Fonterra reveals Beingmate share sale in financial report

By Jim Cornall

- Last updated on GMT

 Fonterra said it expects its earnings performance to come under significant pressure in the second half.
Fonterra said it expects its earnings performance to come under significant pressure in the second half.

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Fonterra Co-operative Group Limited has announced its 2021 interim results, which show a total group normalized EBIT of NZ$684m (US$494m), normalized profit after tax of NZ$418m (US$302m) and a decision to pay an interim dividend of 5 cents alongside a strong forecast Farmgate Milk Price.

The company also said it will sell its shares in Beingmate in China by the end of 2021, and sell its JV farms in China.

Fonterra CEO Miles Hurrell said Fonterra is pleased with its reported profit after tax of NZ$391m (US$282.5m), in spite of it being a drop of 22% compared with the same period the previous year.

“While down on this time last year at a headline level, the 2020 financial year benefited significantly from the divestments of DFE Pharma and foodspring,”​ Hurrell said.

“Despite the major impact COVID-19 is having around the world, the coop is staying focused on what it can control – looking after our people, making progress on our strategy to drive sustainable value for New Zealand milk and remaining committed to our 2021 priorities. Those priorities are: our cooperative, which is about being there for farmers and employees; performance, which is about hitting our financial targets; and community, which is about exceeding customer expectations, supporting communities through our nutrition programs and making New Zealand’s low carbon farming model a powerful point of differentiation.”

From a performance perspective, Hurrell says the coop has had a great first six months of the 2021 financial year with total group normalized EBIT up NZ$100m (US$72m) to NZ$684m, a total group normalized gross margin of 17.4% (up from 16%) and total group normalized operating expenditure down NZ$37m (US$26.7m).

“Our standout performer continues to be Greater China. The team has delivered a 38% increase in normalized EBIT to NZ$339m (US$245m), reflecting the strength of our foodservice business in this region, improvements in our consumer business and China’s strong economic recovery following the initial impact of COVID-19,”​ Hurrell said.

The numbers:

Reported Profit After Tax $391m, down 22%

Normalized Profit After Tax: $418m, up 43%

Total Group Normalized Earnings Before Interest and Tax (EBIT): $684m, up 17%

Total Group EBIT: $657m, down 18%

Net debt: $5.6bn, down 3%

Total Group normalized Gross Profit: $1.722bn, up 3%

Total Group normalized Gross Margin: 17.4%, up from 16%

Total Group normalized Operating expenditure: $1.055bn, down 3%

Normalized Greater China EBIT: $339m, up 38%

Normalized Asia Pacific EBIT: $190m, up 9%

Normalized Africa, Middle East, Europe, North Asia, Americas EBIT: $201m, down 7%

Full year forecast normalized earnings per share: 25-35 cents per share

Interim dividend: 5 cents per share

Forecast Farmgate Milk Price: $7.30-$7.90 per kgMS

Forecast milk collections: 1.525bn kgMS, up 0.5%

(All figures in New Zealand dollars)

He said Asia Pacific’s normalized EBIT is up 9% to NZ$190m (US$137m) as a result of improvements in foodservice and consumer. Consumer has benefitted from more people staying at home and cooking with dairy and a renewed focus on our brands of Anchor, Anmum and Anlene.

“AMENA’s normalized EBIT is down 7% because of lower sales volumes in Ingredients as we made the most of our ability to move milk into higher returning markets and products. However, we did see some good improvements in foodservice and consumer across AMENA.”

Regarding global supply chain challenges, Hurrell said Fonterra is proactively managing the situation and working with its ocean freight partnership Kotahi to keep product moving.

“Our sales book is well contracted – however, as a result of some small shipping delays, our product inventory is higher than it was this time last year and this means our investment in working capital is also higher. By the end of the financial year we expect this to be back to more normal levels as we have confidence in our supply chain to get product, already contracted, delivered to our customers.

“There’s still more work to do, but our improved performance and reduced debt levels are helping us build the financial strength of the coop and we’re on track to achieve our target debt/EBITDA ratio of less than 3.5 this year.  The Board wanted to be in a position to continue paying dividends. It is encouraging to have got the coop’s earnings and debt to a level that supports a 5 cent dividend at this point in the year.”

As part of Fonterra’s continuous review of its asset portfolio, Fonterra said it has decided to undertake a sales process for the JV farms in China.

Hurrell said as with Fonterra’s own China farms, the decision to sell the JV farms is in line with the coop’s strategy to focus on New Zealand milk.

“We expect the sales of our farms to be completed this financial year and the sale of the JV farms to be completed this calendar year.”

Fonterra has also continued to reduce its shareholding in Beingmate, which on January 31, 2021 was sitting at 3.94 % and is now 2.82%.

Hurrell said Fonterra will continue to sell down its remaining shareholding and expects to have fully exited this investment before the end of this financial year.

“As shown through our results today, Greater China continues to be one of our most important strategic markets. We remain committed to growing the value of our Greater China business, which we’ll do by bringing the goodness of New Zealand milk to Chinese customers in innovative ways and partnering with local Chinese companies to do so.”

Hurrell said at the same time as driving financial performance, the coop needs to be there for farmers, employees and customers, contribute to local communities and reduce its environmental footprint.

On the second half of the financial year, Hurrell reaffirmed the forecast Farmgate Milk Price range of NZ$7.30-NZ$7.90 (US$5.27-US$5.71) per kgMS and forecast normalized earnings guidance of 25-35 cents per share.

He said despite a strong first half, Fonterra expects its earnings performance to come under significant pressure in the second half.

“The increasing raw milk prices through the first half and now into the second half puts a lot of pressure on our sales margins and this will be seen through the second half of the year.  We will face into this challenge in the same way we are with others – that’s focusing on what’s in our control and staying on strategy.”

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