Friday, July 1, 2022

Fonterra’s Q3 delivers despite disruption

Fonterra is bringing the 2022 season to a close with good financial results despite dealing with multiple disruptive events across multiple markets.

Announcing the third-quarter results, chief executive Miles Hurrell held the farm gate milk price forecast at $9.30/kg mid-point and maintained group earnings guidance at 25c to 35c a share.

Fonterra’s increasingly volatile business environment included further covid-19 impacts, financial markets and foreign exchange volatility, a tightening labour market, increasing interest rates, geopolitical events and the possible impact on demand from higher dairy prices.

Sales volume was down 4% to just under three million tonnes, but revenue was up 10% to $17 billion because of higher product prices.

Hurrell expects these strong pricing relativities to continue in the fourth quarter (May to July) and therefore the earnings guidance to remain.

In the past high milk prices have impacted added-value margins and therefore Fonterra has not been profitable, but this year is different.

Just how different was illustrated by the alarming numbers from the historical $500m Sri Lankan market, where political unrest and bad policies have bankrupted the country and devalued the SL rupee by 70% against the US dollar since March.

Fonterra’s products are sold to Sri Lanka in US dollars, so the local business subsidiary has taken an $81m devaluation hit on payables.

Hurrell said Fonterra’s financial discipline has put it in a good position to manage the impacts of these recent events.   

“With over 95% of our milk contracted for the season, our strong balance sheet gives us the ability to hold higher inventory to manage the short-term impacts on demand and our sales profile. 

“Our working capital, and therefore debt, is higher than usual at this point in the season but we expect this to balance out over the course of the year.”

In the results normalised net profit after tax was down 20% to $472m and earnings per share down 18% to 28c.

Therefore, Fonterra has already booked most of the earnings guidance it is forecasting for the full financial year and is not expecting fourth-quarter trading to add significantly.

Submissions from the company and the co-operative council are being made to government policy makers to introduce flexible shareholding into the capital structure.

On the sharemarket, supply share prices are down 35% over the past year to sit at $2.25.

Fonterra Shareholders Fund investment units have fallen $1 in the past year, including 50c in the past month.

Capital restructuring is weighing heavily on the markets for shares and units despite the company having a strong balance sheet and producing good financial results.

“We are continuing our ownership review of our Australian business and the divestment process for our Chilean business, Soprole, is underway. 

“We are taking our time to ensure the best outcomes for both businesses and remain confident on delivering on our intention to return around $1b of capital to our shareholders and unit holders by FY24,” Hurrell said.

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