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.
Barron says the co-op has made good progress on its strategy to cut costs and reduce debt.
Farmers are also happy with Fonterra reaffirming its forecast farm gate price of $7 to $7.60/kgMS in its interim result announcement last week.
Barron notes that the forecast payout is the highest since 2014, when Fonterra paid out a record $8.40/kgMS.
“It’s a great time to be supplying healthy and nutritious products to the world,” he says.
He also backed the board’s decision not to declare an interim dividend due to uncertainty over coronavirus.
“It’s a prudent measure and farmers support the move: it takes into account the uncertainty times we are facing.”
Fonterra, last week, announced normalised earnings before tax of $584 million, up from $312m the previous year. Net profit rose to $501m, up from $72m last year. Net debt was reduced from $7.4 billion last year to $5.8 billion.
Fonterra chief executive Miles Hurrell says the co-op has delivered this through stable underlying earnings from Ingredients business, improving gross margins in Foodservice and reducing operating expenses.
“Our Foodservice business has definitely been our stand-out performer in the first half as we’ve grown our sales to bakeries and coffee and tea houses across Greater China and Asia.”
The co-op is continuing its strategy of reducing debt by selling non-core assets. The sale of DFE Pharma and Foodspring brought in $624 million.
Hurrell says this helped reduce net debt by 22% or $1.6 billion.
He says the co-op has built on the work done in 2019 and has continued to reset its business, introducing a new strategy, reorganising and resizing its teams so there is greater focus on customers, and at the same time, significantly lifting its financial performance.
“We are now a very different co-op to this time last year – we’re prioritising New Zealand milk and staying focused on what we know we’re good at and what makes a difference to our farmer owners, unit holders, employees and communities.
“While there’s no doubt the world is experiencing an almost unprecedented situation and response to COVID-19, I’m pleased with the progress we’ve made so far against our four priorities for 2020.
“These are to hit our financial targets, reduce our environmental footprint, build a great team, and support regional New Zealand. By achieving these, we will take strides towards our long-term goals of Healthy People, Healthy Environment and Healthy Business.”
Fonterra’s key financial targets for 2020 are to meet its earnings guidance of 15-25 cents per share, achieve a gross margin in excess of $3 billion, reduce debt so it is no more than 3.75x its earnings and ensure capital expenditure is no more than $500 million.
Hurrell is pleased with the progress and momentum Fonterra has achieved in the first six months of the financial year, but cautions that Fonterra is now operating in a very different global context as a result of COVID-19.
