Dairy co-operative Fonterra has improved 'normalised' profit by 43% and paid a dividend of 5c but says the second half of the year will be affected by the rising costs of dairy products

Giant dairy co-operative Fonterra has reported a 43% rise in 'normalised' after-tax profits for the six months to the end of January and will pay an interim dividend of 5c a share.

But while the first half of the year has been good, Fonterra's warning that the second six months of this year will be affected by rising costs of raw materials due to the increasing global dairy prices.

Fonterra's forecasting for the whole year earnings per share of between 25c and 35c and on a 'normalised' basis it actually made 25c per share - suggesting modest profitability in the second half, if at all.

These are the highlights as presented by Fonterra for the first half:

Summary of numbers
• Reported Profit After Tax $391 million, down 22%*
• Normalised Profit After Tax: $418 million, up 43%#
• Total Group normalised Earnings Before Interest and Tax (EBIT): $684 million, up 17%#
• Total Group EBIT: $657 million, down 18%
• Net debt: $5.6 billion, down 3%
• Total Group normalised Gross Profit: $1,722 million, up 3%
• Total Group normalised Gross Margin: 17.4%, up from 16%
• Total Group normalised Operating expenditure: $1,055 million, down 3%
• Normalised Greater China EBIT: $339 million, up 38%
• Normalised Asia Pacific EBIT: $190 million, up 9%
• Normalised Africa, Middle East, Europe, North Asia, Americas (AMENA) EBIT: $201 million, down 7%
• Full year forecast normalised 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: 1,525 million kgMS, up 0.5%

* 2020 included the gain from the divestments of DFE Pharma and foodspring®.
# These normalised numbers reflect the underlying performance of the business.

Chief executive Miles Hurrell said the co-operative "has had a positive first half", resulting in a normalised earnings before interest and tax of $684 million, normalised profit after tax of $418 million and a 'reported' profit after tax of $391 million.

While the reported profit was down on the same time a year ago, the 2020 results included one-offs from the divestments of DFE Pharma and foodspring®.

And the divestments are continuing. Fonterra previously said it was putting its wholly owned farms in China up for sale - and now it is putting its joint venture China farms on the block as well.

Hurrell says as with Fonterra’s own China farms, the decision to sell the JV farms is in line with the Co-op’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 31 January 2021 was sitting at 3.94 % and is now 2.82%. Another $50 million loss was recorded on this investment during the first half.

In talking about the second half of the financial year, Hurrell reaffirmed Fonterra's recently issued forecast Farmgate Milk Price range of $7.30 - $7.90 per kgMS and forecast normalised earnings guidance of 25-35 cents per share.

“Fortunately, we are in a position, where so far, New Zealand dairy is proving to be resilient in a Covid-19 world. It’s a staple in people’s diets around the world and demand is strong.

“Despite a strong first half, we are expecting our earnings performance to come under significant pressure in the second half.

“The strong milk price is great for farmers. It’s good for New Zealand too – with a mid-point of $7.60 per kgMS, it would see us contribute more than $11.5 billion to the New Zealand economy.

“However, 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.”

Global dairy prices dipped at the latest auction early on Wednesday, but most of the gains from the previous stellar auction two weeks ago were retained.

See dairy payout history and economists' price predictions.