Fonterra lifts earnings, set to contribute $12 billion to NZ economy

Fonterra has issued its latest earnings update. Photo / Northern Advocate

Fonterra has lifted its earnings for the first nine months of its financial year and has set its opening milk price forecast range for next season at $7.25 - $8.75 per kgMS, with a midpoint of $8 per kg.

A milk price at that level would contribute $12 billion to the New Zealand economy.

At the same time, Fonterra narrowed its 2020/21 forecast milk price range, which reduces the midpoint by 5 cents to $7.55 per kg.

Fonterra's normalised earnings before interest and tax were up 18 per cent to $959m, due to higher margins and reduced operating expenditure.

However, it cautioned that higher milk prices would put "significant pressure" on earnings in the last quarter due to the normal seasonal profile of the business, combined with tightening margins.

Chief executive Miles Hurrell said the improving global economic environment and strong demand for dairy, relative to supply, were behind the co-op's $8 midpoint of its 2021/22 milk price forecast.

"At this point, it would see the Co-op contributing more than $12 billion to the New Zealand economy next season," he said in a statement.

Listen to Jamie Mackay interview Miles Hurrell on The Country below:

For the nine months to April 30, Fonterra delivered a normalised net profit after tax of $587 million, up 61 per cent year-on-year, reflecting the co-op's improving underlying business performance and stronger balance sheet, he said.

Fonterra's net profit was $603m, up 2 per cent.

Fonterra maintained its normalised earnings guidance of 25-35 cents per share for the current year to July 31.

While year-to-date normalised earnings per share came to 34 cents, the co-op expects earnings in the fourth quarter to come under further pressure and is providing guidance that its full-year earnings are expected to be more towards the mid-point of the range.

Hurrell said global demand for dairy, especially New Zealand dairy, was continuing to grow and that he expected milk prices to remain elevated.

"China is leading the charge as its economy continues to recover strongly.

"Prompted by COVID-19, people are seeking the health benefits of milk and customers are wanting to secure their supply of New Zealand dairy products and ingredients," he said.

"Growth in global milk supply seems muted and the global supply of whole milk powder is looking constrained," he said.

"Based on these supply and demand dynamics, along with where the NZ dollar is sitting relative to the US dollar, we're expecting whole milk prices to remain at current levels for the near future," he said.

Fonterra had set a wide range for the season ahead, reflecting a number of risks.

"Some of the major risks include: Covid-19, which is far from over; the impacts of governments winding back their economic stimulus packages; foreign exchange volatility; changes in the supply and demand patterns that can enter dairy markets when prices are high; and as always, potential impacts of any geopolitical issues around the world."

Turning to its regions, Hurrell said Greater China continues to be an important performer, delivering year-to-date normalised EBIT of $457m, up 30 per cent or $106m, year-on-year.

Fonterra chief executive Miles Hurrell. Photo / NZ Herald

Foodservice, once again, was the big driver behind China's result, contributing $93m of the growth.

Asia Pacific's normalised EBIT came to $224m, down 10 per cent or $24m.
While consumer improved by 29 per cent and Foodservice by 89 per cent, this was offset by the ingredients sector which was impacted by pricing lags on sales contracts with customers, delaying Fonterra's ability to pass through the increase in input costs.

For AMENA - which covers Europe, the Middle East and Africa, North Asia and the Americas- Fonterra's normalised EBIT of $322m was down by 11 per cent or $40m, mainly due to lower ingredients sales volumes.

However, it said AMENA's consumer and food service continue to perform well, maintaining a year-on-year improvement in gross margins.

Hurrell said the Co-op's ongoing financial discipline is also a big part of its third-quarter performance story.

"Fonterra's operating expenses were down 5 per cent year-to-date but we are planning some additional expenditure in the final quarter to support our brands and product initiatives for next year.

Our debt reduction over the last couple of years and lower interest rates have reduced our interest bill by $69m for the nine months ending 30 April 2021."

Westpac senior agri economist Nathan Penny said Fonterra had surprised on two fronts.

"The first surprise was its bold opening salvo for next season's farmgate milk price forecast."

Traditionally, Fonterra starts low and lifts its forecast over the year as it tries to avoid overpaying farmers early in the season and the risk that it has to reduce its forecast later in the year.

Penny pointed out the forecast range is large at $1.50/kg. "However, from our point of view, the range is sensible given the price volatility that is inherent in global dairy markets."

The second surprise was an anticlimactic milk price forecast update for 2020/21, which took the mid-point down to $7.60/kg to $7.55/kg.