Fonterra CEO Miles Hurrell says 2019/2020 was a good year for the co-op, with profit up, debt down and a strong milk price.

Fonterra Co-operative Group Limited announced its annual results mid-September, with a final Farmgate Milk Price of $7.14 per kgMS and a dividend of five cents per share for the 2019/2020 season, bringing the final cash payout for farmers to $7.19 per kgMS.

Plus the co-op reported a profit of $659 million, up $1.3 billion; and net debt of $4.7 billion, down $1.1 billion.

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

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

“This time last year we were announcing our new strategy and customer-led operating model. We were clear that to build a sustainable future we needed to focus on three interconnected goals – Healthy People, a Healthy Environment and a Healthy Business.

“We went on to deliver a strong performance for the first half. However, what none of us could have ever predicted was what then played out – a world facing Covid-19. The flow-on effects of the pandemic did impact our performance in the second half, particularly in our Consumer and Foodservice businesses.”

Miles says as a result, 2019/2020 proved to be a year of two halves, but Fonterra delivered on all four of its priorities:

“We’ve supported regional NZ, contributing around $11 billion into NZ’s rural economies through the milk price, and we’ve rethought our approach to community support with the aim of helping out more where it’s needed the most – such as, growing the KickStart Breakfast programme...”.

“We’ve built a great team through a focus on our culture, and we’ve seen that in action in how we’ve responded to Covid-19.

“We’ve continued to reduce our environmental footprint, including hitting our 2020 target to reduce energy intensity across our NZ manufacturing sites by 20 per cent, from a 2003 baseline. 

“We’ve achieved our key financial targets with normalised earnings of 24 cents per share, a Total Group normalised gross profit of $3.2 billion, a $181 million reduction in capital expenditure and a $1.1 billion reduction in debt so the ratio of Debt to EBITDA has now improved to be 3.4 times our earnings, down from 4.4 times.”

Miles says the co-op’s work done to strengthen its balance sheet has allowed it to focus on managing Covid-19. “So far, demand for dairy has proved resilient and our diverse customer base and ability to change our product mix and move products between markets has meant we 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.”

Business Performance

Miles says 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 $812 million to $879 million, despite the financial impact of Covid-19 in many of its markets.

Miles 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 $790 million last year to $827 million this year, with normalised gross profit up $165 million to $1.6 billion.

Miles says 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 $114 million last year to $169 million this year.

Miles 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 per cent.

“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 per 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 per cent on last year to $209 million, which is a result of the strong performance by the Greater China business in the first half.”

The Consumer business’ normalised EBIT reduced to $149 million from $227 million, mainly as a result of impairments of $57 million relating to the Chesdale brand and NZ Consumer business’ goodwill.

Normalised EBIT, excluding these impairments, of the Consumer businesses in Oceania and Asia improved, despite Covid-19. However, due to civil unrest and market disruptions in Hong Kong and Chile, the normalised EBIT, after excluding these impairments, of the Consumer business declined 10 per cent.

“Our Australian Consumer business performed strongly with sales continuing to increase thanks to its popular beverage, spreads and cheese products,” says Miles.

“NZ Consumer business focused on improving customer service and keeping supermarket shelves well stocked, particularly as New Zealanders were stock piling through Covid-19.

“Despite the better performance this year, due to the economic outlook post-Covid-19, our NZ Consumer business’s future cashflow projections are lower than we estimated last year and, as a result, we’ve decided to write down its goodwill by $21 million. It now has a total value in our accounts of $699 million.”

Miles says, in addition to the improved earnings performance, Fonterra has followed through on its commitment to financial discipline and this has increased the financial strength of the co-op.

“Our cash flow has improved and our debt has reduced by 19 per cent, or $1.1 billion, compared to last year. Increased earnings, reduced capex, as well as the sale of DFE Pharma and foodspring for cash proceeds of $623 million in the first half of the year, have all contributed to this improvement.”

Dividend and Farmgate Milk Price for 2019/2020

Fonterra announced a dividend for the 2020 Financial Year of five cents per share and final Farmgate Milk Price for the 2019/2020 season of $7.14 per kgMS.  

Fonterra chairman John Monaghan says for a 100 per cent share-backed farm, this gave them a final cash payout of $7.19 per kgMS.

“This year marks a return to paying dividends, a position we expect to maintain in the future, assuming normal operating conditions.

“At five cents per share, the dividend is at the lower end of the five-seven cent range calculated under the board’s dividend policy guidelines.

“In the context of so much uncertainty, as Covid-19 continues to impact our key markets and customer confidence, distributing a five-cent dividend is a prudent decision and one that balances our aims of further reducing debt and distributing earnings.”

Outlook

Fonterra has announced a 2020/2021 earnings guidance range of 20-35 cents per share and has also reaffirmed its 2020/2021 forecast Farmgate Milk Price range of $5.90-$6.90 per kgMS.

John says 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.”

Annual Results Summary:

- Final cash payout for 2019/20 season: $7.19 per kgMS

- Final 2019/20 Farmgate Milk Price: $7.14 per kgMS

- 2019/20 dividend: 5 cents per share

- Reported Profit After Tax: $659 million, up $1.3 billion

- Normalised Profit After Tax[1]: $382 million, up $118 million

- Total Group Earnings Before Interest and Tax (EBIT): $1.1 billion, up $1.2 billion  

- Total Group normalised EBIT: $879 million, up $67 million

- Total Group normalised operating expenses: $2.3 billion, down $14 million

- Free cash flow: $1.8 billion, up $733 million