Fonterra back in black, signals sale of European joint venture

Fonterrra chief executive Miles Hurrell. Photo / NZ Herald

Fonterra has gone back into the black with a net profit after tax of $80 million in the first half, and has signalled the sale of its half share in a European joint venture it has with FrieslandCampina.

The co-op said its normalised earnings before interest and tax (EBIT) were down 29 per cent on the same period last year to $323m.

At the previous interim result, the co-op reported a net loss of $348m.

Fonterra said it was on track to reduce its debt by $800m by the year's end.

In an update on its strategic review, Fonterra identified a third asset that it has up for sale - its investment in DFE Pharma - a 50/50 joint venture established in 2006 between Fonterra and FrieslandCampina.

DFE Pharma is one of the largest suppliers of pharmaceutical excipients, which are used as a carrier agent in medicines such as tablets and powder inhalers.

Miles Hurrell, chief executive officer at Fonterra, said the firm had let FrieslandCampina know that it has started a sales process for its half share.

He said Fonterra had received strong interest in Tip Top and was actively considering its options for its 18.8 per cent shareholding in China's Beingmate.

"We are well on track to meet our target to reduce end-of-year debt by $800 million," Hurrell said.

Fonterra has sold its interest in its Venezuelan consumer joint venture Corporacion Inlaca to Mirona, an international food business, for $16m.

The decision to sell Inlaca is the result of ongoing instability in Venezuela, which had led to "challenging" operating conditions, he said.

"The economic situation in Venezuela is not expected to improve in the foreseeable future, so we have made the decision to act now to minimise the impact on Fonterra," Hurrell said.

Fonterra said the steady performance from New Zealand Ingredients in the first half had been offset by challenges in Australia Ingredients, which had seen its total Ingredients EBIT decline by 17 per cent to $461m.

"Our Australia Ingredients business continues to feel the impact of the drought. We can see it in the decline of Australian milk collections and aggressive price competition for milk, which is resulting in the under-utilisation of manufacturing assets and tightening margins," Hurrell said.

Fonterra's consumer and foodservice was tracking behind last year with an EBIT of $134m.

Hurrell said this part of the business had been held back by disruptive political and economic conditions as well as high input costs in Latin America.

"In addition, in our China Foodservice business, demand slowed due to higher prices and in-market inventory levels growing for butter at the end of FY18," he said.

Fonterra has forecast Farmgate Milk Price of $6.30-$6.60 per kgMS and an earnings guidance range of 15-25 cents per share for the year to July 31.

The range had built in an expectation of a slightly softer second half for its ingredients business, but a "meaningful" increase in consumer and foodservice earnings.

Fonterra chairman John Monaghan said the co-op was undergoing fundamental change.

"We are taking a hard look at our end-to-end business, where we can win in the world and the products where we have a real competitive advantage," he said.

Monaghan said the co-operative's strategy would focus on sustainability and provenance throughout the value chain.