Fonterra Co-operative Group Limited · NZX:FCG
Fonterra Co-operative — FY2018 Earnings Presentation
39 slides from Fonterra Co-operative's earnings presentation, Sep 13, 2018
Slide 1: Annual Results 2018
ANNUAL RESULTS 2018 13 SEPTEMBER 2018
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: We didn’t meet our earnings guidance
We didn’t meet our earnings guidance Why did this happen? What are we going to do differently? • Optimistic forecast • Take stock of our businesses – Required Q2 performance to repeat in – Evaluate against today’s criteria Q3 and Q4 – Actions under way • Late season increase in the Farmgate Milk • G
Slide 4: Reported a net loss
Reported a net loss Due to lower operating earnings, higher funding costs and one-offs • Reported net loss of $196 million, this FY17 – FY18 NPAT reconciliation ($m) includes a 5 cent reduction in the 1,000 74 (337) Farmgate Milk Price 781 800 • EBIT1,2, before Milk Price adjustment, 600 (136) down
Slide 5: Disappointing earnings performance
Disappointing earnings performance Margin pressure, higher costs and one-offs VOLUME REVENUE GROSS MARGIN¹ OPEX1 22.2B LME $20.4B $3,152M $2,496M 3% 6% 3% 7% NORMALISED EBIT2 NORMALISED NPAT2 NET PROFIT AFTER TAX ANNUAL DIVIDEND $902M $382M $(196)M 10CPS 22% 51%, EPS¹ 24c 126%, EPS (14)c 75% YIELD 1
Slide 6: More volume to higher value
More volume to higher value 465 million more LMEs shifted to higher value DIRA Consumer • Overall volumes GDT 2% – Total volumes declined 3% due to 12% Foodservice lower collections 20% 11% – Larger proportion went into higher value, up from 42% to 45% 45% FY18 Combined consumer, 22.2b • Ingredients
Slide 7: Stronger Milk Price impacted margins
Stronger Milk Price impacted margins Fat prices reduce profits in Consumer and Foodservice • Stronger Farmgate Milk Price • Higher fat prices impacted margins – 10% up on last year driven by – Butter and cream prices up on improved WMP and significant last year increase in butter and AMF prices – Bu
Slide 8: Increased Opex after sustained reductions
Increased Opex after sustained reductions Due to Ingredients and future growth spend Normalised1 operating expense breakdown ($ million) After reducing costs over two years, normalised opex went up by 7%, or $161 million, driven by: 2,661 2,509 2,496 • Ingredients: $83 million 2,335 – Increased acro
Slide 9: Greater China is our largest market
Greater China is our largest market Total revenue of $4 billion Integrated Greater China Business Advanced China Ingredients Foodservice Consumer Beingmate Nutrition¹ Farms FY18 LME 3.8B 1.3B 0.1B 0.03B NA 0.3B Business Performance 1. Includes Anmum sales through Beingmate. © Fonterra Co-operative G
Slide 10: Value creation not satisfactory
Value creation not satisfactory Requires improved performance and better use of capital GROSS MARGIN2 OPEX2 NORMALISED EBIT2 Return 1,2 15.4% $2,496M $902M RETURN ON CAPITAL Down from 16.9% 7% 22% 6.3% CAPEX WORKING CAPITAL NET DEBT3 Down from 8.3% Capital $861M 83 DAYS $6.2B 1% 8 days Up 11% 1. Ret
Slide 11: Committed to reducing debt
Committed to reducing debt A strong balance sheet provides options NET DEBT² DEBT/EARNINGS³ $6.2B 4.5X GEARING¹ Up 11% Up from 3.5x 48.4% TOTAL EQUITY CREDIT RATING Up 4.1% $6.3B A STABLE A- STABLE 12% Fitch S&P 1. Gearing ratio is economic net interest-bearing debt divided by economic net interest-
Slide 12: FY19 earnings guidance
FY19 earnings guidance FORECAST 2019 FARMGATE MILK PRICE FORECAST 2018/19 MILK COLLECTIONS $6.75 PER KGMS 1,525 MILLION KGMS FORECAST EPS1 INGREDIENTS CONSUMER AND FOODSERVICE 25-35 CENTS FORECAST GROSS MARGIN 8 - 10 % % FORECAST GROSS MARGIN 23 - 26 % % FORECAST EBIT FORECAST EBIT $850 - $950 M $54
Slide 13: Outlook for 2019
Outlook for 2019 • Total available for pay-out for FY19 of $7.00-$7.10 per kgMS, before retentions – A forecast Farmgate Milk Price of $6.75 per kgMS – A forecast earnings performance of 25-35 cents per share • Strong financial discipline: – Gearing ratio within 40-45% range – Capex reduced to $650M
Slide 14: Appendix: Farmgate Milk Price and global context
Appendix Farmgate Milk Price and global context Confidential to Fonterra Co-operative Group Page 14
Slide 15: Increased Farmgate Milk Price
Increased Farmgate Milk Price Forecast total available for 8.50 payout1 7.90 6.79 7.00 – 7.10 0.10 6.37 0.30 6.40 6.52 6.16 5.20 0.40 0.10 0.27 0.32 0.32 4.65 4.30 0.48 Range 0.25 0.40 25 to 35 4.72 6.10 7.60 6.08 5.84 8.40 4.40 3.90 6.12 6.69 6.75 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2
Slide 16: Strong WMP and butter prices increased Farmgate Milk Price
Strong WMP and butter prices increased Farmgate Milk Price Composition of the Farmgate Milk Price • The Farmgate Milk Price SMP Manual calculates a 10% uplift for FY18 vs. FY17 11% 20% • This increase is driven by WMP, Butter and AMF • Prices vary from the GDT WMP Butter 9% spot market because the 8
Slide 17: 2017/18 had variable on-farm conditions
2017/18 had variable on-farm conditions 2018/19 volumes forecast up 1% on last year 90 80 Volume (m litres/day) 70 • 2017/18 season ended at 60 1,505m kgMS 50 • Difficult weather 40 conditions throughout the Season Total Milk Solids (kgMS) Peak Day Milk 2017/18 season 30 — 2016/17 1,526m (down 3%) 8
Slide 18: Global dairy market – positive outlook but some demand and supply risks
Global dairy market – positive outlook but some demand and supply risks Supply EU Russia China 12 months EU’s largest dairy 12 months Demand production +3% export market – trade imports +17% US Last 3 months +2% embargo remains Last 3 months 12 months (Apr, May, Jun) (Jan, Feb, Mar) +3% production +
Slide 19: Globally competitive cash pay-out
Globally competitive cash pay-out Global Milk Prices (USD / litre) • Farmgate Milk Price Manual 0.5 EU USNZ reinforces competitive milk price 0.8 – Since 2009: added 52 cents per 0.3 Aug- 17 Sep- 17 Oct -17 Nov- 17 Dec- 17 Jan -18 F eb- 18 Ma r- 18 Apr- 18 Ma y-1 8 Jun -18 Jul- 18 kgMS in total 0.6
Slide 20: Committed to ESG Reporting
Committed to ESG Reporting NUTRITION ENVIRONMENT COMMUNITY Improving health and wellbeing through the Achieving a healthy environment for farming and Delivering prosperity for our farmers and wider products and services we deliver society communities FY18 delivery FY18 delivery FY18 delivery ● Launc
Slide 21: Appendix: Our Performance
Appendix Our Performance Confidential to Fonterra Co-operative Group Page 21
Slide 22: Ingredients
Ingredients A solid result despite the volume headwinds Volume (m LME)¹ Volume • Challenging New Zealand milk collection profile and lower (4%) opening inventory impacted sales volumes • Growth in Advanced Ingredients, added 334m more LMEs Value 21,305 20,520 • Gross margin flat on last year, includ
Slide 23: Consumer and Foodservice
Consumer and Foodservice Shifting volume to higher value but higher fat prices impacted margins Volume (m LME)¹ Volume • Additional 131m LMEs shifted to higher value products, 2% increasing sales volume by 2% • Oceania volumes down 5% because of underperformance from our New Zealand business 5,459 5
Slide 24: Consumer and Foodservice
Consumer and Foodservice Tighter margins mean EBIT down in all regions except Latin America Asia Greater China Volume (m LME)1 Normalised EBIT ($m) Volume (m LME)1 Normalised EBIT ($m) 4% 11% 1,703 1,773 194 176 1,278 1,413 204 165 2017 2018 2017 2018 2017 2018 2017 2018 Oceania Latin America Volume
Slide 25: Greater China – Consumer and Foodservice
Greater China – Consumer and Foodservice Continued volume growth but tighter margins Volume (m LME)¹ Volume • Anchor Food Professional volumes up 17%, with strong growth in 11% UHT cream • China brands up 24%, Anchor UHT milk holds No.1 market share in imported milks 1,278 1,413 • Continued growth b
Slide 26: Asia – Consumer and Foodservice
Asia – Consumer and Foodservice Higher input costs could not be recovered Volume (m LME)¹ Volume • Volume growth across most regions from new consumer product 4% launches and continued Foodservice expansion • Sri Lanka added 23 million LMEs with a strong performance from the Ratthi brand 1,703 1,773
Slide 27: Oceania – Consumer and Foodservice
Oceania – Consumer and Foodservice Lower earnings from New Zealand business Volume (m LME)¹ Volume • Volumes were lower in New Zealand due to (5%) operational challenges • Australia grew volumes in cheese and butter extending our brand leadership position 1,743 1,656 Value 2017 2018 • Gross margins
Slide 28: Latin America – Consumer and Foodservice
Latin America – Consumer and Foodservice Growth in EBIT with a challenging macro-environment in some markets Volume (m LME)¹ Volume • Soprole continues to have strong growth, up 7% 2% • Volumes across Brazil and Venezuela impacted by a challenging economic environment Value 735 747 • The only region
Slide 29: Consumer
Consumer Strong growth in some markets and overall maintained margins Volume (m LME)¹ Volume • Strong performances across Asia due to new product launches 0% and the revitalisation of the Anlene brand • China Brands achieved 24% volume growth • Australia extended their leadership position in cheese
Slide 30: Our consumer business
Our consumer business Solid growth in most markets, offset by challenges in Oceania Asia Greater China Volume (m LME)¹ Gross margin % Volume (m LME) ¹ Gross margin % 2% 24% 1,104 1,131 31% 31% 112 139 45% 43% 2017 2018 2017 2018 2017 2018 2017 2018 Oceania Latin America Volume (m LME) ¹ Gross margin
Slide 31: Foodservice
Foodservice Volume growth with higher input costs impacting margins Volume (m LME)¹ Volume • Volume growth led by China in UHT cream 6% • Middle East achieved strong butter sales and Asia realised strong sales in part due to the Beverage channel which we are starting to roll out 2,295 2,438 Value 20
Slide 32: Our foodservice business
Our foodservice business Strong volume growth realised in Asia and China Asia Greater China Volume (m LME) ¹ Gross margin % Volume (m LME) ¹ Gross margin % 7% 9% 599 643 19% 13% 1,166 1,273 24% 15% 2017 2018 2017 2018 2017 2018 2017 2018 Oceania Latin America Volume (m LME) ¹ Gross margin % Volume (
Slide 33: China Farms
China Farms Lower volumes and higher costs Volume (m LME)¹ Volume • Volume declined by 12%, excluding powder sales in FY17 (19%) • Down due to lower production as changes are made to the herd profile to improve its future productivity • Volumes are expected to increase next year 335 273 Value 2017 2
Slide 34: Committed to returning key balance sheet metrics to target ranges
Committed to returning key balance sheet metrics to target ranges Gearing1 Working capital days2 49.7% 103 48.4% 87 77 83 75 44.3% 44.3% 42.3% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Net debt3 Debt/EBITDA ratio4 4.9 4.7 4.5 7,120 6,199 5,473 5,601 3.5 4,732 2.8 2014 2015 2016 2017 2018 201
Slide 35: Diversified and prudent funding position
Diversified and prudent funding position Diversified profile¹ Prudent liquidity Drawn Facilities At 31 July 2018 ($ B) USD DCM 12% At 31 July 2018 ($ B) $1.29B 26% Bank Facilities Undrawn NZD DCM 12% 48% Facilities $3.73B EUR/GBP 10% 74% AUD DCM 12% CNY DCM 6% Bank facility maturity profile DCM matu
Slide 36: Normalised EBIT reconciliation
Normalised EBIT reconciliation Year ended Year ended $ million 31 July 2018 31 July 2017 Profit after tax (196) 745 Add: Net finance costs 416 355 Add/Less: Taxation expense 42 20 Total reported EBIT 262 1,120 Add: Impairment of Investment in Beingmate 405 35 Add: WPC80 Recall costs 196 – Add: Share
Slide 37: NZ Ingredients product mix
NZ Ingredients product mix Year ended Year ended Year ended Year ended $ million 31 July 2018 31 July 2018 31 July 2017 31 July 2017 $ per MT $ per MT Sales volume (000 MT) Reference products 1,794 – 1,841 – Non-reference products 620 – 696 – Revenue ($ million) Reference products 8,703 4,851 7,846
Slide 38: Glossary
Glossary Acronyms and Definitions AMF Fluid and Fresh Dairy Regulated Return Anhydrous Milk Fat The Fonterra grouping of skim milk, whole milk and The earnings component of Milk Price generated cream – pasteurised or UHT processed, from a WACC return on an assumed asset base BMP concentrated milk pr
Slide 39: Glossary: Fonterra Strategic Platforms
Glossary Fonterra Strategic Platforms Ingredients The Ingredients platform comprises bulk and specialty dairy products such as milk powders, dairy fats, cheese and proteins manufactured in New Zealand, Australia, Europe and Latin America, or sourced through our global network, and sold to food produ
Fonterra Co-operative Group — FY2018 Earnings Presentation on 6ix