.
Fonterra CEO, Miles Hurrell says that the company has built on the work done in 2019 and has continued to restructure its business.
The dairy co-operative has benefited from the introduction of a new strategy, reorganising and resizing its teams to enable the company to increase its focus on customers, while at the same time lifting its financial performance.
“We are now a very different Co-op to this time last year – we’re prioritising New Zealand milk and staying focused on what we know we’re good at and what makes a difference to our farmer owners, unit holders, employees and communities,” Miles said.
“While there’s no doubt the world is experiencing an almost unprecedented situation and response to COVID-19, I’m pleased with the progress we’ve made so far against our four priorities for 2020.
The company is targeting to hit its financial targets, reduce environmental footprint, build its team, and support regional New Zealand.
Fonterra’s key financial targets for 2020 are to meet its earnings guidance of 15-25 cents per share, achieve a gross margin in excess of NZD3 billion (US$1.76bn), reduce debt so it is no more than 3.75x its earnings and ensure capital expenditure is no more than NZD500 million (US$292.96m).
Commenting on these targets, Mr Hurrell says he is pleased with the progress and momentum Fonterra has achieved in the first six months of the financial year, but Fonterra is now operating in a very different global context as a result of COVID-19.
In the first half of its financial year, the company said that it benefited from stable underlying earnings from its Ingredients business, improved gross margins in Foodservice and reduced operating expenses.
“Our Foodservice business has definitely been our stand-out performer in the first half as we’ve grown our sales to bakeries and coffee and tea houses across Greater China and Asia,” Hurrell said.
Fonterra completed the sale of DFE Pharma and foodspring in the first half of the year with cash proceeds of NZD624 million (US$365.62m), which helped to reduce net debt by 22% or NZD1.6 billion (US$940m), compared to the time last year.
The company is continuously reviewing its asset portfolio and has also completed strategic reviews on China Farms and DPA Brazil. Hurrell revealed that the sales processes for both assets are under way.
“Through these sale processes and strategic reviews, we have gained additional information and further insights and, as a result, we have revised down the valuation of China Farms and DPA Brazil by a total of NZD134 million (US$78.51m).
“We have also reduced the value of our China Farming joint venture by NZD65 million (US$38m) and we continue to look for opportunities to improve the ongoing performance of the business,” he explained.
Outlook for the second half
Commenting on the company’s expectations for second half of the financial year, Mr Hurrell reaffirmed a forecast Farmgate Milk Price range of $7.00-$7.60 per kgMS and forecast normalised earnings guidance of 15-25 cents per share.
“Our underlying earnings are tracking well at the half year, but there is no doubt that we have a number of risks that are outside our control in the second half – in particular.
“The potential impact of COVID-19 on global demand, geo-political risks in key markets such as Hong Kong and Chile, and ongoing dry weather conditions here in New Zealand which could impact collections and potentially input costs.
“As a result, we have held our forecast earnings range at 15-25 cents per share,” he said.