In contrast Synlait announced a half-year profit of $37m on revenue of $471m.
Fonterra’s revenue was down 1% on the previous year but the profit was up 123% on last year’s loss. Fonterra’s earnings before interest and tax were $323m, down 29%.
It has sold Corporacion Inlaca to Mirona and has started the sales process for its 50% share of DFE Pharma for $16m in its bid to save $800m.
The full review of its business strategy isn’t mere tinkering around the edges, Monaghan said.
“There will be fundamental change.
“We are taking a hard look at our end-to-end business, where we can win in the world and the products where we have a real competitive advantage.
“Our co-operative values of the last 148 years won’t change.
“Our farmers’ quality, pasture-based milk will always be collected, processed and sold for the highest possible returns.
“They’ll always be paid on the 20th of the month – every month.
“Outside of that, there are no sacred cows.
“The business strategies designed to secure the highest possible returns will change but some underlying principles will remain.”
The strategy will focus on sustainability and provenance throughout the value chain.
“We are a New Zealand dairy farmers’ co-op.
“Maximising the value of our home milk supply will always be our number one priority. We believe there’s a premium to be earned from products backed by our co-operative heritage and provenance.
“Our future will be built on our owners’ farming businesses that use advancements in technology and innovation, including adaptations from other industries to help protect or enhance the premium qualities and reputation of our milk.”
The review will simplify Fonterra’s business and concentrate on getting the basics right.
It is changing its portfolio of investments to achieve higher return on capital, Monaghan said.
“Achievement of our ambition will rely on us maintaining premium quality right across the supply chain, starting on-farm and flowing through to the products we make and the customers we sell to.
“It will need the support and commitment of all our people – our farmer owners and our employees.
“It sounds simple. The best strategies often are,” he said.
Chief executive Miles Hurrell said while it is good to see the co-operative back in the black, its earnings performance is not where it should be and that was the reason for revising the full year earnings guidance down to 15-25 cents a share in February.
“The steady performance from NZ ingredients in the first half of FY19 has been offset by challenges in Australian ingredients and this has seen our total ingredients EBIT decline by 17% to $461m.
“Our Australia ingredients business continues to feel the impact of the drought.
“We can see it in the decline of Australian milk collections and aggressive price competition for milk, which is resulting in the underutilisation of manufacturing assets and tightening margins.
“Consumer and food service is tracking behind last year with an EBIT of $134m.
“This part of the business has been held back by disruptive political and economic conditions as well as high input costs in Latin America.
“In addition, in our China food service business, demand slowed due to higher prices and in-market inventory levels growing for butter at the end of FY18.
“In Sri Lanka our performance was impacted by price constraints.”
The focus in the second half year is to meet the earnings guidance, deliver the three-point plan and fundamentally reset the business so it can deliver sustainable earnings.
“We have a forecast farmgate milk price of $6.30-$6.60 a kilo MS but we also have to meet our earnings guidance range of 15-25 cents per share.
“This range builds in an expectation of a slightly softer second half for our ingredients business but a meaningful increase in consumer and food service earnings,” Hurrell said.
“Our forecast increase in our consumer and food service performance is based on a few key factors.
“It needs a strong improvement in our food service business in Greater China, stronger consumer demand for Soprole in Chile and chilled dairy in Brazil and an improvement in our Sri Lankan business.
“Our three-point plan involves taking stock of our business and conducting a portfolio review, getting the basics right and improving our forecasting.
“We’ve made good progress so far and we will continue to take these steps in the second half to firm up our foundations and strengthen our balance sheet.
“The second half will also see us continuing the work on developing a new strategy to support a much-needed change in direction.
“We are doing the right things but it’s clear more is needed to lift our performance.
“We need to simplify and improve the co-op so we can grow value.”
DFE Pharma, a 50:50 joint venture established in 2006 with FrieslandCampina is one of the largest suppliers of pharmaceutical excipients, which are used as a carrier agent in medicines such as tablets and powder inhalers.
“We have confirmed that we are committed to maintaining our lactose service and supply agreements from Fonterra’s Kapuni operation in Taranaki and supporting the ongoing operations of the DFE Pharma business.
“Together with our partner, we have grown DFE Pharma from relatively small beginnings into a significant and successful business.
“While continuing to perform well, ownership of DFE is not core to our strategy.”
The Co-op has received strong interest in Tip Top and is actively considering its options for its shareholding in Beingmate.
“We are well on track to meet our target to reduce end of year debt by $800m,” Hurrell said.
On the sale of its interest in Venezuelan consumer joint venture, Corporacion Inlaca, to Mirona, an international food business, he said “The decision to sell Inlaca is the result of ongoing instability in Venezuela which has led to challenging operating conditions.
“The economic situation in Venezuela is not expected to improve in the foreseeable future so we have made the decision to act now to minimise the impact on Fonterra.”
Though Fonterra got $16m cash for the Inlaca sale it is exposed to currency risk on its overseas operations and the impact of changes is held in a foreign currency translation reserve (FCTR). “When a business is sold there is a non-cash accounting adjustment that releases the accumulated FCTR to the profit and loss statement. The full impact of this transaction, including the devaluation of the Venezuelan currency which has resulted in a negative FCTR balance of approximately $126m, will be reflected in the profit and loss statement,” Hurrell said.
This sale is not directly included in Fonterra’s half-year results and the impact of the FCTR on the profit and loss statement has not been reflected in the forecast earnings per share range. Fonterra expects there to be a number of one-off transactions and adjustments over the course of its financial year, some positive and some negative.
The sale of Inlaca would have an eight cents a share negative impact on earnings.
As Fonterra has other one-off transactions that are under way but not yet completed, such as the potential sale of Tip Top and DFE Pharma, it is too early to assess the overall impact of the divestment programme on the co-op’s FY19 earnings.
As a result, the announced forecast earnings will continue to reflect only the underlying performance of the business.
Fonterra will advise any one-off impacts of a transaction on its FY19 earnings when that transaction is announced and will provide details of the overall impact of its divestment programme on FY19 earnings as part of its full-year financial statements.
