Tuesday, 29 March 2016 11:55

Ingredients, added value and lower costs lift profits

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Fonterra is converting more milk into higher-returning consumer and foodservice products. Fonterra is converting more milk into higher-returning consumer and foodservice products.

Fonterra earnings and profit are well up for the first half of this financial year.

Fonterra chief executive Theo Spierings says this is based on efficiency, sales, value added to products and financial discipline.

The co-op has announced normalised earnings before interest and tax (EBIT) of $665 million, up 77% on the comparable period and net profit after tax of $409 million up 123%.

Spierings says the cooperative's strong performance reflected a sustained effort in three main areas.

"We focused on the efficiency of our ingredients business and capturing demand for ingredients in a wide range of markets," he says. "We aimed to make the most of global consumption growth by building demand for higher-value products in our consumer and foodservice markets."

Spierings says working capital improved significantly, and inventory levels are lower than in recent periods for this time of year. They are down 9% in volume due to strong sales.

Free cashflow for the six months to January 31, 2016 was $2.1 billion higher than the first half last year, with gearing at 49% down from 51% in the previous year.

"We maintained strict financial discipline to keep lifting our return on capital; and our strong cash flow has enabled us to strengthen the cooperative and reduce gearing," says Spierings.

The ingredients business achieved normalised EBIT of $617 million, up 27% on the first half last year. This resulted from improved product mix returns, and the increased production and cost efficiencies from investments in plant capacity in New Zealand.

"In consumer and foodservice we have delivered very good growth, with normalised EBIT increasing 108% to $241 million," Spierings says.

"We remain focused on growing demand, especially in the eight markets where we currently hold or want to gain leadership or a very strong position: NZ, Australia, Sri Lanka, Malaysia, Chile, China, Indonesia and Brazil. These are well established markets for Fonterra, so we are working off a strong base.

"The additional 235 million litres of milk we converted into higher-returning consumer and foodservice products in this six month period built on the additional 600m L last year."

Spierings says Fonterra's farms in China are a key part of its integrated dairy business.

"We are achieving operational efficiencies on the farms which are helping offset the current low domestic milk price in China."

Current global economic conditions remain challenging and are impacting dairy demand and prices.

Chairman John Wilson says the supply and demand imbalance in the globally traded dairy market has brought prices down to unsustainable levels for farmers around the world, and particularly in New Zealand.

The strong NZ dollar has also had a negative impact on the milk price.

"The low prices have placed a great deal of pressure on incomes, farm budgets and our farming families.

"Our priority is to generate more value out of every drop of our farmers' milk by focusing on the areas within our control," says Wilson.

"We aim to efficiently convert as much milk as possible into the highest-returning products.

"Our management is aware of the need for strong performance to ensure we get every possible cent back into farmers' hands during a very tough year.

"We have lifted profitability from last season to this season, resulting in higher earnings per share to help offset low global dairy prices. As a result, we have delivered an interim dividend of 20c/share, up from an interim dividend for last year of 10c/share.

"Our forecast farmgate milk price of $3.90/kgMS reflects low global dairy prices, with whole milk powder decreasing around 17% this season to date."

The forecast total available for payout of $4.35-$4.45/kgMS currently equates to a forecast cash payout of $4.30/kgMS after retentions for a fully shared-up farmer.

"The balance between available dairy exports and imports has been unfavourable for 18 months following European production increasing more than expected and lower imports into China and Russia," says Wilson. "This imbalance is likely to continue in the short term, with prices expected to lift later this calendar year.

"The long term fundamentals for global dairy are positive with demand expected to increase by 2-3% a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics."

Wilson says the cooperative's solid performance was set to continue.

"The business will continue to work on capturing demand and margins in the second half of the year, just as it did in the first half, by focusing on our consumer and foodservice volumes and those of specialty ingredients.

"We remain firmly on track to achieve our forecast earnings of 45-55c/share, ahead of the 40-50c/share we indicated at the commencement of the season.

"Our net debt is $6.9 billion and we are expecting this to reduce significantly in the second half of the year. We are on track to reduce gearing to 40-45% by the end of the current financial year."

The record date for the interim dividend is April 8, and the payment date is April 20.

The cooperative will continue to offer a dividend reinvestment plan, at a discount of 2.5% to the strike price. Eligible shareholders who want to participate for the interim dividend need to submit a notice of participation by April 11.

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