Covid-19's impact on Fonterra's third-quarter performance

Fonterra says it is set to contribute about $11 billion to the New Zealand economy through milk price for the year, despite the impact of Covid-19.

Yesterday the co-op announced its third-quarter business update and reported a sharp lift in earnings for the first nine months of its financial year.

Fonterra's total group normalised earnings before interest and tax (EBIT) for the nine months to April 30 was $815 million, an increase of $301m on this time last year.

Chief Financial Officer for Fonterra, Marc Rivers, told The Country Early Edition's Rowena Duncum that the co-op's work in the past had helped it prepare for Covid-19 challenges.

"The work we've done over the last year to strengthen our balance sheets and the co-op's ability to respond quickly has really helped us manage the Covid-19 situation over the last few months" said Rivers.

"We're drawing on our global supply chain, we've got a diverse product and customer base which really helps us to minimise any disruptions for our customers and our business".

While Fonterra's Foodservice EBIT was the most affected by Covid-19, due to markets being closed by the lockdown, it still managed a 54 per cent rise from $135 million to $208 million, said Rivers.

"Certainly [the lockdown] impacted our sales in the third quarter but we had a strong first half".

Fonterra also narrowed the range for its 2019/2020 forecast Farmgate Milk Price, and announced an opening forecast Farmgate Milk Price range for the 2020/2021 season.

The forecast for the current season was at the lower end of a previously advised range, at $7.10-$7.30 per kg of milksolids.

"Just to put that in perspective that means that the co-op is contributing $11 billion directly into the New Zealand economy through the milk price for this year - so that's pretty significant" said Rivers.

Fonterra's milk price for the 2020/21 season was $5.40-$6.90 per kg of milksolids, which was a "wider range" due to the uncertainty caused by Covid-19, said Rivers.

Fonterra's third-quarter summary

• Total Group Earnings Before Interest and Tax (EBIT): $1.1 billion, up from $378 million
• Total Group normalised EBIT: $815 million, up from $514 million
• Total Group normalised gross margin: $2.5 billion, up from $2.2 billion
• Normalised Total Group operating expenses: $1,665 million, down $148 million from $1,813 million
• Free cash flow: $698 million, up $1.4 billion
• Net debt: $5.7 billion, down from $7.4 billion
• Normalised Ingredients EBIT: $668 million, up from $615 million
• Normalised Foodservice EBIT: $208 million, up from $135 million
• Normalised Consumer EBIT: $187 million, up from $128 million
• Full year forecast underlying earnings: 15-25 cents per share
• 2019/20 forecast Farmgate Milk Price range: $7.10 - $7.30 per kgMS
• Opening 2020/21 forecast Farmgate Milk Price range: $5.40 - $6.90 per kgMS
• 2020/21 Advance Rate Schedule has been set off the mid-point of $6.15 per kgMS