Fonterra’s bid to get back to basics
Fonterra expects to announce a third leg to its plans to get the co-op back to basics by the middle of next year, chief executive Miles Hurrell said.
The dairy giant confirmed yesterday it was looking at offloading its Tip Top icecream business and it planned to go to full ownership of its plant at Darnum, in Victoria, which is currently 51 per cent owned by its China associate Beingmate.
Fonterra’s 18.8 per cent stake in Beingmate is also under review.
“The third one we have not yet announced publicly — we are still working through that — and by midyear we should be in more of a position to give an update,” Hurrell told the Herald.
As expected, the company cut its farmgate milk price forecast for 2018/19 to $6.00 to $6.30 kg of milk solids from a previous range of $6.25 to $6.50/kg. It kept its forecast earnings per share of 25 to 35 cents a share for the full year.
First-quarter revenue came to $3.8 billion, down 4 per cent, but Hurrell said the quarter was not a good indication of how the year was likely to pan out. Gross margins improved to 17 per cent from 16.6 per cent.
The co-op wants to reduce its gearing ratio to 40 to 45 per cent after the ratio blew out to 48.4 per cent, following on from the writedown of its investment in Beingmate and the payment of a legal settlement to French food group Danone, in order to retain its credit “A-” credit rating from S&P Global.
The co-op is seeking to reduce debt by $800 million through improved earnings, lower capital expenditure and asset sales.
Hurrell said he was comfortable with the co-operative’s financial performance to date and with the review of its portfolio.
“If you look at the gross margin numbers — they are in line with expectations — and the first quarter always reflects a slow start to the year anyway,” Hurrell said. “We are comfortable with how we are tracking. We got our plans under way in terms of the portfolio review and in getting back to basics for our organisation. And we are in good shape.”
In China, Fonterra had taken over distribution of Anmum from Beingmate and sales of the formula were up 43 per cent against this time last year. Fonterra’s preference was to keep Tip Top in New Zealand ownership.
“We would like to see it remain in New Zealand. We have not determined whether or not we would retain a stake, or what the sale process would look like,” Hurrell said.
Fonterra’s chief financial officer Marc Rivers said the co-op was attaching “a high level of importance” in retaining its credit rating and getting the ratio back to within 40 to 45 per cent.
“In order to get there it means delivering on our EPS target — and we are on track for that — and being really tight on capex,” he said. “That will get us closer to that range, but to be well within the range — the $800 million will be key to that.”
Chairman John Monaghan said the revision in the milk price was due to the global milk supply remaining stronger relative to demand, which has driven a downward trend on the GlobalDairyTrade index since May.
Rabobank dairy analyst Emma Higgins said a change in the weather would alter the supply/demand dynamic. “Should New Zealand’s production come back, we would expect the market to move quite quickly in the other direction,” she said.