Fonterra Co-operative Group Limited · NZX:FCG
Fonterra Co-operative — H1 FY2018 Earnings Presentation
33 slides from Fonterra Co-operative's earnings presentation, Mar 21, 2018
Slide 1: Interim Result 2018
21 MARCH 2018 Interim Result 2018 OUR CO-OPERATIVE OUR POTENTIAL OUR PERFORMANCE
Slide 2: Disclaimer
Disclaimer This presentation may contain forward-looking statements and projections. There can be no certainty of outcome in relation to the matters to which the forward-looking statements and projections relate. These forward-looking statements and projections involve known and unknown risks, uncer
Slide 3: Global Context, Value Creation, Trust
• Industry outlook continues to be positive Global • Global dairy prices reflect ongoing strong demand Context • An increase in EU production may cause price volatility • Operating performance in line with expectations Value • Danone costs and Beingmate impairment impacted our result Creation • Grea
Slide 4: Our Co-operative
Our Co-operative Confidential to Fonterra Co-operative Group Page 4
Slide 5: Higher forecast pay-out for farmers
Higher forecast pay-out for farmers Improved Farmgate Milk Price, plus forecast dividend range Indicative payout for 8.50 budgeting¹ 7.90 0.10 6.80-6.90 6.37 0.30 6.40 6.16 6.52 Range 5.20 0.27 0.32 0.40 0.25 0.32 4.65 4.30 to 0.48 0.35 0.25 0.40 4.72 6.10 7.60 6.08 5.84 8.40 4.40 3.90 6.12 6.55 200
Slide 6: Difficult weather conditions impacted New Zealand supply
Difficult weather conditions impacted New Zealand supply Outlook for lower volumes overall this season 100 90 • Season forecast is 80 1,480 million Volume (m litres/day) kgMS, 3% down 70 on last year 60 • Driven by difficult 50 weather 40 conditions impacting 30 pasture growth Season Total Milk Soli
Slide 7: Global demand for dairy remains strong
Global demand for dairy remains strong Supply EU Russia China Demand 12 months 12 months EU’s largest dairy production -1% export market – trade imports +13% US Last 3 months embargo remains Last 3 months (Oct, Nov, Dec) +2% (Oct, Nov, Dec) +16% 12 months production +1% Asia (excl China) Middle East
Slide 8: Stable WMP prices – key driver of milk price
Stable WMP prices – key driver of milk price Positive stream returns contribute to earnings this half Products informing milk price Other products Whole Milk Powder Cheddar 6,000 6,000 HY2018 5,000 5,000 HY2017 HY2017 Avg price $3,835 HY2018 Avg price $3,514 4,000 Avg price $3,038 4,000 Avg price $2
Slide 9: Higher input costs impacting returns
Higher input costs impacting returns Significant increase in fat prices, particularly butter Butter • Transfer price for Consumer 8,000 80% HY2018 and Foodservice set quarterly Avg price $5,346 6,000 HY2017 – Based on market prices Avg price $3,938 4,000 – 3-month lag 2,000 • Significant increase in
Slide 10: Globally competitive cash pay-out
Globally competitive cash pay-out Driven by our demand-led strategy Global Milk Prices (USD / litre) 0.5 EU US NZ 0.8 • Higher NZ pay-out this 0.3 season 0.6 • Farmgate Milk Price Manual reinforces 0.4 competitive milk price • The 2016 manual change has added six cents per 0.2 kgMS to milk price for
Slide 11: Our Potential
Our Potential Confidential to Fonterra Co-operative Group Page 11
Slide 12: Operating performance in line with expectations
Operating performance in line with expectations Result impacted by lower volumes and abnormal items VOLUME REVENUE GROSS MARGIN NORMALISED OPEX¹ 10.5B LME $9.8B $1,662M $1,263M 11% 6% 6% 3% NORMALISED EBIT NORMALISED NPAT² NET PROFIT AFTER TAX INTERIM DIVIDEND $458M $248M $(348M) 10CPS 25% 36%, EPS2
Slide 13: Result impacted by Danone costs and Beingmate
Result impacted by Danone costs and Beingmate Normalised earnings better reflect operating performance Half Year NPAT1 reconciliation ($m) • Normalised NPAT of $248m – Equates to normalised Earning 400 Per Share of 15 cents $248 – Total normalisations of $596m 200 ($3) • Beingmate investment ($160)
Slide 14: Strategy focussed on moving volume to value
Strategy focussed on moving volume to value Lower volumes but increased proportion in higher value categories 1 DIRA Optimise Consumer 19% • Volumes down 11% to NZ milk 3% 10.5b LME GDT 2 Build and grow beyond our current 2% 5% • GDT consumer positions 13% Foodservice – Volumes aligned with 3 22% De
Slide 15: Greater China integrated strategy
Greater China integrated strategy Growing volume and value in our most important market HY18 LME¹ HY18 $GM² Strategic rationale 1 Ingredients Optimise NZ milk 1.7bn 134m 1 China is a growing net importer of dairy 2 Build and grow 2.2bn 216m beyond our current consumer positions Consumer & Foodservic
Slide 16: Greater China growing volumes and earnings
Greater China growing volumes and earnings Currently 23% of Fonterra total gross margin and 28% of volume Volume (m LME) • Our integrated business in Greater 4,000 45% China, including Taiwan and 3,000 Ingredients Hong Kong, is delivering value 2,000 Consumer & Foodservice • Gross margin of $390 mil
Slide 17: Impairment of Beingmate investment
Impairment of Beingmate investment Asset value now aligned to current share price Fair value approach Declining share price • Estimate of what a market participant would pay 30 Share price in for a similar long-term strategic stake 25 • Based on current share price 20 RMB • Equivalent to a RMB 5.88
Slide 18: China Farms – fresh milk in China
China Farms – fresh milk in China Well positioned for increasing demand for fresh milk Fresh milk consumption in China – retail sales (RMB bn)¹ • Market in China is shifting from 50 63% ambient to fresh milk 40 53% – 6-year growth of 53%, forecast to 30 20 grow a further 63% in the next Forecast 10
Slide 19: Greater China operations are a substantial business
Greater China operations are a substantial business Breakdown of Fonterra’s Enterprise Value for HY2018 • Based on our current share price, Fonterra’s Enterprise Value (EV)¹ Total Fonterra exceeds $16bn $16.3bn $0.24bn Total China • Greater China’s share of EV $4.7bn estimated to be $4.7bn Beingmate
Slide 20: Australia – strategic update
Australia – strategic update Growing volume and value in Australia • Continued strong performance from Australia this half year ROC (%) – Total Australia normalised EBIT of around $38m 16 Future – Ingredients gross margin up $23m or 86% 12 Today – C&FS normalised EBIT stable despite the significant
Slide 21: A win-win strategic relationship with The a2 Milk Company
A win-win strategic relationship with The a2 Milk Company • Milk pools – Source A2 milk from Fonterra farmers in NZ and Australia – Expand milk pools over time Milk pools • Nutritional products – Supply of nutritional milk powder products from Fonterra facilities in NZ and Australia • Distribution a
Slide 22: Our journey to making a difference to the lives of 2 billion people
Our journey to making a difference to the lives of 2 billion people Value SUSTAINABLE CO-OP ENSURE THE FUTURE Creation of sustainable value for all stakeholders INNOVATIVE CO-OP LEAD THE FUTURE Investment in technology and people for the future FUND THE FUTURE STRONG V3 CO-OP Demand-led optimisation
Slide 23: Our Performance
Our Performance Confidential to Fonterra Co-operative Group Page 23
Slide 24: Ingredients
Ingredients Solid result and with lower collection volumes Volume (m LME)¹ Volume • Record low opening inventory (11%) 10,981 9,777 • Unusual profile of milk collection in New Zealand due to difficult weather conditions Value • Normalised EBIT growth of $48m, an increase of 9% 2017 2018 • Positive s
Slide 25: Consumer and Foodservice
Consumer and Foodservice Areas of volume growth but tighter margins from higher input costs Volume (m LME)¹,² Volume 2,711 2,659 • Holding volumes despite shift in product mix away from (2%) butter, as consumer demand responds to higher prices • Consumer volumes impacted by exit from parts of our pr
Slide 26: Consumer and Foodservice
Consumer and Foodservice Robust consumer margins largely absorb higher input costs Consumer¹ Foodservice¹ Volume (m LME)² Volume (m LME)² 1,597 (3%) 1,545 (0%) 1,114 1,113 2017 2018 2017 2018 Gross Margin (%) Gross Margin (%) 31% 27% 27% 17% 2017 2018 2017 2018 1. On a comparable business basis Cons
Slide 27: Consumer and Foodservice
Consumer and Foodservice Solid performance in Greater China and Latin America Asia Greater China Volume Normalised EBIT Volume Normalised EBIT 2% 3% 857 874 124 583 599 96 92 56 2017 2018 2017 2018 2017 2018 2017 2018 Oceania¹ Latin America¹ Volume Normalised EBIT Volume Normalised EBIT (10%) 3% 912
Slide 28: Strong Co-op and financial discipline continues
Strong Co-op and financial discipline continues Higher half year debt and gearing but reducing at full year NET DEBT2 WORKING CAPITAL GEARING¹ $7.1B 80 DAYS 51.6% 15% Up 12 days CAPEX CREDIT RATING Up from 46.6% $346M A A- 42% STABLE STABLE Fitch S&P 1. Gearing ratio is economic net interest-bearing
Slide 29: Summary and outlook for second half of FY18
Summary and outlook for second half of FY18 Operating performance in line with expectations • Solid Ingredients’ results with low opening inventory and lower collection volumes • Consumer and Foodservice achieved areas of volume growth but tighter margins from higher input costs • Danone costs and B
Slide 30: Supplementary Information
Supplementary Information Confidential to Fonterra Co-operative Group Page 30
Slide 31: Normalised EBIT reconciliation
Normalised EBIT reconciliation Six months ended Six months ended $ million 31 January 2018 31 January 2017 Profit after tax (348) 418 Add: Net finance costs 201 157 (Less):Add: Taxation (credit)/expense (29) 69 Total reported EBIT (176) 644 Add: Danone recall costs 196 – Add: Reduction in carrying v
Slide 32: New Zealand Ingredients product mix
New Zealand Ingredients product mix Six months ended 31 January 2018 Six months ended 31 January 2017 $ million $ per MT $ million $ per MT Sales volume (000 MT) Reference products 900 – 973 – Non-reference products 277 – 338 – Revenue Reference products 4,305 4,783 3,768 3,873 Non-reference product
Slide 33: Diversified and prudent funding position
Diversified and prudent funding position Diversified profile¹ Prudent liquidity At 31 January 2018 At 31 January 2018 ($ billion) USD DCM 14% Drawn Facilities $1.7b Bank Facilities NZD DCM 10% 35% Undrawn 46% Facilities EUR/GBP 12% $3.1b 65% CNY DCM 5% AUD DCM 13% Bank facility maturity profile² DCM
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