Fonterra enjoyed a 17 per cent lift in its operating earnings over the first half but chief executive Miles Hurrell says high milk prices will make for a challenging second half.
The co-op has forecast a $7.60/kg milk price for the season, which will represent a higher input cost for the group.
"This is not new to us. We have been here before," Hurrell told the Herald.
"While it puts pressure on the earnings side of the business, it is good for farmers," he said.
"We need to look through that, but the team is under no illusions around what is required," he said.
Fonterra enjoyed strong margins in the first half but the second half might be a different story.
However, the co-op has stuck with its 25 to 35 cents earnings per share range for the full year.
"In no way do we see it (earnings) falling below guidance at this point," Hurrell said.
In its result, Fonterra said a "standout performance" from its Greater China business helped drive its normalised operating profit for the six months to January up by 17 per cent to $684 million.
The former loss-making dairy giant embarked on a "reset" programme in 2019 to try and reverse its fortunes, with the aim of reaching earnings per share of 50 cents by 2024.
Jarden's head of research Arie Dekker said it was a good result, the highlight being foodservice in Greater China, but he still sees the co-op as being a work in progress.
"I think that they have turned it around but I would not describe them as being on the home straight in terms of their aspirations of getting things to where they were," he said.
"They have halted the value-destroying course that they were on. They have stabilised earnings but I don't think they are on the home straight."
In slides accompanying the result, revenue was evenly spread between the co-op's three geographical segments, with Asia Pacific contributing $3.4 billion, Africa, Middle East, Europe, North Asia, Americas (Amena) $3.1b and Greater China $3.06b.
The co-op declared a dividend - 5 cents - after opting not to pay one in the previous interim period.
Fonterra, which has its capital structure under review, said there would be no dividend reinvestment plan.
The co-op's "reported" net profit came to $391m, down 22 per cent, with the prior period number being inflated by asset sales.
After being "normalised" the figure came in at $418m, up 43 per cent.
Chief financial officer Marc Rivers said global supply chain issues had resulted in "higher levels of inventory than we would like".
Inventory is expected to return to normal by the end of the financial year.
In 2019, Fonterra embarked on a programme of asset sales, debt reduction and a focus on the provenance of New Zealand milk.
Hurrell said "we are well and truly on track with the implementation of that strategy".
Hurrell said he expects its investment in Brazil's DPA will be sold this year as well as its joint venture farms in China.
The ill-fated holding in China's Beingmate is now under three per cent, down from its initial holding of just over 18 per cent.
The co-op's net debt came to $5.6 billion, down 3 per cent.
Hurrell said the co-op has had "a great first six months", with a total group normalised gross margin of 17.4 per cent (from 16 per cent) and total group normalised operating expenditure down $37m.
China delivered a 38 per cent increase in normalised Ebit to $339m, reflecting the strength of Fonterra's foodservice business in this region, improvements in its consumer business and the PRC's strong economic recovery following the initial impact of Covid-19.
Asia Pacific's normalised Ebit was up 9 per cent to $190m as a result of improvements in Foodservice and Consumer.
Fonterra's consumer division benefited from more people staying at home and cooking with dairy and a renewed focus on the Anchor, Anmum and Anlene brands.
Normalised Ebit from Amena came to $201m, down 7 per cent because of lower sales volumes in its ingredients business.
Commenting on the global supply chain challenges, Hurrell said the co-op was "proactively managing the situation" and working with its ocean freight partnership Kotahi to keep product moving.
"Our sales book is well contracted – however, as a result of some small shipping delays, our product inventory is higher than it was this time last year and this means our investment in working capital is also higher," he said.
Hurrell said the co-op was on track to achieve
its target debt/Ebitda ratio of less than 3.5 times this year.
Fonterra's units last traded at $5.06, down 3c from Tuesday's close.
Ratings agency S&P Global said higher milk prices would weigh on the co-op in the second half.
"Despite this, we believe Fonterra's improved business model and debt reduction provides it with greater versatility to withstand these headwinds," it said.