Fonterra profits up 65%

By Jim Cornall

- Last updated on GMT

Fonterra has published its 2015/16 financial report, revealing profits after tax of $604m
Fonterra has published its 2015/16 financial report, revealing profits after tax of $604m

Related tags Milk price Milk

New Zealand’s Fonterra Co-operative Group has announced a 65% increase in net profit after tax to NZ$834m ($604m) for the financial year ended July 31, 2016.

The cooperative is paying a cash payout of NZ$4.30 ($3.11) for the 2016 season for a 100% share-backed farmer, comprising a Farmgate Milk Price of $3.90 ($2.82) per kgMS and a dividend of 40 cents per share, on a total available for payout of NZ$4.41 ($3.19).

The company has already increased its 2016/17 forecast Farmgate Milk Price by 50 cents to NZ$5.25 ($3.84) per kgMS. 

When combined with the forecast earnings per share range for the 2017 financial year of 50 to 60 cents, the total payout available to farmers in the current season is forecast to be NZ$5.75 to NZ$5.85 ($4.16-$4.24) before retentions.

Chairman John Wilson said that the 2015/16 season had been incredibly difficult for farmers, with global dairy prices at unsustainable levels.

He stated that the company is moving more milk into higher-returning consumer and foodservice products.

Wilson said farmers’ decisions to reduce stocking rates and supplementary feeding to help lower costs resulted in milk collection across New Zealand for the 2015/16 season declining to 1.566bn kgMS, down 3% on the previous season.

Strong volume and value growth

Chief executive Theo Spierings said more volumes of milk sold at higher value is at the heart of Fonterra’s strategy.

“All of this effort, combined with higher earnings and margins meant our measure of return on capital has increased from 8.9% to 12.4%.”

Other figures

In the annual review, Fonterra says that its total ingredients gross margin rose 19% to NZ$1.86bn ($1.35bn). The company made 9% more higher-value products such as cheese and casein and there were lower volumes of products such as milk powders, which were down 7%.

Normalized EBIT was up 39%.

Fonterra says that Greater China delivered strong results, with volume growth of 48% in consumer and foodservice. The consumer and foodservice division in Australia and New Zealand saw EBIT increase from NZ$46m ($33m) to NZ$97m ($70m).

Future outlook

Wilson said over the higher forecast earnings per share range reflects the performance improvements the business will continue making.

“It is still early in the season, and we expect continuing volatility as reflected in price improvements in recent GDT auctions,”​ Wilson said.

“Current global milk prices remain at unrealistically low levels, but as the signs in the market improve, we are very strongly positioned to build on a good result in the year to come.”

Commission report published

The news comes shortly after the New Zealand Commerce Commission released its final report on its review of Fonterra’s 2015/16 base milk price calculation.

The Commission said, after considering submissions on the draft report released in August, that Fonterra’s calculation of the 2015/16 base milk price is largely consistent with both the efficiency and contestability purposes of Dairy Industry Restructuring Act (DIRA).

Deputy Chair Sue Begg said that the conclusion changed from the draft report because the Commission was not able to conclude on the practical feasibility of the asset beta, which is a key input to the weighted average cost of capital in the milk price calculation.

The Commission said it appreciated Fonterra’s continued efforts to provide more transparency of information about how it calculates the milk price and the ongoing efforts from interested parties to improve the milk price monitoring regime.

Fonterra’s 104-page 2015/16 financial report can be found here​.

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