Greater China drives profit growth for Fonterra
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Dairy giant Fonterra says a 61-per-cent boost in normalized profit for the nine months to April shows its restructuring program is paying dividends.
The New Zealand-headquartered company recorded a net profit after tax of NZ$603 million, up 2 percent – or $587 million ‘normalized’ after extraordinary items were factored in.
CEO Miles Hurrell said the company achieved higher margins and reduced its operating expenditure, despite the challenges of the Covid-19 pandemic, which remains very much part of life for the co-op’s employees and customers around the world.
“It’s too easy to forget this if you’re sitting here in New Zealand – but today’s results show that despite these challenges we’ve lifted our financial performance. Over the last three months, we have also committed to getting out of coal by 2037 and made some promising progress in a trial using seaweed in cows’ feed to reduce emissions,” said Hurrell.
Fonterra’s results illustrate the importance of Greater China to the company’s overall fortunes, delivering year-to-date EBIT up 30 percent year on year to $106 million.
Foodservice continued to be the big driver behind the result, contributing $93 million of that growth. The year-to-date margin in China increased from 21.5 percent to 28.6 percent.
In Asia Pacific, normalized EBIT of $224 million was down 10 percent, or by $24 million. Consumer sales improved by 29 percent and foodservice by 89 percent, offset by falling sales in the ingredients segment.
“Foodservice continued to be the big driver behind the result, contributing $93 million of that growth.”
And Africa, Middle East, and North America sector saw EBIT fall by 11 percent, or $40 million, to $322 million, largely due to lower Ingredients sales. Consumer and food service sales in those regions continued to perform well.
Hurrell said Fonterra’s operating expenses were down by 5 percent year-to-date but the company will incur some additional expenditure in the final quarter to support its brands and product initiatives for the next year.
Looking ahead, Hurrell says the improving global economic environment and strong demand for dairy – relative to supply – should lead to an increase in the Farmgate Milk Price range to its $8 projected midpoint.
“Global demand for dairy, especially New Zealand dairy, is continuing to grow. China is leading the charge as its economy continues to recover strongly. Prompted by Covid-19, people are seeking the health benefits of milk and customers are wanting to secure their supply of New Zealand dairy products and ingredients,” he said.
“Growth in global milk supply seems muted and the global supply of whole milk powder is looking constrained.
“Based on these supply and demand dynamics, along with where the New Zealand dollar is sitting relative to the US dollar, we’re expecting whole milk prices to remain at current levels for the near future.”
However, Hurrell flagged “a number of risks” including the unpredictable nature of the Covid-19 pandemic, the impacts of governments winding back their economic stimulus packages, foreign-exchange volatility, changes in the supply and demand patterns that can enter dairy markets when prices are high, and – as always – potential impacts of any geopolitical issues around the world.
Questions & Answers
Q.What is the primary reason for Fonterra's increased profit, and how much did this sector contribute?
What is the primary reason for Fonterra's increased profit, and how much did this sector contribute?
Greater China significantly drove the profit growth, with its EBIT increasing 30 percent year on year to $106 million. Foodservice was the main contributor to this growth, adding $93 million.
Q.How did other regions perform compared to Greater China, and what factors influenced their results?
How did other regions perform compared to Greater China, and what factors influenced their results?
Asia Pacific's normalised EBIT fell 10 percent, while Africa, Middle East, and North America saw an 11 percent EBIT decrease. These declines were mainly due to falling sales in the ingredients segment.
Q.What initiatives has Fonterra committed to beyond its financial performance?
What initiatives has Fonterra committed to beyond its financial performance?
Fonterra has committed to becoming coal-free by 2037. The company is also trialling the use of seaweed in cows' feed, aiming to reduce emissions from its operations.
Q.What risks does Fonterra anticipate despite the positive outlook for the dairy market?
What risks does Fonterra anticipate despite the positive outlook for the dairy market?
Risks include the unpredictable pandemic, governments winding back stimulus, foreign-exchange volatility, and potential geopolitical issues. Changes in supply and demand patterns when prices are high also pose a risk.
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