Fonterra – Fonterra Strengthens Second Half Performance in 2014/15


  • Total sales volumes up 9% at 4.3 million metric tonnes
  • Revenue $18.8 billion, down 15%
  • Normalised EBIT $974 million, up 94%
  • Net profit after tax $506 million, up 183%
  • Cash Payout $4.65, down 45%
  • Farmgate Milk Price $4.40 per kgMS
  • Dividend of 25 cents per share
  • 2015/16 forecast total available for payout up 75 cents to $5.00 − $5.10 per kgMS

Annual results

Fonterra Co-operative Group has announced a net profit after tax of $506 million for the financial year ended 31 July 2015 – up 183 per cent – after a stronger second half performance in difficult market conditions.


The Co-operative will pay a final Cash Payout of $4.65 for the 2015 season for a 100 per cent share-backed farmer, comprising a Farmgate Milk Price of $4.40 per kgMS and a dividend of 25 cents per share.

Chairman John Wilson said extremely challenging trading conditions globally had affected all parts of the Co-operative’s business.

“Falling global dairy prices due to a supply and demand imbalance impacted the Milk Price, while the dividend reflected higher funding costs following significant investment in capacity to support milk growth in New Zealand, essential investments in the key strategic market of China, and the costs of maintaining a higher Advance Rate through the season.

“The strengthening of performance in the second half resulted in normalised earnings before interest and tax almost doubling, with good growth in our consumer and foodservice businesses and the results of a major push in our ingredients business to offset low milk prices with improved margins.”

Cash interest costs on funding were up $95 million to $427 million, which had an impact of around 6 cents per share.

Mr Wilson said that despite drought in some regions and floods late in the season, milk collection across New Zealand for the 2014/15 season to 31 May 2015 was 1,614 million kgMS, up two per cent on the previous season.


Strong Volume and Value Growth

Chief Executive Theo Spierings said improved second half results in the 2015 financial year were driven by a strong focus on cash and costs.

“We focused on improving our sales mix, achieving more efficiencies, maximising our gross margins and achieving our strategic goals faster. Our efforts contributed to a second half rebound in our performance and profitability.”

Normalised EBIT for the group was $974 million, up 94 per cent. The ingredients business’ efforts to offset low milk prices with improved margins increased ingredients normalised EBIT by 43 per cent to $973 million. Consumer and foodservice normalised EBIT increased 216 per cent to $408 million.

“Significant progress was achieved in our consumer and foodservice strategy where we are aiming to win hearts, minds and especially market share in our eight strategic markets of New Zealand, Australia, Sri Lanka, Malaysia, Chile, China, Brazil and Indonesia. With the reorganisation of Dairy Partners Americas completed, consumer and foodservice volumes were up a significant 27 per cent to 1.7 million MT,” said Mr Spierings.

“Our Asia and Greater China consumer and foodservices businesses, which source most of their milk from New Zealand, were also important contributors to this result.”

In the 2015 financial year, investments in capacity and maintenance in New Zealand included: the $167 million to complete the Pahiatua dryer and distribution centre; $132 million in the anhydrous milk fat, milk protein concentrate and reverse osmosis plants at Edendale; and the $122 million investment in the dryer at Lichfield due for commissioning in 2016. Combined they represent 8.2 million litres additional capacity.

“Our new plants stand out in terms of efficiency gains and a more flexible product mix. In the second half we optimised our product mix, favouring products where we could secure higher prices, such as cheese and casein, to capture shifts in customer demand,” Mr Spierings said.

“Our $230 million investment in the past two years on capacity to support our consumer and foodservice performance is generating the volume and value growth we want, especially in Asian markets.

“Our return on capital for the Group was 8.9 per cent. Our ingredients business’ return on capital was 9.3 per cent and our consumer and foodservice business achieved a return on capital of 25.5 per cent,” said Mr Spierings.

With capacity now more in line with current expectations of milk growth, the Co-operative would have a reduced capex spend in 2016 of $900 million.

Mr Spierings said this year’s difficult market conditions were shaped by a rare combination of factors.

“Prices are often cyclical, but this year’s market is one of the most difficult I’ve known. The global dairy industry has been hit simultaneously by geopolitical turmoil in the Middle East and Russia, Ebola in Africa, an economic slowdown in China and the sharp drop in oil and mineral prices. These events suppressed demand at a time when farmers all around the world had ramped up production in response to previous high prices. This resulted in an inevitable impact on pricing.

“Looking ahead, this uncertainty means that world markets are likely to be difficult in the medium-term. However, we will be more than ready when the market turns.

“That’s because we have thoroughly reviewed our execution of strategy, our processes and working practices to embed long-term change. We are focusing all our resources to make us faster, more efficient, and achieve sustainable results,” said Mr Spierings.

Fonterra’s business review is an on-going process across the whole organisation to identify areas where the Co-operative can find more efficiencies and improve future performance.

This on-going review is targeting one-off cash savings and recurring cash savings from across the business including procurement, operations, supply chain and sales mix. These cash savings are expected to build over the next 24 months and, as they are realised, will impact Milk Price, earnings, cash flow and the balance sheet.

“Our business review is about always pursuing the full potential of our Co-op so we are in the best position to drive performance now in these challenging times and when global conditions improve,” said Mr Spierings.


Global Outlook

The Co-operative is lifting its forecast Farmgate Milk Price for the 2015/16 season to $4.60 per kgMS, an increase of 75 cents.

It has also reduced its New Zealand forecast production volumes by at least five per cent compared with the previous season. Click here for the media release detailing the new forecasts.

The forecast total payout available to farmers in the 2015/16 season is now $5.00 − $5.10 per kgMS, comprising:

  • Forecast Farmgate Milk Price $4.60 per kgMS
  • Forecast earnings per share range of 40 – 50 cents per share.

Mr Wilson said the lift in profitability in the second half of the 2015 financial year was expected to carry through into the current financial year.

“Our track record this year in growing consumer and foodservice, along with our ingredients margins, make us confident in our forecast earnings per share range of 40-50 cents,” said Mr Wilson.

An update on the outlook will be provided at Fonterra’s Annual Meeting in November.


2014/15 Dividend Payment

The dividend of $0.25 per share comprises an interim dividend of $0.10 and a final dividend of $0.15. Record date for the final dividend is 8 October 2015, with a final dividend payment date of 20 October 2015.

The dividend reinvestment plan (DRP), under which eligible shareholders and unit holders can elect to reinvest all or part of their cash dividends in additional shares or units, will be made available in respect of the 2015 final dividend. The Board has determined that shares and units will be issued at a 2.5% discount on the average of the daily volume weighted average price for the period 6-12 October 2015. Participation election notices for the final dividend DRP must be received by 9 October 2015.


Click here to view Annual Results presentation, the Annual Review and the Financial Statements & Statutory Information.


NB: All dollars quoted are New Zealand dollars

Source: Fonterra – Fonterra Strengthens Second Half Performance in 2014/15

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