June 2, 2022


Fonterra provides update on business performance


Fonterra provided an update on its third-quarter performance late last month.


According to the dairy cooperative's chief executive officer, Miles Hurrell, for the nine months ending April 30, 2022, Fonterra's sales volumes were down as a result of lower milk collections and the timing of sales due to short-term impacts on demand including the lockdowns in China, the economic crisis in Sri Lanka and the war in Ukraine.


Total Group normalised EBIT was $825 million, down $134 million reflecting lower sales volumes, continued pressure on margins from the significantly higher milk price, ongoing COVID-19 disruptions and the rapid decline of the Sri Lankan currency.


This was also reflected in Fonterra's normalised profit after tax of $472 million, down $115 million and reported profit after tax of $472 million, down $131 million.


Commenting on Fonterra's performance, Hurrell said despite significant market disruption, the cooperative continued to deliver a strong milk price and solid earnings.


He said: "As an exporter, many of the markets we operate in have been prone to sudden shocks, which can impact what we sell, where we sell it and when, but right now we're feeling the impact of multiple events across multiple markets.


"We are actively managing the challenges arising from COVID-19 and other geopolitical and macroeconomic events. However, increasing market volatility and uncertainty, ongoing supply chain disruptions and growing inflationary pressures have added increased complexity.


"AMENA continued to deliver a strong performance. Normalised EBIT was $406 million, up 30% due to improved gross margins in our ingredients channel, and a strong performance from our Chilean business.


"In Greater China, ingredients continued to benefit from increased sales of higher margin products. However, normalised EBIT was down 17% to $317 million, due to continued pressure on our margins from the higher milk price, particularly in foodservice, as well as the COVID-19 lockdowns. We also expect the impact of the lockdowns to show up in our fourth quarter results.


"Aside from some supermarkets, all restaurants and other food outlets were closed in Shanghai in early April to contain the Omicron outbreak. While restrictions have started to ease, a number of food outlets remain closed, while other cities across China are facing COVID-19 restrictions. The impacts of this, and the disruptions to supply chains, have been felt across the market and is reflected in our Greater China sales volumes which are down on the same time last year.


"APAC's normalised EBIT was down 43% to $177 million. While our Australian business and ingredients channel continued to perform well, this was more than offset by the unprecedented economic challenges in Sri Lanka, margin pressure from the higher milk price and other COVID-19 related challenges.


"While historically a good business for us, the significant deterioration of economic conditions in Sri Lanka has seen the rapid devaluation of the Sri Lankan rupee against the US dollar.


"This means it takes more Sri Lankan rupee to pay for product purchased from New Zealand, which is sold in US dollars, and has resulted in an $81 million adverse revaluation of our Sri Lankan business payables owing to New Zealand. This has been reflected in our normalised EBIT, which may continue to vary as Sri Lanka's currency fluctuates."


Hurrell said Fonterra's focus on financial discipline has put it in a good position to manage the impacts of these recent events. 


He added: "With over 95% of our milk contracted for the season, our strong balance sheet gives us the ability to hold higher inventory to manage the short-term impacts on demand and our sales profile.


"When combined with the increased value of our inventory, which is up due to the higher milk price, this has meant our working capital, and therefore, debt, is higher than usual at this point in the season. We expect this to balance out over the course of the year. 


"Total Group operating expenses have increased, up 3% to $1,632 million mainly due to inflationary pressures and COVID-19 supply chain disruptions which have resulted in higher distribution and storage costs."


Commenting on the rest of the year, Hurrell said Fonterra is maintaining its forecast earnings guidance of 25-35 cents per share.


"While favourable price relativities in the fourth quarter are positive for earnings, we expect continued pressure on our margins due to the higher milk price coupled with the normal seasonal profile of our business," he said.


- Fonterra

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