Fonterra is strengthening its balance sheet and reducing its debt, posting earnings of $815 million for the third quarter.
This was up from $514m in the same quarter the previous year while net debt for the nine months was down from $7.4b to $5.7b.
Fonterra chief executive Miles Hurrell says the co-operative has done well to manage the COVID-19 situation over the last few months.
“We’re drawing on our global supply chain and diverse product and customer base to minimise disruptions for our customers and our business.
“COVID-19 has affected virtually every country, market and industry, and as a result, the global dairy market is volatile and the outlook is uncertain. This is a tough environment for everyone.
“As a New Zealand dairy co-op, exporting 95% of our products, many of the markets we do business in have always been prone to sudden shocks and this can impact where, when and what we sell. However, the global nature of COVID-19 is like nothing we’ve experienced before.
“Like other businesses, we will feel the impact of COVID-19 and its flow-on effects but how and to what extent is still uncertain. We are drawing on all our experience in managing market volatility,” Hurrell says.
The diary giant’s foodservice earnings of $208m (up 54%) were most affected by COVID-19 with restaurants, bakeries and cafes in many of its markets closed due to lockdowns and restrictions.
“In China, the foodservice sector started its recovery relatively quickly, although it is still not at 100%. We saw our sales in China fall in February, but they bounced back to more normal levels in March and this continued in April. We are now seeing the impact of COVID-19 across our foodservice businesses in Oceania, South East Asia and Latin America. We expect this impact to also show up in our fourth quarter results,” Hurrell says.
“While the consumer business benefited from a spike in sales as people stockpiled and bought food to cook at home, this was not sustained through the COVID-19 lockdowns. Overall, Consumer EBIT was $187 million, up 46% from $128 million on the same period last year. This was mainly due to cost savings across all regions and gross margin growth in Asia.”
Fonterra has narrowed its 2019/2020 forecast Farmgate Milk Price range for the season to $7.10 – $7.30 per kgMS, with a mid-point of $7.20 per kgMS.
This will see the co-op contribute about $11b to the New Zealand economy through milk price for the year.
Chairman John Monaghan says the forecast is in response to a softening of demand relative to supply which is pushing prices down.
“One of the main drivers of the softening demand is that many foodservice businesses remain closed. On the supply side, the EU and the US have just been through the peak of their season and that milk is flowing into export markets and increasing competition for sales. As a result, prices are softening across the board.
“This supply and demand imbalance has impacted GlobalDairyTrade (GDT) prices for the products that determine our Farmgate Milk Price. In US dollar terms, GDT prices for Whole Milk Powder are down 17% since late January.
“Looking out to next season, a global recession will continue to reduce consumers’ purchasing power,” Monaghan says.
Third quarter summary
- Total Group Earnings Before Interest and Tax (EBIT): $1.1 billion, up from $378 million.
- Total Group normalised EBIT: $815 million, up from $514 million.
- Total Group normalised gross margin: $2.5 billion, up from $2.2 billion.
- Normalised Total Group operating expenses: $1,665 million, down $148 million from $1,813 million
- Free cash flow: $698 million, up $1.4 billion
- Net debt: $5.7 billion, down from $7.4 billion
- Normalised Ingredients EBIT: $668 million, up from $615 million
- Normalised Foodservice EBIT: $208 million, up from $135 million
- Normalised Consumer EBIT: $187 million, up from $128 million
- Full year forecast underlying earnings: 15-25 cents per share
- 2019/20 forecast Farmgate Milk Price range: $7.10 – $7.30 per kgMS
- Opening 2020/21 forecast Farmgate Milk Price range: $5.40 – $6.90 per kgMS
- 2020/21 Advance Rate Schedule has been set off the mid-point of $6.15 per kgMS
