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March 20, 2019

Fonterra back in black as disposals announced

New Zealand dairy heavyweight Fonterra has seen a marked improvement in performance in the six months to 31 January and announced two non-core asset disposals.

By Leonie Barrie

New Zealand dairy heavyweight Fonterra has returned to the black, recording net profit after tax of NZD80m (US$54.7m) in the six months to 31 January, following its first-ever annual loss last year. 

Meanwhile, the company has announced the next steps in its strategic review. It has offloaded its interest in a Venezuelan consumer joint venture Corporacíon Inlaca to international food business Mirona and announced it aims to sell its 50% stake in DFE Pharma, a joint venture established in 2006 between Fonterra and European dairy group FrieslandCampina. 

Speculation in New Zealand media yesterday that suggested Fonterra could announce its exit from South America and an end to its troubled relationship with Chinese infant-formula company Beingmate, in which it has an 18.8% shareholding, proved to be unfounded.

Fonterra has already put its ice cream business Tip Top up for sale – with bids due in last week – as part of its strategic review announced last autumn, at the same time it reported its first annual net loss, amounting to NZD196m, and debt of NZD6.2bn.

Despite its increase in profit, the company revealed today (20 March) that its revenue dropped 1% to NZD9.7bn in the six-month period, on a like-for-like basis, while its debt in January had increased to NZD7.35bn.

Fonterra’s chief executive officer Miles Hurrell said that while being back in the black is good news, the cooperative’s earnings performance is not where it should be and this was the reason for revising the full-year earnings guidance down to 15-25 cents per share in February.

“The steady performance from New Zealand Ingredients in the first half of FY19 has been offset by challenges in Australia Ingredients and this has seen our total Ingredients EBIT decline by 17% to NZD461m,” he said.

“Our Australia ingredients business continues to feel the impact of the drought. We can see it in the decline of Australian milk collections and aggressive price competition for milk, which is resulting in the under-utilisation of manufacturing assets and tightening margins.”

On the asset sales, Hurrell said the Corporacíon Inlaca disposal – for NZD16m – is partly linked to the turbulent situation in Venezuela.

“The decision to sell Inlaca is the result of on-going instability in Venezuela which has led to challenging operating conditions,” he said.

 “The economic situation in Venezuela is not expected to improve in the foreseeable future, so we have made the decision to act now to minimise the impact on Fonterra.” 

On selling its stake in DFE Pharma, he said: “Together with our partner, we have grown DFE Pharma from relatively small beginnings into a significant and successful business. While continuing to perform well, ownership of DFE is not core to our strategy.”

Hurrell said Fonterra is “on track” to meet its target to reduce end-of-year debt by NZD800m.

He said the co-op has received “strong interest” in Tip Top and is “actively considering its options” for its shareholding in Beingmate.

Hurrell was permanently appointed as the Anchor butter maker’s CEO earlier this month after serving as interim chief executive since last August.

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