By Bernard Hickey
Fonterra has announced it made a NZ$736 million net profit for the 2012/13 financial year, up 18% on the previous year because of NZ$109 million of benefits from tax credits and lower interest costs.
Pre-tax earnings fell 3% to NZ$1 billion because of problems in Fonterra's Australian arm, which is being restructured, and a spike in milk powder prices in the second half of the year because of New Zealand's drought, which reduced production 2%.
Fonterra also set the final total payout for the just completed season at NZ$6.16/kg for fully shared up farmers, including a NZ$5.84/kg milk price and a 32c/share dividend. This was up from Fonterra's May forecast for a NZ$6.12/kg total payout, including a NZ$5.80/kg milk price and a 32c/share dividend, but down 4% on the 2011/12 payout.
Yesterday Fonterra forecast a total payout for the current 2013/14 season of NZ$8.62/kg, including a NZ$8.30/kg payout and a 32c dividend. Fonterra is currently forecasting total production for the current year of around 1.536 billion kgs, which implies given the current forecast a rise in farmer payouts in the current season of over NZ$4 billion to NZ$13.2 billion.
“2013 was a year that tested our resilience. After a superb first six months for both production and performance, our farmer shareholders endured a drought which in some regions was the worst in nearly 70 years," Chairman John Wilson said.
New Zealand milk production fell 9% in the second half of the year and ended down 2% at 1.463 billion kgs for the year.
Wilson said Fonterra had used its balance sheet, which has a debt to debt plus equity ratio of 39.6%, to support farmers with a relatively high advance payout. However, this meant operating cash flows fell 28% from a year ago. He cited Fonterra's move to end redemption risk by creating a market for farmers to trade shares and for outside investors to buy units in the Fonterra Shareholders Fund.
Australian problems
Fonterra Chief Executive Theo Spierings said the combined impact of the drought and a restructure of Fonterra's Australian business had combined to reduce Fonterra's earnings before interest and tax (EBIT) by 3% to NZ$1 billion. EBIT had however been strong in Asia, Africa, the Middle East and in Fonterra's Soprole business in Chile.
"However, this was offset by a weaker second half from NZ Milk Products and a 37% decline in normalised EBIT in Australia and New Zealand (ANZ) as we make changes to our Australian business," Spierings said.
He said the drought caused a 64% spike in Wholemilk Powder prices from January 2 to April 16.
"This, in turn, had a significant impact on the cost of milk purchased by NZ Milk Products, and meant the high returns achieved in the first half as a result of price premiums, product mix, cost savings and productivity gains were eroded in the second half," he said.
“Although the New Zealand consumer business grew its earnings in a tough trading environment, Australia faced heightened competition for lower milk volumes, and continuing margin squeeze for consumer brands. We expect the significant reshaping of our Australian operations, which is going to plan, will turn performance around. The business has already achieved a 7 per cent reduction in operating expenses of A$49 million (after excluding the impact of the closure of the Cororooke site and Brand impairments).”
Net finance costs fell NZ$41 million because of gains from fixed interest rate hedging and lower funding costs. Fonterra said it also received a NZ$68 million tax credit "due to the revaluation of deferred tax balances and recognition of New Zealand tax losses."
Earnings per share rose 7% to 44c/share, while on a 'normalised' basis they rose 9% to 47c per share.
Botulism recall
Fonterra again defended its decision to recall whey powder after an initial finding it may cause botulism. Subsequent tests showed the powder did not contain the bacteria that causes botulism.
“The subsequent all clear following further tests was a relief, but did not alter our view that the recall was the correct course of action at the time. Fonterra cannot, and will not, take risks with food safety and the health of consumers,” Wilson said.
An operational review of the incident had been completed and Fonterra's board is also undertaking its own independent inquiry, while the government is also doing its own Joint Ministerial Inquiry.
Investment and earnings outlook
Spierings said Fonterra had invested NZ$925 million in building production, manufacturing and supply chain systems to process New Zealand milk, develop farms in China farms, as well as starting to build a NZ$144 million new cheese and dairy ingredients plant in partnership with A-ware Food Group in the Netherlands.
Fonterra warned late yesterday earnings in the current 2013/14 year would be hit by a rise in the milk price.
"The higher cost of goods will make it more difficult to drive earnings growth in Fonterra’s consumer and foodservice businesses in the first half of this financial year. The Co-operative also expects to see a negative impact on product mix returns during the first half of the current year as milk powder prices significantly outpace the relative prices of cheese and casein," Fonterra said.
It added however that prospects for the second half looked more positive for Fonterra’s consumer businesses, but remained uncertain for NZ Milk Products.
Fonterra forecast an unchanged dividend for 2013/14 of 32c/share. Units in the Fonterra Shareholders Fund listed on the NZX fell 1.8% or 13c to NZ$6.94 in morning trade, implying a gross dividend yield of 4.6%.
"Fonterra can draw upon its balance sheet and cash flow performance to support the estimated dividend," it said.
Fonterra added it expected the current "extreme price volatility on product mix" would reverse, but that the impact was likely to be short term.
Here is Fonterra's comments on the performance of its divisions:
NZ Milk Products
NZ Milk Products had a mixed year, resulting in a 1 per cent decline in normalised earnings to $494 million. Although total sales volumes were 1 per cent higher, revenue declined 7 per cent to $13.9 billion for the year. At the half year, milk collection was up 6 per cent compared to the same period last season. Excellent spring and early summer growing conditions across most of the country led to robust growth in New Zealand dairy production.
In the second half of the season, milk collection was down 9 per cent as the drought led to poor pasture conditions across New Zealand. In the second half, unprecedented volatility caused by the extreme drought had a negative influence on earnings. The drought contributed to a spike in Whole Milk Powder (WMP), up 64 per cent from 2 January to 16 April peak price. This had a significant impact on the cost of milk purchased by NZ Milk Products, which was offset to some extent by a positive contribution from price achievement, global sourcing and tighter cost control.
Australia New Zealand (ANZ)
The integrated ANZ business experienced another difficult year with a 37 per cent decline in normalised earnings to $142 million. Total sales volumes for Australia and New Zealand were 9 per cent lower than last year. Normalisation adjustments relate to $30 million in costs associated with the planned closure of the Cororooke site in Australia, and $19 million in costs associated with restructuring. Revenue declined 13 per cent to $3.7 billion. Fonterra Brands NZ volumes (excluding the impact of RD1) were 5 per cent ahead of last year, but volume in our consumer brands business in Australia was lower, driven primarily by the loss of a large private label contract which offset the volume growth in butter and spreads.
The reshaping of the Australian business is progressing. Our strategy includes streamlining our brands, expanding our high value nutritionals output to capitalise on the growing demand for these dairy products in emerging markets and ensuring our manufacturing facilities are aligned to our best market demand prospects. The significant reshaping of the Australian operations has already resulted in a 7 per cent reduction in operating expenses of $49 million after excluding the impact of Cororooke and brand impairments.
Asia/ Africa Middle East (AME) - including China
Asia/AME is now Fonterra’ largest consumer business by normalised EBIT. The business achieved a 15 per cent increase in normalised earnings to $209 million. On a constant currency basis, normalised EBIT was up 22 per cent compared to last year due to the Asia/AME basket of currencies weakening against the NZD.
Sales volumes increased by 11 per cent, driven primarily by new operations in China Farms, strong growth in foodservice across all markets, and growth in Everyday Nutrition in Indonesia and Malaysia. This was supported by distribution expansion of advanced nutrition in Vietnam and geographic development in China foodservice. Revenue grew 3 per cent to $2 billion.
Everyday nutrition, advanced nutrition and foodservice are key platforms for growth in terms of Fonterra’s Group strategy. Across South East Asia, the Middle East and North Africa, all three platforms delivered growth in EBIT with everyday nutrition up 21 per cent, advanced nutrition up 6 per cent and foodservice up 45 per cent.
Normalised EBIT for Greater China was up 20 per cent on last year with a strong result from China foodservice, Hong Kong and our businesses in Taiwan. This was partially offset by a lower contribution from China Brands, as a result of increased investment to grow market share and roll out Anlene into new cities. On a constant currency basis normalised EBIT for Greater China was up 21 per cent compared to last year.
Latin America (LATAM)
LATAM’s normalised earnings increased 4 per cent to $137 million. Sales volumes increased 6 per cent, and revenue was up 12 per cent to $1.1 billion. Soprole, our largest operation in Latin America, performed well with strong growth in its consumer business. Normalised EBIT of $109 million was up 31 per cent compared to last year driven by volume increases, product innovation and improved pricing in the yoghurt and dairy dessert categories. On a constant currency basis normalised EBIT was also up 31 per cent as the currency was relatively stable.
Normalised EBIT in Dairy Partners Americas (DPA) was 46 per cent lower at $25 million driven mainly by lower earnings in DPA manufacturing as a result of last year’s $19 million benefit arising from the review of manufacturing cost recovery arrangements. In addition, EBIT in DPA was negatively impacted by currency movements.
(Updated with more detail, background, updated chart)
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