Friday, March 29, 2024

Where Fonterra’s earnings went

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Over $500 million of gains on sale for divested Fonterra businesses were backed out of the 2020 earnings before the new dividend policy was applied, chief financial officer Marc Rivers says.
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The gains against book valuation were $427 million for the excipients business DFE Pharma and $66m for the protein products business Foodspring – both in Europe, plus smaller gains for Dennington in Australia and Tip Top in Auckland.

When these abnormal items were removed from the 43 cents per share reported earnings, just 11cps was available to the directors on which to apply the new dividend policy.

The policy is between 40% and 60% of reported net profit after tax excluding any abnormal gains, and the directors elected to pay out 45%, or 5c.

Rivers says gains on divestment went into the $1.1 billion reduction in debt last financial year, to bring that number well ahead of the budgeted three-point-seven-five times earnings before interest, tax, depreciation and amortisation (Ebitda).

Debt on July 31 was three-point-four times Ebitda, compared with four-point-four a year before.

The debt target is now two-point-five to three times Ebitda to be reached over the next two years.

Rivers says the lower target reflected Fonterra’s position as a safe, sustainable co-operative, to maintain its A-band credit rating for future capital needs and to avoid covenants, while having flexibility to deal with major events, like the covid-19 pandemic.

He says China Farms and the DPA Brazil joint venture with Nestle were the next planned divestments to go a long way towards the new debt target.

The sale of shares in Beingmate was halfway to completion and the rest of the debt reduction would come from “good, old-fashioned underlying performance improvements”.

The major revaluations and impairments had been made during the past two years in parts of the business that had no head room.

Other substantial assets, such as processing facilities in New Zealand and Australia, did have plenty of head room in their valuations, so were not likely to require impairments.

Rivers says the 38cps retained earnings in the stronger balance sheet was another expression of the gains on divestment and much-improved trading results during the past year.

In the equity statement, retained earnings went up more than $600m and total equity rose more than $900m to be $6.7bn.

With lower debt, he says Fonterra could respond if an attractive investment came up and adequate processing capacity was now in place.

Therefore, the capacity adjustment in the milk price schedule was no longer required and Fonterra proposes it will finish at the end of this season.

“As an industry we no longer see a future of milk growth and therefore the co-op is no longer faced with the challenge of needing to continually invest in new peak stainless steel,” Farm Source director Richard Allen said in a note to farmers last week.

The CA change would not impact the total amount paid for milk and for 87% of farmers the unders and overs movements were less than 2c/kg in the 2020 season.

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