Fonterra Eyes More Asset Sales After Return To Profitability

By Glenn Dyer | More Articles by Glenn Dyer

Fonterra, New Zealand’s largest company, returned to profit in the six months to January, earning $NZ80 million for the six months to January 31, and revealing more asset sale plans.

In its first-half results released on Wednesday, the company said revenue fell 1% to $NZ9.7 billion.

There’s no dividend after the company last month revealed plans to suspend payments to allow it to cut debt (as Nufarm did yesterday – separate story).

Fonterra dropped its final dividend for 2017-18 and looks like not paying one for all of 2018-19, judging by the impact on earnings of dry weather in New Zealand and the drought in much of Australia

Normalised earnings before interest and tax (EBITDA) fell 29% to $NZ323 million in the half year, while the $NZ80 million after-tax profit was up 123% from a year ago.

The fall in EBITDA confirms the reduced earnings outlook delivered in a trading update late last month.

“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 $461 million,” new CEO, Miles Hurrell said in yesterday’s release.

“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 underutilisation of manufacturing assets and tightening margins.”

The forecast farmgate milk price remains at the level set last month in an increase to $NZ6.30-$NZ6.60 a kg of milk solids.

Mr. Hurrell said the dairy group was still not performing as well as it should, although it was on track to cut end of year debt by $NZ800 million.

Fonterra last year reported a $NZ186 million loss, in part thanks to a partial write-off of its investment in Chinese company Beingmate, a court penalty of $NZ183 million to French company Danone and low returns from its dairy operations and exports.

Hurrell said a third asset would be sold, following the recent announcements of the sales of Tip Top ice cream and options for its shareholding in Chinese company Beingmate.

Fonterra said it has started a sales process for its 50% share of DFE Pharma, a joint venture established in 2006 between Fonterra and FrieslandCampina.

DFE Pharma is one of the largest suppliers of pharmaceutical bulking agents in medicines such as tablets and powder inhalers.

“At the same time, we have confirmed that we are committed to maintaining our lactose service and supply agreements from Fonterra’s Kapuni operation in Taranaki and supporting the ongoing operations of the DFE Pharma business.

“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,” Mr Hurrell said yesterday.

Hurrell said Fonterra had sold its interest in its Venezuelan consumer joint venture, Corporacion Inlaca, to Mirona, an international food business, for $16m. The decision to sell was because of instability in Venezuela which had led to “challenging operating conditions”.

The full impact of the sale, including the devaluation of the Venezuelan currency which has resulted in a negative foreign currency translation reserve balance of about $126 million, would be reflected in the profit and loss statement for the full year.

This sale was not directly included in the half-year results, but it would have an eight cents a share negative impact on earnings.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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