UPDATE: Fonterra FY gross margin shrinks on higher milk payment; volumes, profit fall

Monday 25th September 2017

(Adds details of divisional results, China Farms and Beingmate)

Fonterra Cooperative Group's full-year gross margin dropped about 4 percentage points as the dairy company paid more for milk, while rising prices offset a decline in volumes. The changing mix didn't alter Fonterra's forecast payout.

Fonterra's gross margin fell to 17 percent in the year ended July 31 from 21.1 percent a year earlier, the Auckland-based company said. Normalised earnings before interest and tax dropped 15 percent to $1.2 billion. Ebit from ingredients, its biggest business, fell 22 percent to $943 million, while earnings from consumer & food service rose 6 percent to $614 million as increased volumes and sales were offset by "significantly higher input costs."

Sales rose to $19.2 billion from $17.2 billion while cost of sales climbed to about $16 billion from $13.6 billion.

The full-year results gave Fonterra room to answer some critics about its offshore strategy, including its investment in Beingmate Baby & Child Food, the unprofitable Chinese infant formula producer and distributor that sells Fonterra's Anmum formula in China. It took an impairment loss of $35 million on its 18.8 percent stake, reducing the carrying value to $617 million, which it said reflected Beingmate's share price slide and recent losses. Still, "the market fundamentals remain strong and the changes to the regulatory regime, anticipated to be effective from 1 January 2018, are expected to have a positive impact on Beingmate’s financial performance," it said.

Fonterra also disclosed normalised ebit of $1 million for China Farms, its dairying operations in China, compared with an ebit loss of $59 million a year earlier. The turnaround was "due to our ongoing efforts to reduce costs through operational efficiencies, milk volume growth and the impact of the market-based internal raw milk price." Still, Fonterra's gross margin from ingredients included "a $38 million loss representing the difference between the domestic milk price and the internal raw milk price paid to China Farms."

Volumes at its ingredients division fell 5 percent to 22.4 billion litres of milk equivalent (LME), which reflected a "challenging New Zealand milk profile" and lower closing inventory carried into the year.

Volumes in consumer & food service rose 12 percent to 5.5 billion LME while the 6 percent growth in earnings reflected "significantly higher earnings in Greater China and strong sales and earnings growth by Soprole in Chile." Against that, significant increases in input costs put pressure on gross margins, partially offset by revenue growth, it said.

The company affirmed its forecast 2017/18 payout of $6.75 per kilogram of milk solids plus earnings per share in a range of 45-to-55 cents, making the forecast total available payout of $7.20 to $7.30, before retentions. The final cash payout was $6.52 for the 2016/17 season for a 100 percent share-backed farmer.

“We will always need to manage variability across our cooperative – both in global markets and in our local farming conditions," said chair John Wilson. "We’ve demonstrated our ability to deal with those conditions and deliver on our strategy again this year.” He said being able to maintain its forecast dividend "despite the milk price increasing by 57 percent over the year and the impact of negative stream returns was an excellent result."

Net profit was $745 million in the 12 months ended July 31 from $834 million a year earlier, Fonterra said.

Units of the Fonterra Shareholders' Fund rose 0.5 percent to $6.13 and have gained 1.7 percent this year.

(BusinessDesk)

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