Friday, March 29, 2024

Big forecasts confront Fonterra’s leaders

Avatar photo
Fonterra’s challenged consumer and food service division will have to produce a substantial second half improvement for the co-operative to make its earnings goal this financial year.
Reading Time: 2 minutes

In the interim results presentation chief executive Miles Hurrell said he is confident consumer and food service will make $500 million earnings before interest and tax (EBIT) in the full financial year.

To do so it will have to make more than 70% of the target, or $366m, in the second half.

For consumer and food service the first half result was $134m, down $59m or 39% from the first half FY2018.

For only the second time Hurrell released a detailed earnings guidance, with numbers for the two main operating divisions – ingredients and consumer-food service.

It was in keeping with his vow for better disclosures and more accurate forecasting.

He did so for the first time during the full-year result presentation for FY2018 last September.

At that time the predictions for FY2019 were a forecast earnings per share of 25c-35c, EBIT for ingredients of $850m-$950m and for consumer and food service $540m-$590m.

Those numbers are now considered over-optimistic and were reduced in February to 15c-25c earnings a share, ingredients $750m-$850m and consumer and food service $475m-$525m.

The actual achievements in the first half were $461m from the ingredients division and $134m from consumer and food service.

For the whole company reported EBIT was $323m, up 284%, and reported net profit after tax $80m, up 123% from the reported loss of $348m this time last year.

EBIT in the first half was only 25% of the full year target, which Hurrell is still confident Fonterra can achieve.

First-half net profit was 5c/share but the directors had already ruled out the payment of an interim dividend.

The revised full-year net profit target is $240m-$400m, three to five times what was achieved in the first half.

To provide context, Fonterra also announced a negative impact of $126m on the foreign currency translation reserve from the sale and devaluation effects of Venezuelan consumer joint venture Corporacion Inlaca.

Ongoing political instability and a dire economic situation resulted in the sale to Mirona, an international food business, for $16m in cash.

But the true impact on the profit and loss after currency conversion was minus $126m, to be booked in the full-year accounts.

While Hurrell, chairman John Monaghan and chief financial officer Marc Rivers say it is pleasing to see Fonterra back in the black after suffering the 2018 full-year loss of $196m, the earnings performance is clearly not where it should be.

The NZ ingredients division is performing well but its Australian equivalent was hit by drought, reduced milk volume, aggressive price competition and under-use of manufacturing assets.

Consumer and food service is tracking behind last year because of disruptive political and economic conditions as well as high input costs in Latin America.

Demand has slowed in Chinese food service because of higher prices and high in-market butter stocks.

The sales volume was down 17% but the butter market has now corrected sharply and helped clear excess stocks.

China Farms produced 15% less milk because of floods and reported a loss of $21m, the same as last year.

Net debt at January 31 was $7.4b and the debt gearing was 52.5%, reflecting the higher opening debt and the demands of the milk production curve.

Capital expenditure was reduced 9% to $316m and the tide is turning on operating expenditure, Hurrell said.

Total
0
Shares
People are also reading