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Fonterra 3Q2020 update: Dairy market volatile, outlook uncertain, earnings up


Fonterra Co-operative Group recorded $815 million normalised earnings before interest and tax (EBIT) for the nine months to 30 April. CEO Miles Hurrell said it was a $301 million increase on the corresponding period last year.

It also narrowed the range for its 2019/2020 forecast Farmgate Milk Price and announced an opening forecast Farmgate Milk Price range for the 2020/2021 season.

Hurrell said Fonterra was drawing on its global supply chain and diverse produce and customer base to minimise disruptions caused by COVID-19.

“This is a tough environment for everyone. 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,” he said.

“The work done over the last year to strengthen our balance sheet, and the Co-op’s ability to respond quickly has helped us manage the COVID-19 situation over the last few months. 

In FY2019 Fonterra announced a $605 million loss in what Hurrell called an “incredibly tough year”. It followed a three-point plan implemented in 2018 to “get the basics right” by improving cashflow, reducing debt and making significant cost savings (Food & Drink Business, 27/09/2019).

Third quarter summary snapshot
  • Total Group Earnings Before Interest and Tax (EBIT): $1.1 billion, up from $378 million
  • Total Group normalised EBIT: $815 million, up from $514 million
  • Total Group normalised gross margin: $2.5 billion, up from $2.2 billion
  • Normalised Total Group operating expenses: $1,665 million, down $148 million from $1,813 million
  • Free cash flow: $698 million, up $1.4 billion
  • Net debt: $5.7 billion, down from $7.4 billion
  • Normalised Ingredients EBIT: $668 million, up from $615 million
  • Normalised Foodservice EBIT: $208 million, up from $135 million
  • Normalised Consumer EBIT: $187 million, up from $128 million
  • Full year forecast underlying earnings: 15-25 cents per share
  • 2019/20 forecast Farmgate Milk Price range: $7.10 – $7.30 per kgMS
  • Opening 2020/21 forecast Farmgate Milk Price range: $5.40 – $6.90 per kgMS
  • 2020/21 Advance Rate Schedule has been set off the mid-point of $6.15 per kgMS

“As a New Zealand dairy co-op, exporting 95 per cent 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.”

Fonterra had already contracted a high percentage of the season’s milk supply before the pandemic took hold, which minimised its impact.

“Our Ingredients business delivered a normalised EBIT of $668 million in the nine months to 30 April. This is up nine per cent from $615 million on this time last year, mainly due to improved margins. 

Hurrell said all three of Fonterra’s business units delivered a good performance for the year to date, despite the negative impact COVID-19 had on the foodservice business in the third quarter.

Foodservice EBIT was up 54 per cent but was the business unit most affected by the virus.

Hurrell said: “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.

“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. Overall, Consumer EBIT was $187 million, up 46 per cent from $128 million on the same period last year. This was mainly due to cost savings across all regions and gross margin growth in Asia.”

Hurrell says the co-op has a strong balance sheet with good cashflow and is continuing to reduce debt.

It is on track to deliver on its gross margin target, with gross margin up $244 million on last year to $2.5 billion. It has also continued its focus on cost control and reduced Total Group operating expenses by $148 million on the same period last year, Hurrell said.

Free cash flow is $698 million, up by $1.4 billion on last year, and net debt has reduced by 23 per cent or $1.7 billion.

In talking about the remainder of the financial year, Mr Hurrell reaffirmed the FY20 forecast underlying earnings guidance of 15-25c per share.

“Based on the first nine month’s performance we would expect our full year underlying earnings to be at the top half of this range. However, there are significant uncertainties in the last quarter – for example, how quickly the foodservice sector recovers, timing of shipments, and how the broader economic downturn will impact our business,” he said.

Fonterra has narrowed its 2019/2020 forecast farmgate milk price range for the season to $7.10-$7.30 per kgMS, with a mid-point of $7.20 per kgMS.

Source: foodanddrinkbusiness.com.au


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