Without committing to any timeline, outgoing chair John Monaghan and chief executive Miles Hurrell have stated the principles for the capital structure review are now under way.
Among them is a framework to retain milk supply and provide financial flexibility for farmers.
It must be a transition that is affordable, achievable and fair to unit holders and shareholders.
A new structure should align incentives between farmers, with their mainly supply shares, and general and institutional investors in the Fonterra Shareholders’ Fund units.
After two years of waiting for company profitability and a return to paying dividends, the 2020 final dividend of 5c a share and FSF unit was underwhelming.
Normalised earnings per share were 24c, yet the new dividend policy applied by directors indicated a range of 5-7c after abnormal items and the decision was to pay the lesser amount.
Net debt has been reduced by $1.1 billion to $4.7bn, and the debt-to-debt-plus equity ratio has fallen to 41%.
Reported profit after tax at $659 million was $1.3bn higher than the $562m loss last year.
Demand for dairy products had proved to be resilient in the covid-19 pandemic and Fonterra’s diverse customer base and ability to change product mix meant it could move between markets and continue to drive value.
Excluding gains from asset sales, impairments and costs relating to the strategic review, normalised earnings before interest and tax were up from $812m to $879m.
The Ebit for the ingredients division improved from $790m to $827m.
“In the second half we saw restaurants, cafes and bakeries close and intermittent spikes in supermarket sales, creating uncertainty across the global dairy market,” Hurrell said.
“This resulted in softening milk prices which helped improve the gross margin and profit in ingredients.”
Despite all the upsets for foodservice due to covid, normalised Ebit was up 14% to $209m.
However, normalised Ebit for consumer businesses fell to $149m from $227m after impairments of $57m applied to the Chesdale brand and the goodwill of the New Zealand consumer business.
“Due to the economic outlook, our cashflow projections in NZ consumer goods are lower than we estimated last year and we have decided to write down the goodwill by $21m,” he said.
Hurrell says the Australian businesses had returned to profitability despite drought and bush fires.
“We are comfortable with our share of milk to make the consumer products and return the ingredients manufacturing to a sound basis,” he said
The debt reduction was helped by the sale of DFE Pharma and Foodspring for $623m cash in the first half of the year.
Fonterra’s Beingmate shareholding has been sold down to 9%, half of the original purchase.
China Farms asset value has been written down a further $63m with information from the sales process and Fonterra’s share of DPA Brazil has also been written down by $45m.
The China farming joint venture with Abbott has also been written down by $65m on updated valuations.
Capital expenditure was substantially reduced from $600m to $419m, under half the levels of five years ago when Fonterra was still building processing capacity.
Total NZ milksolids collected over the season was unchanged at 1,520m/kg and the daily peak in processing was 82.6m litres, well below the 90m-plus total capacity.
Total revenue was up $1.1bn to $21bn and consumer and foodservice sales were 33% of the total 4.62m tonnes.
The average currency conversion rate achieved during the year was US66c, which gave a revenue advantage compared with 69c the previous year.
The outlook for 2021 includes an earnings guidance of 20-35c a share along with the farm gate milk price range of $5.90-$6.90/kg.
“The supply and demand picture remains finely balanced and for that reason we are maintaining our previous forecast range,” Hurrell said.
“Significant uncertainties continue, including how the global recession and new waves of covid-19 will impact demand and what will happen to the price relativities between the products that determine our milk price and the rest of the product range.
“As a result of these uncertainties and given that the financial year has just begun, we are giving a forecast earnings range wider than we usually would.
“The best way of coping with uncertainty is to stay on strategy and focus on what is within our control.
“We need to stay agile and draw on our strengths across the supply chain to manage and adapt to the changing global situation.”
