It’s earnings befoe interest and tax for the first six months of the season are down 25% on the 2017 interim result to $458m on revenue of $9.8 billion, up 6% on 2017. Its net profit after tax is a $3348m loss, down 183% on 2017.
The milk price and dividend give farmers a possible payout of $6.80 to $6.90 a kilogram with an interim dividend of 10c a share on earnings of 15c a share, to be paid in April.
The ingredients business’s earning before interest and tax are $558m, up 9% from 2017 wguke its consumer and food service Ebit is $193m, down 38% from 2017.
Chairman John Wilson said ongoing strong global demand for dairy and stable global supply are continuing to support global prices, particularly for the important whole milk powder category.
“Farmers will welcome a forecast cash payout of $6.80-$6.90, which would be the third highest in the last decade.
“This is also good news for New Zealand as it represents around $10 billion flowing into the country’s economy.
“However, we are very aware of the challenges many of our farmers are facing this season with difficult weather conditions impacting production.
“While the global supply and demand picture remains positive and we expect prices to stay around current levels we will be watching for any impact on market sentiment as spring production volumes build in Europe,” he said.
Fonterra’s Greater China business continues to perform well overall but the co-operative has re-assessed the value of its Beingmate investment so it reflects fair value.
Wilson said the board assessed the carrying value of Beingmate at $244m and therefore took an impairment of $405m.
“While we appreciate the substantial opportunity and privilege of our business in China, our shareholders and unitholders will be rightfully disappointed with this outcome.
“Beingmate’s continued under-performance is unacceptable.
“The turnaround of the investment is a key priority for our senior management team.
“The opportunity in the Chinese infant formula market remains, as does the potential for our Beingmate partnership – but an immediate business transformation is needed for Beingmate to benefit from the ongoing changes in the market.”
In December, Fonterra paid $183 million to Danone as a result of arbitration after the WPC80 precautionary recall botulism scare in 2013.
Wilson said the board will decide how the Beingmate impairment and the Danone payment will be treated for final dividend purposes after the end of the financial year when it will have the full picture of Fonterra’s operating performance.
Given the possible impact of those decisions, the board provided a forecast dividend range for the full-year of 25-35 cents a share rather than just the earnings per share guidance normally given.
“Based on our dividend policy, this forecast dividend range would allow for the board to add back the Beingmate impairment at the lower end through to an adjustment for both Beingmate and Danone as one-off events at the higher end.
“In the circumstances, we have taken a prudent approach in determining the 10 cent interim dividend.”
Chief executive Theo Spierings said the operating performance for the first half year was generally as expected.
“We knew going into this year we would have to carefully manage low starting inventory levels.
“This was followed by reduced New Zealand milk collections due to difficult weather conditions, further impacting our volumes available for sale.
“On top of this, we also had to navigate higher input costs which squeezed our margins.
“So, at the end of the first half, our total sales volumes are down 11% to 10.5 billion LME and normalised earnings before interest and tax 25% lower at $458m compared to $607m in the same period last year,” Spierings said.
“Despite this, overall sales revenue in the business was up 6% to $9.8b compared to the same period last year, mainly due to the improved global prices for dairy.
“While our reported net profit after tax shows a loss of $348m it includes the payment to Danone and the Beingmate impairment.
“As these are one-off events, our normalised net profit after tax of $248m is a better reflection of our underlying operating performance for the half year.”
Spierings said the ingredients team achieved a strong result with growth of 9% to $558m compared to $510m in the same period last year, despite lower sales volumes of 9.8 billion LME.
“The result benefited from higher stream returns in the first half – $90m compared to $40m for the same period last year.
“These additional stream returns were predominantly due to improved margins for non-reference products during this period.
In relation to Fonterra’s consumer and food service business, Spierings says the higher input costs mean margins were reduced by 15%, with strong competition in the co-operative’s strategic markets, especially in food service, limiting the short-term options to pass through the higher costs.
“Consumer and food service’s volumes were 2% lower compared to the same period last year.
“Our sales volumes in Asia, Latin America and Greater China improved but they were offset by lower volumes in Oceania, caused primarily by operational start-up challenges at our new distribution centre in Auckland, which is now operating as we’d expect.
“Overall, consumer and food service normalised EBIT was $193m compared to an exceptional $313m in the prior comparable period when input costs were considerably lower.”
Spierings said the co-operative’s China Farms strategy is beginning to bear fruit and the farms’ improved performance is reflected a normalised EBIT loss of $12m – half the $24m loss for the same period last year.
“This result is helped by the price the ingredients business pays China Farms for its milk, which is currently higher than the unsustainably low domestic milk price.
“This approach is producing better results by allowing the China Farms managers to focus on ongoing onfarm efficiencies and the ingredients managers to focus on getting the best price for our high-quality milk.
“The potential is strong as Chinese demand for high-quality local fresh milk continues to grow.
“In February this year, we launched a new premium Daily Fresh milk range alongside Alibaba’s Hema Fresh stores in Shanghai and Suzhou. This milk is sourced directly from our farm hub in Hebei province. While early days, the opportunity for scale and reach alongside Alibaba is huge.”
Spierings said while the Beingmate investment has underperformed, the co-operative’s integrated Greater China business is delivering positive results for shareholders and unitholders and continues to have high growth prospects.
“In our first half, China volumes accounted for 2.2b LME of our total 9.8b LME in ingredients with around 80% of this milk sourced in NZ. In our consumer and food service business, China volumes accounted for 600m LMEs of the total 2.7b LMEs sold over the first half, with consumer and food service in Greater China achieving normalised EBIT of $92m on volume growth of 3% compared to the same period last year.
“Clearly the outcome of re-assessing the value of our investment in Beingmate downwards is unacceptable to our shareholders and unitholders.
“The recovery of the value of this investment is the number one immediate priority for me and the senior management team.
“To be blunt, the investment in Beingmate has not gone the way we expected and there are things we would do differently knowing what we know now.
“We are very focused on doing all we can to get things where they need to be.
“As an 18.8% shareholder, we do not have direct control over the company but we are influencing its direction and continue to call for an urgent business transformation by working co-operatively with Beingmate’s founder and majority shareholder.
“We see there are a number of opportunities to reverse the current performance, unlock the distribution network and meet customers’ preferences for e-commerce.
“While this seems like a slow process and we’re not allowed to share all of the information about Beingmate’s business, we are working hard in the background to get ourselves in a position where there is a tangible action plan for transforming Beingmate that we can share more widely and monitor progress,” Spierings said.
A working group of the board – that includes independent directors Simon Israel and Clinton Dines, who both have significant China experience and expertise – is providing guidance and oversight as the senior management team works to recover the investment.
Fonterra expects its earnings to be weighted to the second half of the year.
Despite more favourable weather conditions recently, the co-operative still expects its NZ milk volumes to be down for the year and will be managing its inventory and product mix carefully for the remainder of the season to ensure it maximises the overall value of its farmers’ milk.
Spierings says a strong commitment to the V3 strategy of shifting more volume into higher value products at velocity is critical to the business achieving its forecast.
“We will continue to put as much milk as possible into higher value products, particularly into our advanced ingredients business and consumer and food service business where we are still targeting an additional 400m litres of volume this year.
“Our co-operative remains focused on delivering sustainable value for our farmers – that’s a sustainable farmgate milk price, dividend and return on their investment in the co-op as we provide high quality dairy nutrition to consumers around the world.”
