Fonterra profit up 65% to $834m

The cooperative is paying a cash payout of $4.30 for the 2016 season for a 100% share-backed farmer, comprising a farmgate milk price of $3.90/kgMS and a dividend of 40 cents per share, on a total available for payout of $4.41.

Chairman John Wilson says the 2015/16 season had been incredibly difficult for farmers, their families and rural communities, with global dairy prices at unsustainable levels.

“Our cooperative has responded,” he says.
“We continued with the significant and necessary changes we began in the business over three years ago to support our strategy and its priorities, and worked hard to return every possible cent of value back to our farmers.

“Our business strategy is serving us well. We are moving more milk into higher-returning consumer and foodservice products while securing sustainable ingredients margins over the GlobalDairyTrade benchmarks, especially through speciality ingredients and service offerings.

“Through increased earnings and continuing financial discipline we have increased the return on capital and strengthened our balance sheet by significantly reducing debt.

“We have done what we can to support our farmers with the cooperative Support Loan, and early payment of dividends.
“After a period of deliberate and disciplined attention to the business, we have become a stronger cooperative operationally, financially and in our mindset with a clear sense of direction and a structure which will support real momentum in our strategy going forward,” says Wilson.

Wilson says farmers’ decisions to reduce stocking rates and supplementary feeding to help lower costs resulted in milk collection across New Zealand for the 2015/16 season declining to 1,566 million kgMS, down 3% on the previous season.

Strong volume and value growth
Chief executive Theo Spierings says more volumes of milk sold at higher value is at the heart of Fonterra’s strategy.

“For our farmers, the promise is that we will make the most of their milk. We’re keeping that promise,” he says.
“We’ve seen the real strength of our ingredients business this year,” says Spierings.

“The money our farmers have invested in stainless steel is giving us more choice, and we have matched production to the highest value customer demand. In a difficult market, we increased ingredients normalised EBIT this year by 24% to $1,204 million.

“In consumer and foodservice, we converted an additional 380 million litres of liquid milk equivalents (LME) into higher returning products, bringing our total volumes in this business up from 4.5 billion LME to 4.9 billion. Increasing our consumer and foodservice volumes, and especially our foodservice growth, meant we increased our normalised EBIT in this business by 42 per cent to $580 million.

“Our results show that we continue to do what we said we would do right across the co-op. We are single-minded about transforming our business to get the best results. We have cut our operating expenses, increased our free cash flow, reduced our working capital days, driven debt down, and reduced our capex and our gearing.

“All of this effort, combined with higher earnings and margins meant our measure of return on capital has increased from 8.9% to 12.4%.

“Our results show how our strategy is creating value for our shareholders. We are driving more volume into higher value products, and we are achieving results with increasing efficiency. We will continue to build on this strong platform to keep improving and delivering results to our farmers.

“At the same time, we have kept our promise to share great dairy nutrition with our communities through Fonterra Milk for Schools, and through our Grass Roots Fund and Living Water partnership, we are looking after local communities and the environment.

“We can only do all of this with the support and commitment of our farmers, investors and employees. Throughout the year we have challenged our people to adapt how we work to better manage the shifts in the global market. It has been a real team effort and I want to thank all of our people in New Zealand and around the world,” says Spierings.

With a forecast farmgate milk price of $5.25/kgMS, the forecast total payout available to farmers in the 2016/17 season is $5.75 to $5.85 before retentions. This includes a forecast earnings per share range of 50 to 60 cents.
Wilson says over the past three years the cooperative had worked hard to align its structure to its strategy with a focus on achieving more value for the volumes of milk produced by its farmers.

“The higher forecast earnings per share range reflects the performance improvements the business will continue making,” he says.

“It is still early in the season, and we expect continuing volatility as reflected in price improvements in recent GDT auctions.

“Current global milk prices remain at unrealistically low levels, but as the signs in the market improve, we are very strongly positioned to build on a good result in the year to come.”

Highlights
• Sales volume increased 4% to 23.7 billion Liquid Milk Equivalents (LME)
• Revenue $17.2 billion, down 9%
• Normalised EBIT $1.4 billion, up 39%
• Net profit after tax $834 million, up 65%
• Return on capital 12.4%, up from 8.9%
• Ingredients inventories down 25%
• Gearing ratio reduced to 44.3% from 49.7%
• Debt reduced by $1.6 billion to $5.5 billion
• Earnings per share 51 cents
• Cash Payout $4.30
- Farmgate Milk Price $3.90 per kgMS
- Dividend of 40 cents per share