Fonterra's profit booms but pandemic dampens outlook

Headlining the figures in the 2020 interim results released on Wednesday is a normalised net profit after tax of $293 million, up from $72 million.

Fonterra chief executive Miles Hurrell said Fonterra had built on the work done in 2019 reorganising and resizing its teams.

"We are now a very different co-op to this time last year - we're prioritising New Zealand milk and staying focused on what we know we're good at and what makes a difference to our farmer owners, unit holders, employees and communities," Mr Hurrell said.

Fonterra's key financial targets for 2020 are to meet its earnings guidance of 15-25 cents per share, achieve a gross margin in excess of $3 billion, reduce debt so it is no more than 3.75 times its earnings and ensure capital expenditure is no more than $500 million.

While pleased with the progress made towards those targets in the first six months of the financial year, Mr Hurrell said Fonterra was now operating in a very different global context as a result of COVID-19.

"Our total group normalised earnings for the first six months of the 2020 financial year are up $272 million on last year to $584 million," he said.

"We've delivered this through stable underlying earnings from our Ingredients business, improving gross margins in Foodservice and reducing our operating expenses.

"Our Foodservice business has definitely been our stand-out performer in the first half as we've grown our sales to bakeries and coffee and tea houses across Greater China and Asia."

The sale of DFE Pharma and foodspring in the first half of the year with cash proceeds of $624 million helped reduce net debt by 22 per cent or $1.6 billion, compared to this time last year.

The sales of China Farms and DPA Brazil were also under way, although it had revised down their value by a total of $134 million.

The China Farming joint venture's value was also slashed by $65 million.

Cost-cutting had reduced Fonterra's operating expenditure by $140 million on the same period last year.

Despite the strong earnings performance so far this year, Fonterra will not declare an interim dividend.

Fonterra chairman John Monaghan said: "After considering the current uncertainty of the impact COVID-19 could have on earnings in the second half of the year, the board has elected to not pay an interim dividend."

"At the end of the financial year, the board will reassess the co-op's financial position and review the decision to pay a dividend."

Fonterra maintained its forecast NZ farmgate milk price range of NZ$7-$7.60 a kilogram milk solids and normalised earnings guidance of 15-25 cents per share.

"Our underlying earnings are tracking well at the half year, but there is no doubt that we have a number of risks that are outside our control in the second half - in particular, the potential impact of COVID-19 on global demand, geo-political risks in key markets such as Hong Kong and Chile, and ongoing dry weather conditions here in New Zealand which could impact collections and potentially input costs," Mr Hurrell said.

"As I said a few weeks ago, we have already contracted a high percentage of this year's milk supply. But our teams know we have to keep our foot on the pedal and navigate very carefully through the challenges we'll face in the second half."