It also narrowed its 2020-21 forecast, reducing the midpoint by 5c to $7.55/kg MS and reported a strong performance for the nine months ending April 30, 2021.
However, it cautions there will be significant pressure on earnings in the last quarter of the year due to the normal seasonal profile of the business combined with tightening margins.
Chief executive Miles Hurrell says the improving global economic environment and strong demand for dairy, relative to supply, are the reasons behind its $8 forecast midpoint for the new season.
“At this point it would see the co-op contributing more than $12 billion to the New Zealand economy next season,” Hurrell said.
“Global demand for dairy, especially NZ dairy, is continuing to grow. China is leading the charge as its economy continues to recover strongly.
“Prompted by covid-19, people are seeking the health benefits of milk and customers are wanting to secure their supply of NZ dairy products and ingredients.
“Growth in global milk supply seems muted and the global supply of whole milk powder (WMP) is looking constrained.
“Based on these supply and demand dynamics, along with where the NZ dollar is sitting relative to the US dollar, we’re expecting whole milk prices to remain at current levels for the near future.”
Hurrell says there were a number of risks over the next 18 months to the co-op’s business and this was why there was such a large range to its forecast.
These risks include covid-19; the impacts of governments winding back their economic stimulus packages; foreign exchange volatility; changes in the supply and demand patterns that can enter dairy markets when prices are high; and potential impacts of any geopolitical issues around the world.
Having sold most of its milk for the 2020-21 season, Fonterra is now in a position to narrow this season’s forecast from $7.30-$7.90/ kg MS to $7.45-$7.65/kg MS.
Hurrell says the $7.55 mid-point would be the second year in a row with the forecast above $7/kg MS.
“Since March, we have seen prices settle, somewhat, which is why we have revised our midpoint down 5c,” he said.
“In that extraordinary March GDT event, where prices jumped 15% and which contributed to the increase in our forecast 2020-21 farm gate milk price range, the average price for WMP was over US$4350 per metric tonne.”
“In the last three GDT events, however, the average price has reduced to close to $4100/t. And GDT butter prices have gone from almost $6000/t to below $5,000/t for the first time since January.”
The co-operative’s net profit after tax lifted 61% to $587 million for the nine months ending 30 April.
This was a reflection of Fonterra’s improving underlying business performance and stronger balance sheet. Reported net profit after tax was $603m, up 2%.
Its total group normalised EBIT was up 18% to $959m, due to higher margins and reduced operating expenditure.
Hurrell says covid-19 challenges are still very much part of life for Fonterra’s employees and customers around the world.
“It’s too easy to forget this if you’re sitting here in NZ, but today’s results show that despite these challenges we’ve lifted our financial performance,” he said.
“Over the last three months, we have also committed to getting out of coal by 2037 and made some promising progress in a trial using seaweed in cows’ feed to reduce emissions.
“I would like to thank all our employees for delivering another strong set of results and also our farmer owners for their high-quality NZ milk and ongoing support. I couldn’t be prouder of how our employees and farmers are working together.”
Hurrell says China continued to be an important performer for us, delivering year-to-date EBIT of $457m, up 30% or $106m, year-on-year.
Foodservice was the big driver behind this result, contributing $93m of the growth.
“In the third quarter, the team continued to improve the strong gross margins we saw in foodservice at half-year by shifting milk into higher-value products; for example, cream cheese. As a result, the year-to-date margin increased from 21.5-28.6%,” he said.
Asia Pacific’s EBIT of $224m was down 10% or $24m. While consumer improved by 29% and foodservice by 89%, this was offset by ingredients which was impacted by pricing lags on sales contracts with customers, delaying its ability to pass through the increase in our input costs.
“AMENA’s (Africa, Middle East, Europe, North Asia and America) normalised EBIT of $322m was down by 11% or $40m, mainly due to lower ingredients sales volumes as we continue to make the most of one of our strengths and that is our ability to move milk into higher value products and markets,” he said.
“However, AMENA consumer and foodservice continue to perform well, maintaining a year-on-year improvement in gross margins.”
Hurrell says the co-op’s ongoing financial discipline is also a big part of its third-quarter performance story.
“Fonterra’s operating expenses are down 5% year-to-date, but we are planning some additional expenditure in the final quarter to support our brands and product initiatives for next year,” he said.
“Our debt reduction over the last couple of years and lower interest rates have reduced our interest bill by $69m for the nine months ending April 30, 2021.”
Fonterra is maintaining its normalised earnings guidance of 25-35c per share. While year-to-date normalised earnings per share are 34c, it is expecting earnings in the fourth quarter to come under further pressure and is providing guidance that its full year earnings are expected to be more towards the midpoint of the range.
Hurrell says there are some clouds on the horizon when it comes to Fonterra’s earnings performance.
“While overall we’ve seen stronger gross margins so far this year, they’ve narrowed in the third quarter as the increasing raw milk prices have flowed through to our input costs and the pricing lags on sales contracts with customers have delayed our ability to pass through the increase in our input costs,” he said.
“As a result, we’re forecasting increased pressure on margins in the fourth quarter. This is compounded by the normal seasonal profile of our business, where we have our ongoing fixed costs but lower volumes of milk being processed and sold.
“All of this means the fourth quarter will be challenging from an earnings perspective, and we expect the margin pressure to continue into the first quarter of the 2022 financial year.”
Hurrell says the progress that has been made on its portfolio review is allowing Fonterra to really focus on its strategy of growing the value of NZ milk by using innovation, sustainability and efficiency to deliver products that customers value.
“It starts with having the best milk in the world – our NZ milk – and by having a more focused asset portfolio, it allows us to prioritise more of our resources around it and we can see this coming through in our performance,” he said.
That review saw the sale of its Beingmate shareholding and marked the full exit of its investment in the company and completed the sale of Fonterra’s two wholly owned China farming hubs in Ying and Yutian.
