Fonterra CEO Miles Hurrell said 2019/20 was a good year for the coop, with profit up, debt down and a strong milk price.
“We increased our profit after tax by more than NZ$1bn (US$671m), reduced our debt by more than NZ$1bn and this has put us in a position to start paying dividends again,” he said.
“I’m proud of how farmers and employees have come together to deliver these strong results in a challenging environment. They have had to juggle the extra demands and stress of COVID-19 and have gone above and beyond. I would like to thank them for their hard work and support.
“This time last year we were announcing our new strategy and customer-led operating model. We were clear that to build a sustainable future we needed to focus on three interconnected goals – Healthy People, a Healthy Environment and a Healthy Business.
“We went on to deliver a strong performance for the first half. However, what none of us could have ever predicted was what then played out – a world facing COVID-19. The flow-on effects of the pandemic did impact our performance in the second half, particularly in our Consumer and Foodservice businesses.”
Hurrell said 2019/20 proved to be a year of two contrasting halves, but the coop delivered on all four of its priorities.
“We’ve supported regional New Zealand, contributing around NZ$11bn (US$7.38bn) into New Zealand’s rural economies through the milk price, and we’ve rethought our approach to community support, with the aim of helping out more where it’s needed the most – such as, growing the KickStart Breakfast programme alongside Sanitarium and the New Zealand Ministry of Social Development and partnering with the New Zealand Food Network to help get dairy nutrition to those that need it the most,” Hurrell said.
“We’ve built a great team through a focus on our culture, and we’ve seen that in action in how we’ve responded to COVID-19.”
He said Fonterra has continued to reduce its environmental footprint, including hitting the 2020 target to reduce energy intensity across its New Zealand manufacturing sites by 20%, from a 2003 baseline.
He said Fonterra has achieved its key financial targets with normalized earnings of 24 cents per share, a Total Group normalized gross profit of NZ$3.2bn (US$2.14bn), a NZ$181m (US$121.5m) reduction in capital expenditure and a NZ$1.1bn (US$738m) reduction in debt so the ratio of debt to EBITDA has now improved to be 3.4 times earnings, down from 4.4.
“The work we’ve done to strengthen our balance sheet has allowed us to focus on managing COVID-19. So far, demand for dairy has proved resilient and our diverse customer base and ability to change our product mix and move products between markets has meant we can continue to drive value.
“We’re at our best when we’re clear on what we need to do, why and how, and the whole Co-op is focused on it. When I look back on last year, it’s great to see how this clarity has helped us respond to challenges, adapt and deliver results.”
Business Performance
Total Group normalized EBIT was up on last year from a loss of NZ$17m (US$11.4m) to earnings of NZ$1.1bn. This includes gains from asset sales, and impairments and costs relating to the strategic review.
Once these are taken out, the Total Group normalized EBIT, which the cooperative uses to show its underlying business performance, was also up from NZ$812m (US$545m) to NZ$879m (US$590m), despite the financial impact of COVID-19 in many of its markets.
Hurrell said the main drivers of the underlying business performance was a strong normalized gross profit in the ingredients business and, although there was the disruption from COVID-19, the strong sales and gross margins from the Greater China foodservice business in the first half of the year.
Ingredients’ normalized EBIT improved from NZ$790m (US$530m) last year to NZ$827m (US$555m) this year, with normalized gross profit up NZ$165m (US$110.8m) to NZ$1.6bn (US$1.1bn).
Hurrell said that at the coop’s interim results, the normalized gross profit in ingredients was relatively steady.
“As we moved through the second half, we saw restaurants, cafes and bakeries close and intermittent spikes in supermarket sales, creating uncertainty across the global dairy market. This uncertainty resulted in softening milk prices, which helped improve the gross margin and gross profit in Ingredients.”
Greater China Foodservice’s normalized EBIT increased from NZ$114m (US$76.5m) last year to NZ$169m (US$113m) this year.
Hurrell said the business achieved strong year-on-year sales growth in the first half of the year but was then hit by COVID-19 when many food outlets were closed. Normalized gross profit started to quickly rebound in the third quarter – although he also pointed out it is still not at 100%.
“We have seen significant growth across the Anchor Food Professional product range in China. We have entered 50 new cities across China, taking our total to 350, and our products are now not only being used in Western style restaurants and bakeries but also those serving local cuisine.
“However, as per our guidance in our third quarter business update, our foodservice businesses across Asia, Oceania and Latin America were impacted by COVID-19 in the fourth quarter. All three markets reported losses in the second half.
“Despite this, normalized EBIT for foodservice overall was up 14% on last year to NZ$209m (US$140m), which is a result of the strong performance by the Greater China business in the first half.”
The consumer business’ normalized EBIT reduced to NZ$149m (US$100m) from NZ$227m (US$152m), mainly as a result of impairments of NZ$57m (US$38.3m) relating to the Chesdale brand and New Zealand Consumer business’ goodwill.
Normalized EBIT, excluding these impairments, of the consumer businesses in Oceania and Asia improved, despite COVID-19. However, due to civil unrest and market disruptions in Hong Kong and Chile, normalized EBIT, after excluding these impairments, of the consumer business declined 10%.
Hurrell said the Australian Consumer business performed strongly with sales continuing to increase thanks to its beverage, spreads and cheese products.
“Our New Zealand consumer business focused on improving customer service and keeping supermarket shelves well stocked, particularly as New Zealanders were stockpiling through COVID-19.
“Despite the better performance this year, due to the economic outlook post-COVID-19, our New Zealand Consumer business’s future cash-flow projections are lower than we estimated last year and, as a result, we have decided to write down its goodwill by NZ$21m (US$14.1m). It now has a total value in our accounts of NZ$699m (US$469m).”
Hurrell said, in addition to the improved earnings performance, Fonterra has followed through on its commitment to financial discipline and this has increased the financial strength of the coop.
“Our cash flow has improved and our debt has reduced by 19% or NZ$1.1bn compared to last year. Increased earnings, reduced capex, as well as the sale of DFE Pharma and foodspring for cash proceeds of NZ$623m (US$418m) in the first half of the year, have all contributed to this improvement.”
Fonterra announced a dividend for the 2020 Financial Year of 5 cents per share and final Farmgate Milk Price for the 2019/20 season of $7.14 per kgMS.
Fonterra chairman John Monaghan says for a 100% share backed farm, this gave them a final cash payout of $7.19 per kgMS.
“This year marks a return to paying dividends, a position we expect to maintain in the future, assuming normal operating conditions.
“At 5 cents per share, the dividend is at the lower end of the 5-7 cent range calculated under the Board’s dividend policy guidelines. In the context of so much uncertainty, as COVID-19 continues to impact our key markets and customer confidence, distributing a 5-cent dividend is a prudent decision and one that balances our aims of further reducing debt and distributing earnings.”
Fonterra has announced a 2020/21 earnings guidance range of 20-35 cents per share and has also reaffirmed its 2020/21 forecast Farmgate Milk Price range of $5.90-$6.90 per kgMS.
Monaghan says the impact of COVID-19 is still playing out globally.
“From a Milk Price perspective, the supply and demand picture remains finely balanced and for that reason we are maintaining our previous forecast range for this season. In terms of our earnings, we are forecasting a full year normalized earnings per share range of 20-35 cents per share.
“There continues to be significant uncertainties – including how the global recession and new waves of COVID-19 will impact demand globally, and what will happen to the price relativities between the products that determine our Milk Price and the rest of our product range.
“As a result of these uncertainties and given that financial year has just begun, we are giving a forecast earnings range wider than we usually would.
“We will be monitoring the situation throughout the season and as the year progresses, we would expect the earnings range to narrow.”
He added, “The best way of coping with uncertainty is to stay on strategy and focus on what is within our control – delivering for our farmers, unit holders and customers, and maintaining our financial discipline.
“We need to stay agile and draw on our strengths across the supply chain to manage and adapt to the changing global situation.”