Fonterra is reporting a net profit after tax of NZ$80 million for its interim results.
It’s a return to profit for the co-operative after its first ever net loss after tax last year of $196m.
However, normalised earnings before interest and tax (EBIT) is down 29% on the same period last year to $323 million.
Fonterra chief executive Miles Hurrell says it’s good to see the company back in the black but is disappointed earnings performance is not where it should be.
As a result, the full year earnings guidance has been revised down 15 to 25 cents per share in February.
“The steady performance from New Zealand ingredients in the first half of FY19 has been offset by challenges in Australia ingredients and this has seen our total ingredients EBIT decline by 17% to $461 million.
“Our Australia ingredients business continues to feel the impact of the drought. We can see it in the decline of Australian milk collections and aggressive price competition for milk, which is resulting in the underutilisation of manufacturing assets and tightening margins.
“Consumer and foodservice is tracking behind last year with an EBIT of $134 million. This part of the business has been held back by disruptive political and economic conditions as well as high input costs in Latin America. In addition, in our China Foodservice business, demand slowed due to higher prices and in-market inventory levels growing for butter at the end of FY18. In Sri Lanka, our performance was impacted by price constraints.”
Hurrell says the focus ahead is to meet the earnings guidance and reset the business so it can deliver sustainable earnings.
“We have a forecast farmgate milk price of $6.30-$6.60 per kgMS but we also have to meet our earnings guidance range of 15 to 25 cents per share. This range builds in an expectation of a slightly softer second half for our ingredients business, but a meaningful increase in consumer and foodservice earnings,” Hurrell says.
“Our forecast increase in our consumer and foodservice performance is based on a few key factors. It needs a strong improvement in our foodservice business in greater China, stronger consumer demand for Soprole in Chile and chilled dairy in Brazil, and an improvement in our Sri Lankan business.
“Our three-point plan involves taking stock of our business and conducting a portfolio review, getting the basics right and improving our forecasting. We’ve made good progress so far and we will continue to take these steps in the second half to firm up our foundations and strengthen our balance sheet.
“The second half will also see us continuing the work on developing a new strategy to support a much-needed change in direction. We are doing the right things but it’s clear more is needed to lift our performance. We need to simplify and improve the Co-op so we can grow value,” Hurrell says.
Fonterra has identified DFE Pharma as a third asset in its portfolio review, a 50/50 joint venture established in 2006 between Fonterra and FrieslandCampina.
DFE Pharma is one of the largest suppliers of pharmaceutical excipients which are used as a carrier agent in medicines such as tablets and powder inhalers.
Hurrell says Fonterra has let FrieslandCampina know that it has started a sales process for a 50% share of DFE Pharma.
The co-op has also received strong interest in Tip Top and is actively considering its options for its shareholding in Beingmate.
Fonterra has sold its interest in its Venezuelan consumer joint venture, Corporacion Inlaca, to Mirona, an international food business. Fonterra received $16m cash for the sale.
“The decision to sell Inlaca is the result of ongoing instability in Venezuela which has led to challenging operating conditions.
“The economic situation in Venezuela is not expected to improve in the foreseeable future, so we have made the decision to act now to minimise the impact on Fonterra,” Hurrell says.
