Fonterra returns to profit and resumes dividend payout to farmers

After a number of difficult years, New Zealand dairy giant Fonterra looks like it is firmly back on track after reporting a solid financial performance for its 2019/20 financial year. Last week, Fonterra announced net profits of €374m (NZ$659m) for its financial year to the end of July 2020.

This is a marked improvement compared to recent years for the farmer-owned co-op after it racked up a net loss of almost €350m for 2019 and a loss of €111m the year before that.

Fonterra reported a near 30% increase in operating profits for the year to €533m (NZ$940m), as operating profit margins improved to a healthy 4.5%.

Earnings (EBITDA) for the year grew by 10% to reach €855m (NZ$1.5bn), as earnings margins in the business widened from 6.9% in 2019 to 7.2% for its 2020 financial year. Fonterra’s earnings per share (EPS) stood at 23c (NZ$0.43/share).

Despite a 2% fall in sales volumes for the year, Fonterra saw its total revenues grow by 5% last year to just shy of €12bn (NZ$21bn) thanks to higher dairy commodity prices for most of the year.

We increased our profit after tax by more than NZ$1bn, reduced our debt by more than NZ$1bn

Fonterra CEO Myles Hurrell said the improved performance last year was down to higher profits in its dairy ingredients and food service divisions, which more than offset a sharp fall in profits in Fonterra’s consumer dairy business.

“We increased our profit after tax by more than NZ$1bn, reduced our debt by more than NZ$1bn and this has put us in a position to start paying dividends again. As we moved through the second half of the year, we saw restaurants, cafes and bakeries close and intermittent spikes in supermarket sales, creating uncertainty across the global dairy market,” said Hurrell.

“So far, demand for dairy has proved resilient and our diverse customer base and ability to change our product mix and move products between markets has meant we can continue to drive value,” he added.

Dividend

The improved profitability means Fonterra will resume its dividend payout to farmer and investor shareholders in 2020 – albeit a modest dividend of just under 3c per share (NZ$0.05/share). Last year, the co-op was unable to pay any dividend to farmers for the first time in its history due to the massive losses incurred.

In previous years, Fonterra has paid out a dividend as high as 23c/share

The 2020 dividend will see an additional €43m paid out to Fonterra’s 10,500 milk suppliers, which is a cash dividend of just over €4,000 for the average supplier. In previous years, Fonterra has paid out a dividend as high as 23c/share (NZ$0.40/share), which equates to an annual payout of almost €33,000 for the average supplier.

Milk price

Fonterra announced its final farmgate milk price for the 2019/20 milking season would be $7.14/kg of milk solids (MS), which equates to a milk price of 30.3c/l in Irish terms.

Including the dividend, this brings Fonterra’s final cash payout to farmers to just over 33c/l for the 2020 milking season.

For the coming season, the dairy co-op has set an initial milk price forecast in the range of NZ$5.90/kg MS to $6.90/kg MS, which is a range of 25c/l to 29.2c/l. Fonterra is also forecasting a significant improvement in its dividend for 2021 to a range of 10c to 20c (NZ$0.20/share to NZ$0.35/share).

Food service

Despite COVID-19 resulting in the mass shutdown of food service and restaurants right around the world in the first half of 2020, Fonterra said its food service business enjoyed a very strong first half of the year before the virus hit.

Sales in Fonterra’s food service division were down slightly (-1%) to €1.5bn (NZ$2.7bn) for the year but profits were up 14% to just under €120m (NZ$209m). Profit margins in the division improved to a very healthy 7.9% last year.

In China, Fonterra said its food service business now serves customers in over 350 cities

Fonterra said its food service business in Asia, Oceania and Latin America all reported third quarter losses due to COVID-19 disruptions to restaurants, cafes and bakeries but said customer demand has since bounced back following the reopening of economies.

In China, Fonterra said its food service business now serves customers in over 350 cities in the world’s most populous country.

Ingredients

Fonterra’s ingredients business, which is by far the largest division of the co-op, recorded sales growth of 7% last year to just under €10bn (NZ$17.4bn). Profits in the business grew by 5% to hit €469m (NZ$827m), as profit margins held steady at 4.8%.

Fonterra said the recent uncertainty in dairy markets had softened the outlook for milk prices, which had improved profitability within its dairy ingredients division in the second half of the year.

Consumer dairy

The only segment to record a weaker performance last year was Fonterra’s consumer foods division. Although sales held steady at €2.4bn (NZ$4.3bn), profits plunged 35% in the year to just €85m (NZ$149m). Fonterra said the slump in profits was due to a once-off charge against its consumer dairy brands in New Zealand and China, as well as market challenges in Chile and Hong Kong last year.

Despite the debt reduction, Fonterra remains highly leveraged with its net debt to earnings ratio still on the high side at 3.4 times

The dairy co-op, which is the world’s largest dairy exporter, was also able to reduce its net debt during the year by almost €620m to just over €2.6bn at year-end. Despite the debt reduction, Fonterra remains highly leveraged with its net debt to earnings ratio still on the high side at 3.4 times.

However, the co-op has already signalled its intention to sell its DPA Brazil business, which is a joint venture business with Nestlé that distributes chilled dairy products, as well as its China Farms operations, where the co-op operates two wholly-owned dairy farms. Fonterra said it plans to use the cash generated from the sale of these assets to pay down its net debt even further.