Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
As Fonterra exports 95% of its products it must remain strong to take on global challenges, he said, while announcing the co-op’s half-year results in Auckland last week.
Revenue for the six months ending January 31, 2017 was higher at $9.2 billion and normalised EBIT was over $600 million with net profit after tax of $418m.
The results were consistent and in line with the co-op’s strategy, Spierings says.
On a global scale, dairy’s future remains strong as a demand-led industry, he says. Despite the recent slip in global dairy prices, overall the future remains very strong.
“However, geopolitical concerns remain because of some new leaders and statements being made here and there,” he says. “As we export 95% of our dairy products we have to understand what’s happening out there.”
Spierings notes that Fonterra has no influence on geopolitical events and cannot change them. However, it can influence value creation within the co-op with its strategy.
“But also important next to value creation is net profit and the strength of the balance sheet; we are in an extremely good position to go forward.
“A lot is going to happen in the global context, a lot is going to change, but a strong performance and a strong balance sheet are crucial now.”
Fonterra’s total volume of milk processed during the six months fell by 7% to 11.7b liquid milk equivalents (LME, quantity of milk used in processed dairy product). The co-op attributes this to lower opening inventory and a cooler spring which affected milk production in New Zealand.
Despite lower milk volumes, revenue rose 5% to $9.2b because of higher milk prices. Operating expenses dropped 6%.
Spierings expressed pride in the co-op’s efforts to reduce operating costs, which “went down again by 6%, so year-on-year over the last four years we have seen a stronger company but with lower operating expenses.”
Fonterra also shaved off $800m from its net debt, dropping 11% to $6.1b at the end of half year.
The ingredients business suffered an 11% drop in profit margins; higher milk prices affected margins.
Its consumer and food service business was the star performer: volumes rose to 2.7b LME, gross margin rose 30% and normalised earnings before tax reached $313m.
Spierings says the first half result shows Fonterra’s strategy of moving more volume into higher value products is working.
“Our ingredients business maintained good margins. We made the most of our manufacturing capacity and the flexibility it provides to match production to demand and secure the best returns for farmers’ milk.
“By the end of the first half we shifted an additional 227m LME into higher value products in our consumer and foodservice business, contributing to a 30% increase in normalised EBIT. We are well on track to achieve our target of an additional 400m LME into higher value products by year end.
“This shows us doing what we said we would, continue delivering value even in a volatile environment,” says Spierings.
Result Highlights
- Revenue $9.2 billion, up 5%
- Normalised EBIT $607 million, down 9%
- Net profit after tax (NPAT) $418m, up 2%
- Revised forecast earnings per share 45-55 cents
- Interim dividend of 20 cents per share, to be paid in April
- Forecast payout $6.45 - $6.55
- Ingredients normalised EBIT $510m, down 17%
- Consumer and foodservice normalised EBIT $313m, up 30%
- Moved an additional 227million LME of milk into consumer and foodservice products.
