Fonterra Co-operative Group released its 1H20 results this week, cutting its interim dividend due to COVID-19. The group's financial performance has improved but uncertainty around the virus's impact on 2H20 drove the board's decision not to pay the dividend.
Chair John Monaghan said the board will reassess at the end of FY20.
CEO Miles Hurrell said underlying earnings were “tracking well” but there was “no doubt” there were a number of risks outside of the company's control, particularly COVID-19 and its potential impact on global demand. Geopolitical issues in Hong Kong and Chile and climate changes could have an impact.
“We are 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.”
Interim Results Summary (in NZ$)
- Total group normalised Earnings Before Interest and Tax (EBIT): $584 million, up from $312 million
- Total group EBIT: $806 million, up from $312 million
- Normalised Net Profit After Tax: $293 million, up from $72 million
- Reported Net Profit After Tax: $501 million, up from $72 million
- Free cash flow: $369 million, up from $(782) million
- Net debt: $5.8 billion, down from $7.4 billion
- Normalised Ingredients EBIT: $441 million, down from $464 million
- Normalised Foodservice EBIT: $147 million, up from $61 million
- Normalised Consumer EBIT: $116 million, up from $67 million
- Full year forecast normalised earnings: 15-25 cents per share
- Decision not to pay an interim dividend
- Forecast Farmgate Milk Price: $7.00-$7.60 per kgMS
- Forecast milk collections: 1,515 million kgMS
The dairy giant has been in restructuring mode since last year when it plunged to a net loss of NZ$605 million largely due to asset writedowns of NZ$826 million.
Over the first half, it has reduced operating expenditure by NZ$140 million on the same period last year.
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.
“We continue to reduce our debt. We completed the sale of DFE Pharma and foodspring in the first half of the year with cash proceeds of $624 million and this has helped reduce net debt by 22 per cent or $1.6 billion, compared to this time last year.
“Our strategy and the importance we place on financial discipline means we are continuously reviewing our asset portfolio. We’ve completed strategic reviews on China Farms and DPA Brazil, and sales processes for both assets are well under way.
“Through these sale processes and strategic reviews, we have gained additional information and further insights and, as a result, we have revised down the valuation of China Farms and DPA Brazil by a total of $134 million.
“We have also reduced the value of our China Farming joint venture by $65 million and we continue to look for opportunities to improve the ongoing performance of the business.
“Our teams continue to carefully manage costs and we’ve reduced our operating expenditure by $140 million on the same period last year. At the same time, we are not cutting costs in areas that are aligned to our strategy and will deliver additional long-term value from our farmer owners’ milk.”
“Our underlying earnings are tracking well at the half year, but there is no doubt that we have a number of risks that are outside our control in the second half – in particular, the potential impact of COVID-19 on global demand, geo-political risks in key markets such as Hong Kong and Chile, and ongoing dry weather conditions here in New Zealand which could impact collections and potentially input costs. As a result, we have held our forecast earnings range at 15-25 cents per share.”
Fonterra was #1 on Food & Drink Business's Australia's Top 100 Food & Drink Companies 2019 report.