Fonterra CEO Miles Hurrell said despite the challenges of coronavirus, the cooperative’s total group normalized Earnings Before Interest and Tax (EBIT) for the nine months to April 30, is NZ$815m (US$498.5m), an increase of NZ$301m (US$184m) on this time last year.
“The work done over the last year to strengthen our balance sheet, and the coop’s ability to respond quickly has helped us manage the COVID-19 situation over the last few months. We’re drawing on our global supply chain and diverse product and customer base to minimize disruptions for our customers and our business,” Hurrell said.
“COVID-19 has affected virtually every country, market and industry, and as a result, the global dairy market is volatile and the outlook is uncertain. This is a tough environment for everyone. As a New Zealand dairy coop, exporting 95% of our products, many of the markets we do business in have always been prone to sudden shocks and this can impact where, when and what we sell.
“However, the global nature of COVID-19 is like nothing we’ve experienced before. Like other businesses, we will feel the impact of COVID-19 and its flow-on effects but how and to what extent is still uncertain. We are drawing on all our experience in managing market volatility.”
Hurrell says all three of Fonterra’s business units have delivered a good performance for the year to date, despite the negative impact COVID-19 had on the foodservice business in the third quarter.
“As we said at half-year, when the COVID-19 pandemic took hold, we had already contracted a high percentage of this season’s milk supply and this has helped minimize the impact of COVID-19 to date.
“Overall Foodservice EBIT for the year is NZ$208m (US$127m), up 54% – however, it was the part of our business that was most affected by COVID-19. Restaurants, bakeries and cafes in many of our markets were closed as a result of government enforced lockdowns and restrictions. This impacted our sales in the third quarter.
“In China, the foodservice sector started its recovery relatively quickly, although it is still not at 100%. We saw our sales in China fall in February, but they bounced back to more normal levels in March and this continued in April. We are now seeing the impact of COVID-19 across our foodservice businesses in Oceania, South East Asia and Latin America. We expect this impact to also show up in our fourth quarter results.”
Hurrell said while the consumer business benefited from a spike in sales as people stockpiled and bought food to cook at home, this was not sustained through the COVID-19 lockdowns.
Hurrell says the coop has a strong balance sheet with good cashflow and is continuing to reduce debt.
Fonterra said it is on track to deliver on its gross margin target, with gross margin up NZ$244m (US$149m) on last year to NZ$2.5bn (US$1.53bn). It has also continued its focus on cost control and reduced total group operating expenses by NZ$148m (US$90.5m) on the same period last year.
Hurrell reaffirmed the FY20 forecast underlying earnings guidance of 15-25c per share.
Fonterra also narrowed its 2019/2020 forecast Farmgate Milk Price range for the season to NZ$7.10-NZ$7.30 (US$4.34-US$4.46) per kgMS.
Chairman John Monaghan says the coop narrowed its price range and reduced the mid-point of the range in response to a softening of demand relative to supply which is pushing down prices.
“One of the main drivers of the softening demand is that many foodservice businesses remain closed. On the supply side, the EU and the US have just been through the peak of their season and that milk is flowing into export markets and increasing competition for sales. As a result, prices are softening across the board,” Monaghan said.
“This supply and demand imbalance has impacted GlobalDairyTrade (GDT) prices for the products that determine our Farmgate Milk Price. In US dollar terms, GDT prices for Whole Milk Powder are down 17% since late January.”
Monaghan said that, looking out to next season, a global recession will continue to reduce consumers’ purchasing power.
“It is not clear what impact government interventions in the EU and US will have on curbing their milk supply, however, we expect our competitors there to put more of their milk into the product types that determine our Milk Price, as they chase government support programs and favor longer-life products,” he added.
“COVID-19 adds significant uncertainty into the process of forecasting what will happen with global dairy prices over the next 15 months.
“For that reason, we are setting the opening 2020/21 forecast Farmgate Milk Price range at NZ$5.40-NZ$6.90 (US$3.30-US$4.22) per kgMS. The wider range reflects the increased uncertainty we face in the coming season.”
Hurrell said in response to the coronavirus crisis, the cooperative is making an additional 2m liters of ethanol available to help with the supply of hand sanitizer in New Zealand; redirecting Anchor milk from the in-school nutrition program, Fonterra Milk for Schools, into communities throughout New Zealand as schools were closed; and making improvements to farmers’ payments to get money to them faster.