New Zealand dairy co-op Fonterra says its half-year profit after tax has risen by 50% to NZ$546m, and is returning $800m to shareholders from the sale of overseas assets.
The co-op upgraded its full-year forecast normalised earnings from 50-70 cents per share to 55-75 cents per share and announced a proposed tax-free capital return to farmer owners and unit holders of around 50 cents per share, subject to completion of the sale of its Chilean Soprole business.
“Our co-op’s scale and diversification across channels and markets has enabled us to navigate through disruption and make the most of favourable market conditions in a number of areas,” said CEO Miles Hurrell.
“Our improved earnings and strong balance sheet have enabled us to pay an interim dividend of 10 cents per share which is positive news for our farmer owners and unit holders. We also expect to be able to pay a strong full year dividend, in addition to our proposed capital return.
“The outlook for high quality sustainable New Zealand dairy remains positive. We have a clear strategy and are well-positioned to take advantage of this demand.”
He added: “This lift in earnings is thanks to our co-op’s scale and ability to move our farmer owners’ milk into products and markets where we’re seeing favourable prices.
“With whole milk powder prices down, we moved more milk into skim milk powder and cream products to optimise our Farmgate Milk Price.
“We also made the most of favourable margins in our cheese and protein portfolios, by moving a higher proportion of current season milk into these products which has benefited our earnings.”
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Hurrell warned that the co-op’s domestic consumer business, Fonterra Brands New Zealand (FBNZ), has been under margin pressure and is not improving as fast as planned. Its Asia consumer brands have also been struggling, with some markets in the region suffering from weakening currency, higher interest rates and a declining economic environment.
This has prompted Fonterra to write down the valuation of FBNZ by $92m and its Asia consumer brands Anlene, Chesdale and Anmum by $70m.
“As a result of market conditions and the impact of impairments, our overall consumer channel normalised EBIT is down $177m to a loss of $94m,” said Hurrell.
But the co-op’s Group Operations arm – which represents the business activities that collect and process New Zealand milk through to selling the products to our customer-facing regional business units, Global Markets and Greater China – saw normalised EBIT rise $412mto $501m, due to higher Ingredient prices.
“We continue to exercise financial discipline with a focus on delivering returns, while managing higher costs and ongoing market disruption,” said Hurrell.
“Since year end we have improved our net debt and working capital position through improved earnings and clearing the higher year-end inventory.
“Severe storms and flooding across the North Island in January and February temporarily delayed some product getting onto ships. We remain focussed on inventory management, which seasonally peaks through February and March. ”
Fonterra is also looking to return round 50 cents per share and unit – around $800m – to shareholders from the sale of its Chilean Soprole business to Gloria Foods.
It hopes to deliver the money to shareholders in October; the move is subject to a shareholder vote and High Court approval.
“The sale of Soprole remains subject to satisfaction of conditions previously announced, including commencement of an irrevocable public tender offer process in Chile for the outstanding shares in Soprole not already owned by Fonterra,” said Hurrell.
Fonterra has been selling underperforming overseas assets after a period of global expansion increased its debts and failed to deliver the hoped-for profits. But, as previously announced, it has decided to retain full ownership of Fonterra Australia, another business which had been under review.
