Rewards all round as Fonterra improves half-year profit by 23pc

Fonterra shaved $1.6 billion off its debt while its financing costs improved by $40 million in a financial half-year result that rewarded both farmer and unit shareholders of the dairy export leader.

New Zealand’s biggest business reported an interim dividend of 15c per share, up from 10c in the corresponding period last year, earnings per share of 40c and a return on capital of 13.4 per cent, up on last year’s 8.6 per cent.

Reported profit after tax lifted 23 per cent to $674m, while earnings before tax and interest from continuing operations was $986m, an increase of 14 per cent.

The farmer-owned cooperative, which offers listed dividend-carrying units to outside investors, maintained its full-year earnings range forecast of 50-65c per share. It narrowed its forecast farmgate milk price for the season to $7.50-$8.10 per kilogram of milk solids.

Chief executive Miles Hurrell said the result was underpinned by higher margins and sales volumes across the company’s diversified product and category mix.

Chief financial officer Simon Till said the earnings per share of 43c from continuing operations was driven by higher operating earnings and lower financing costs.the $122m increase in operating earnings reflected higher sales volumes overall “but importantly, higher sales volumes in food service and consumer channels”, he said.

Despite higher sales, overall revenue of $11.08b was down on the corresponding period’s $12.3b, due to lower returns for ingredients products.

Debt had been reduced from $5.8b to $4.2b, reflecting the strong underlying performance, lower working capital and the impact of divestments, Till said.

Debt was typically higher at interim result time due to the seasonal nature of Fonterra’s business.

“This year the earnings profile is more balanced with approximately half of the operating earnings from ingredients (sales), 35 per cent from food service and 15 per cent from consumer (product sales),” Till said.

A low point of the result was the performance of the Australian business, which reported a 70 per cent fall in profit after tax to NZ$21M. Ingredients and food service returns had been impacted by reduced demand, the company said.

Fonterra recently announced it was merging its Australian and New Zealand business.

Operating expenses increased by $52m, driven by higher volumes and margins through the food service and consumer businesses, as well as upfront costs from efficiency improvements, Till said.

The $40m improvement in finance costs reflected Fonterra’s lower average total borrowing, mainly due to higher earnings, improved working capital and divestments.

Softer global milk powder prices resulted in total group ingredients after-tax profit falling $229m to $334m.

This result comprised core operations after-tax profit of $81m, down $212m; global markets $209m (down $5m); and Greater China $44m (down $12m).

Food service after-tax profit was $259m up $169m. To this result, core operations contributed $23m, up $50m; global markets $56m (up $38m) and Greater China $180m (up $81m).

In the consumer channel business, after-tax profit was $121m, up $230m.

The total after-tax profit across all product channels was $714m, up $170m on the last interim result.

Core operations reported profit was down $154m to $102m, due to lower ingredients prices compared to last year. The company said this result had been partly offset by manufacturing efficiencies in New Zealand.

Hurrell said Fonterra expected pressure on food service and consumer margins in the second half of the financial year, due to the higher cost of milk it buys from farmers.

“We’re also expecting price relativities to return to more normal levels, which will affect our ingredients’ margins. This is reflected in our fullyear forecast earnings range of 50-65c per share.” — NZ Herald