Fonterra profits fall 15% as rising milk prices drive costs higher

For its 2017 financial year, Fonterra reported a 12% increase in sales to €11.8bn, which was primarily driven by the improvement in dairy commodity prices over the course of the year.

Product sales volumes actually declined 3% to less than 4.2m tonnes as a result of lower milk collections from farmer suppliers.

However, operating profits (EBIT) for the year declined 15% to €709m as profit margins narrowed almost 200 basis points to 6%.

Fonterra processed close to 23bn litres of milk last year and has said it is aiming to reach 30bn litres by 2025 in order to drive volume growth in its core ingredients business.

By division

The backbone of Fonterra is its ingredients division, which accounts for two-thirds of annual sales. For the 2017 financial year, Fonterra’s ingredients division saw sales increase by almost one fifth (+18%) to €9.4bn, despite a 5% decline in product sales volumes.

However, the increase in farmgate milk over the year saw profit margins in Fonterra’s ingredients business shrink over 300 basis points to 6.2%. Fonterra’s consumer and food service business saw a 4% increase in sales to €4bn, as earnings improved 6% to €377m.

Fonterra also operates a division called China Farms, which has caused it some major financial headaches in recent years due to spiralling costs.

Milking almost 35,000 cows across 10 different farms, Fonterra’s China Farms pumped out a cumulative 335m litres last year.

The China farm investment returned a €600,000 profit in 2017 having racked up €36m in losses the previous year.

Fonterra says it has now gained a handle on its production costs at these farms and is aiming to produce 380m to 400m litres per year as production per cow improves.

CEO remuneration

Fonterra’s annual accounts show that chief executive Theo Spierings was paid just over €5.1m in total remuneration for the co-op’s 2017 financial year. Spierings’ base is just over €1.5m, with almost €3.5m of his 2017 remuneration package relating to short- and long-term performance bonuses.

The Dutch native, who joined Fonterra over six years ago from Friesland Campina, is the highest-paid executive in New Zealand, reflecting the global scale of the business.