Wednesday, May 22, 2024

Early runs on board for Fonterra

Avatar photo
Fonterra’s first-quarter results for the 2020 financial year show its strategy reset and operational changes have begun to deliver more consistent outcomes, it says.
Reading Time: 2 minutes

In the Q1 announcements it held the full-year earnings guidance of 15c to 25c a share and added 25c to the forecast farmgate milk price, now in a narrower range of $7-$7.60/kg milksolids.

If delivered at the $7.30 mid-point, on which the advance price schedule is now based, it will be the fourth-best milk price from Fonterra.

Milk-supplying farmers will earn $11.2 billion for their 1530m kilos of milksolids in the full season, an increase of $382m on the previous forecast.

Responding to media scepticism that both earnings and a high milk price can be delivered together, chief executive Miles Hurrell conceded earnings are under pressure.

“We are going to have to work hard to achieve the gross margin and offset the milk cost increases in our value-add products, from which the earnings are generated,” he said.

“But at this stage we are comfortable with the earnings guidance, which is unchanged.”

Hurrell said there is not a lot to report on possible asset sales, now concentrated on finding buyers for China Farms, the Brazilian operations and selling down Beingmate shares.

Chief financial officer Marc Rivers said the intention is to deliver those asset sales in this financial year and the proceeds of the previously announced sales of Foodspring and DSFE Pharma will contribute well to the FY20 bottom line.

Fonterra shed a further 200 jobs during the first quarter and reduced operating expenditure by $104 million.

The Q1 numbers included a normalised earnings before interest and tax (EBIT) of $171m, up $145m, and a reported Ebit of $259m, up $233m compared with Q1 2019.

However, those Q1 2019 figures were dismal so the big increases in the comparatives are not especially meaningful.

Rivers characterised the results as a little better than those of previous first quarters, when Fonterra was trading profitably.

Fonterra ingredients lifted Ebit by $32m to $139m, validating the new emphasis on New Zealand milk in the strategy.

Hurrell said the key targets for 2020 include a gross margin of $3b, reduction in capital expenditure by $100m to $500m and divestment of more assets to bring debt down to 3.75 times Ebit.

The underlying performance improved in Q1, delivering a gross margin on $740m, up from $646m.

Improved free cash flow to reduce debt and pay interest and dividends was $595m better than last year.

Hurrell reported some progress in Australia, including record market share in the chilled spreads category and some improvement in ingredients performance from a more profitable product mix and reduced expenses.

He said the NZ Fonterra Brands business is showing early signs of a turnaround.

China food service continues to deliver higher sales volumes and gross margins.

“We have entered a further 24 cities, taking the total to 327, successfully marketed our Anchor range for use in local cuisines and continued to see strong growth in Chinese bakeries and beverages.”

Worldwide, the supply-demand balance has tipped slightly in favour of demand, which had generated a 6% rise in GDT prices since the previous forecast and the highest whole milk powder prices for three years.

“At this stage of the year we have contracted a good proportion of our sales book and that gives us the confidence to increase the mid-point of our forecast milk price range by 25c,” chairman John Monaghan said.

The updated NZ milk forecast is for 1530m kg, up 0.5% on 2018-19, and European and American milk supplies are growing at rates under 1%.

Total
0
Shares
People are also reading