Ann: HALFYR: FCG: Fonterra Co-operative Group Limited Interim Results 2015

• Release Date: 25/03/15 08:44
• Summary: HALFYR: FCG: Fonterra Co-operative Group Limited Interim Results 2015
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25/03/2015 08:44
HALFYR
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REL: 0844 HRS Fonterra Co-operative Group Limited

HALFYR: FCG: Fonterra Co-operative Group Limited Interim Results 2015

Fonterra announces 2015 Interim Results

Results Highlights

-Forecast Cash Payout for the 2014/15 Season of $4.90 - $5.00
- Forecast Farmgate Milk Price $4.70 per kgMS
- Estimated full year dividend of 20-30 cents per share
-Revenue $9.7 billion, down 14 per cent
-Reported EBIT $483 million, up 16 per cent
-Normalised EBIT $376 million, down 7 per cent
-Net profit after tax (NPAT) $183 million, down 16 percent
-Interim dividend of 10 cents per share
-Ingredients normalised EBIT $299 million, up 2 per cent
-Consumer and foodservice normalised EBIT $116 million, up 23 per cent
-International Farming normalised EBIT ($27) million

Forecast Cash Payout

Fonterra Co-operative Group today announced its half-year results.

Chairman John Wilson said that given the results achieved in the first half
of the year and the continued volatility in international prices, the
Co-operative was holding its forecast Farmgate Milk Price at $4.70 per kgMS.

"However, our forecast dividend has been lowered to 20-30 cents per share,
resulting in a forecast Cash Payout of $4.90 - $5.00. The Board has declared
a 10 cent interim dividend.

"These half-year results are below our farmers' expectations, in a period
when the Farmgate Milk Price is low and we are reducing the forecast dividend
range.

"Our half-year results are a snapshot of tough conditions in dairy with
variable production, demand and pricing.  There was also the challenge of
generating profit from inventory made in the previous financial year when the
cost of milk was higher, but sold in the first quarter of the financial year
when global dairy prices were falling.

"In New Zealand, milk production got off to an excellent start. A very dry
summer in most regions curtailed production in the last three weeks of
January, with the Co-operative reducing its milk volume forecast to slightly
below last season's production.

"Our current milk supply forecast for the 2014/15 season has increased to
1,551 million kgMS, two per cent below the 2013/14 season.

"Oversupply from dairy producing regions around the world in the early months
of the financial year saw the trade-weighted GlobalDairyTrade price index hit
a five-year low in December. Supply outweighed demand and buyers undervalued
milk, which was reflected in prices that declined to unsustainable levels.
Lower commodity prices placed downward pressure on our Farmgate Milk Price in
the first half.  This was partially offset by currency, with a benefit of
approximately 30 cents per kgMS to the forecast Farmgate Milk Price, as at 31
January.

"Volatility continues to influence international dairy commodity prices and
given this, we recommend caution with regards to on-farm budgets," said Mr
Wilson.

Net profit after tax is down 16 per cent to $183 million. Normalised EBIT is
also down 7 per cent to $376 million, compared with the same period last
year.

Business Performance

The first half has been subdued for the Co-operative, due to high volatility
and challenging global market conditions, resulting in a 14 per cent decrease
in revenue, CEO Theo Spierings said.

"In the first quarter, opportunities to improve ingredients, consumer and
foodservice gross margins were restricted until carryover inventory from the
previous financial year was cleared.

"There is often a lag between when product is produced and when it is sold.
During the first quarter, the value of our ingredients inventory was
relatively high as it was mostly produced when Whole Milk Powder (WMP) prices
were higher, ranging between USD2,700 to USD4,700 per MT.

"However, these higher inventory costs were not recovered due to rapidly
falling Whole Milk Powder (WMP) prices in the first quarter of this financial
year, which dropped to a low of around USD2,400 per MT.

 "This gap between the value of inventory and selling prices created a margin
squeeze in the first quarter. This contrasts with the first quarter last year
when the value of inventory was based on a lower milk cost, and was sold at a
higher price.

"In the second quarter this year earnings for ingredients improved,
benefiting from the lower cost of milk.

"Our consumer and foodservice business in Asia and China source all of their
milk from New Zealand and benefited from the lower value of milk,
particularly in the second quarter.

"Our Australian and Chilean consumer and foodservice businesses source their
milk in market. Their earnings were significantly impacted by higher milk
prices within each of these milk pools which squeezed margins. In Australia,
Chile and Brazil, the prices paid for milk are influenced by in-market
dynamics rather than global prices, so our businesses in these markets have
faced higher input costs.

"Meanwhile our Sri Lanka business has turned around and improved earnings
after rebuilding the market share lost, following the temporary suspension of
our operations last year.

"Despite some challenges, our consumer and foodservice business overall
achieved volume growth and improved pricing, together delivering a $91
million increase in our gross margin. Normalised EBIT for consumer and
foodservice for the first half was $116 million, an increase of 23 per cent
on the prior comparable period," said Mr Spierings.

Outlook

"Our first half year results combined with the current market conditions mean
that our expectations for the full year have resulted in an updated forecast
dividend range of 20 to 30 cents per share (based on our policy of paying 65
to 75 per cent of net profit after tax)," said Mr Spierings. "We are
maintaining our current forecast Farmgate Milk Price.

"We are strongly committed to the V3 Strategy we formulated three years ago,
which has been a huge change for the Co-op. The strategy is creating
sustainable returns through the integration of our ingredients multi-hubs and
targeted consumer and foodservice positions in our key markets. We remain
uniquely placed in the world with our global reach, asset footprint, and
integrated grass-to-glass supply chain.

"But the change so far has not been easy. Capital structure change was a
necessity. However, the precautionary recall last year, and recent
contamination threat have been unwelcome distractions. These events remind us
that the world is constantly changing and we have to be agile and responsive
so we can remain ahead. We have the building blocks in place to deliver on
our vision and strategy for the long term.

"We have a single-minded focus on delivering results: increasing sales
volumes, reducing complexity, and taking costs out to maximise returns. To
accelerate delivery on strategy, my team and I are leading a comprehensive
business transformation programme. It will firmly embed the best features of
entrepreneurial thinking, such as effectiveness, efficiency and agility.

"This will require some tough decisions. We are committed to improving
performance. We have made good progress so far but we need to increase the
pace of change," said Mr Spierings.

The record date for the interim dividend is 10 April, and the payment date is
20 April.

The dividend reinvestment plan (DRP), under which eligible shareholders and
unit holders can elect to reinvest all or part of their cash dividends in
additional shares or units, will be made available in respect of the 2015
interim dividend. The Board has determined that shares and units will be
issued at a 2.5% discount on the average closing price for the period 8-14
April 2015.

- ENDS -

Note: currency is New Zealand dollars unless otherwise stated.

For further information contact:
Andrew Luxmoore
Fonterra Communications
Phone: +64 21 221 8358

24-hour media line
Phone: +64 21 507 072

About Fonterra

Fonterra is a preferred supplier of dairy ingredients to many of the world's
leading food companies. Fonterra is also a market leader with our own
consumer dairy brands in Australia/New Zealand, Asia/Africa, Middle East and
Latin America.

The farmer-owned New Zealand co-operative is the largest processor of milk in
the world, producing more than two million tonnes of dairy ingredients, value
added dairy ingredients, specialty ingredients and consumer products every
year. Drawing on generations of dairy expertise, Fonterra is one of the
largest investors in dairy based research and innovation in the world. Our
more than 18,000 staff ensure we live up to exacting quality standards and
deliver every day on our customer promise in more than 100 markets around the
world.

APPENDIX ONE

Fonterra has changed the way it structures its financial reporting.  It is
now focused on the Ingredients, Consumer and Foodservice, and International
Farming businesses, to align with our global strategy.

Half-year financial highlights by business divisions

Ingredients
Milk collection across New Zealand for the season to 31 January 2015 was
1,150 million kgMS, three per cent up on the same period last season. Milk
collection in Australia, which is our second largest milk pool, was 82
million kgMS, up six per cent. Ingredients sales volumes were flat as a
result of lower sales to China which was offset by higher sales in other
regions, but revenue was 23 per cent down reflecting the 45 per cent lower
dairy commodity prices during the first half compared to the same period last
year.  Normalised EBIT for the first half was $299 million, up two per cent
relative to the comparable period. The ingredients segment includes group
overheads. Operating costs were $43 million higher mainly due to higher costs
to support our global strategy and ensure efficient allocation of resources,
and higher storage and distribution costs in the United States and New
Zealand.

Consumer and Foodservice
Volume across our consumer and foodservice businesses was up 27 per cent to
840,000MT in the first half compared to the same period last year. On a
like-for-like basis, excluding volumes for Brazil and Venezuela, which were
not consolidated last year, volume was up three per cent. Revenue was up 22
per cent to $3.3 billion and five per cent on a like-for-like basis,
reflecting our ability to increase price points in some key markets.
Normalised EBIT for the consumer and foodservice business in the first half
was $116 million, up 23 per cent compared to the same period last year. This
was mainly due to improved pricing and strong volume growth in China, the
recovery in Sri Lanka and a strong performance from our foodservice business
in Asia. This was partially offset by higher input costs due to the higher
cost of milk in Australia and in Chile in the first half compared to the same
period last year. Operating expenses were $4 million higher mainly because of
higher investment in our China consumer business.

International Farming
We now have two farming hubs with a total of nine productive farms. A single
farm has capacity for around 3,200-3,500 milking cows and a double farm has
around 6,500 milking cows. In total we have 24,000 milking cows and 25,000
heifers and calves across all our farms. Milk production volumes increased
significantly to 67,000 MT for the first half as a result of the new farms
that have come on stream since the first half last year, equating to over
five million kgMS of milk produced for the six months. Normalised EBIT in the
first half was down $29 million on the same period last year due to the
higher livestock revaluation adjustment in the first half of last year not
being repeated this year. Accounting standards require Fonterra to hold
livestock on our balance sheet at fair value. The relatively thinly traded
livestock market on China and the volatile local Chinese milk price
contribute to fluctuations in Chinese livestock valuations. In addition we
had a lower milk price in China which reflected the impact of higher local
milk production.

APPENDIX TWO

Non-GAAP measures
Fonterra uses several non-GAAP measures when discussing financial
performance. For further details and definitions of non-GAAP measures used by
Fonterra, refer to the Glossary in Fonterra's 2014 Annual Review. These are
non-GAAP measures and are not prepared in accordance with NZ IFRS.

Management believes that these measures provide useful information as they
provide valuable insight on the underlying performance of the business. They
may be used internally to evaluate the underlying performance of business
units and to analyse trends. These measures are not uniformly defined or
utilised by all companies. Accordingly, these measures may not be comparable
with similarly titled measures used by other companies. Non-GAAP financial
measures should not be viewed in isolation nor considered as a substitute for
measures reported in accordance with NZ IFRS.

- Fonterra calculates normalised EBIT by adding back net finance costs,
taxation expense and normalisation adjustments to profit for the period.
- Normalisation adjustments are transactions that are unusual by nature or
size such that they materially reduce the ability of users of the financial
results to understand the underlying performance of the Group or operating
segment to which they relate.
- Unusual transactions by nature are the result of a specific event or set of
circumstances that are outside the control of the business, or relate to the
major acquisitions or disposals of an asset/group of assets or business.
- Unusual transactions by size are those that are unusually large in a
particular accounting period.
- Normalisation adjustments are determined on a consistent basis each year.

Reconciliation from the NZ IFRS measure of profit after tax to Fonterra's
normalised EBIT
$ million Six month ended 31 January 2015 Six month ended 31 January 2014
Total EBIT 483     416
Net gain on Latin American strategic realignment (129) -
Time value of options 22       (13)
Total normalisation adjustments (107)   (13)
Total normalised EBIT 376     403
End CA:00262241 For:FCG    Type:HALFYR     Time:2015-03-25 08:44:11