Fonterra reports its Interim Results
Fonterra Co-operative Group Limited
Confidential to Fonterra Co-operative Group Page 1
Results for Announcement to the Market
Results for announcement to the market
Name of issuer
Fonterra Co-operative Group Limited
Reporting Period 6 months to 31 January 2020
Previous Reporting Period 6 months to 31 January 2019
Currency NZD
Amount (m’s) Percentage change
Revenue from continuing operations $10,071 7%
Total Revenue $10,423 7%
Net profit/(loss) from continuing operations $609 534%
Total net profit/(loss) $501 596%
Interim/Final Dividend
Amount per Quoted Equity Security No interim dividend to be paid
Imputed amount per Quoted Equity Security Not Applicable
Record Date Not Applicable
Dividend Payment Date Not Applicable
Current period Prior comparable period
Net tangible assets per Quoted Equity
Security
$2.47 $2.08
A brief explanation of any of the figures
above necessary to enable the figures to be
understood
Please refer to the interim financial statements for further
explanation.
Authority for this announcement
Name of person authorised to make this
announcement
Anya Wicks
Contact person for this announcement Anya Wicks
Contact phone number (09) 374 9341
Contact email address anya.wicks@fonterra.com
Date of release through MAP 18/03/2020
Interim financial statements accompany this announcement.
---
18 March 2020
Fonterra reports its Interim Results
Interim Results Summary
• Total group normalised Earnings Before Interest and Tax (EBIT): $584 million, up from $312
million
• Total group EBIT: $806 million, up from $312 million
• Normalised Net Profit After Tax: $293 million, up from $72 million
• Reported Net Profit After Tax: $501 million, up from $72 million
• Free cash flow: $369 million, up from $(782) million
• Net debt: $5.8 billion, down from $7.4 billion
• Normalised Ingredients EBIT: $441 million, down from $464 million
• Normalised Foodservice EBIT: $147 million, up from $61 million
• Normalised Consumer EBIT: $116 million, up from $67 million
• Full year forecast normalised earnings: 15-25 cents per share
• Decision not to pay an interim dividend
• Forecast Farmgate Milk Price: $7.00-$7.60 per kgMS
• Forecast milk collections: 1,515 million kgMS
Fonterra Co-operative Group Limited today announced its 2020 Interim Results, which show the Co-
operative’s financial performance has improved with increased underlying earnings and reduced debt.
Fonterra CEO Miles Hurrell says Fonterra has built on the work done in 2019 and has continued to reset
its business, introducing a new strategy, reorganising and resizing its teams so there is greater focus on
customers, and at the same time, significantly lifting its financial performance.
“We are now a very different Co-op to this time last year – we’re prioritising New Zealand milk and staying
focused on what we know we’re good at and what makes a difference to our farmer owners, unit holders,
employees and communities.
“While there’s no doubt the world is experiencing an almost unprecedented situation and response to
COVID-19, I’m pleased with the progress we’ve made so far against our four priorities for 2020. These are
to hit our financial targets, reduce our environmental footprint, build a great team, and support regional
New Zealand. By achieving these, we will take strides towards our long-term goals of Healthy People,
Healthy Environment and Healthy Business.”
Fonterra’s key financial targets for 2020 are to meet its earnings guidance of 15-25 cents per share,
achieve a gross margin in excess of $3 billion, reduce debt so it is no more than 3.75x its earnings and
ensure capital expenditure is no more than $500 million.
Fonterra Co-operative Group
Confidential to Fonterra Co-operative Group Page 2
Commenting on these targets, Mr Hurrell says he is pleased with the progress and momentum Fonterra
has achieved in the first six months of the financial year, but Fonterra is now operating in a very different
global context as a result of COVID-19.
“Our total group normalised earnings for the first six months of the 2020 financial year are up $272 million
on last year to $584 million. We’ve delivered this through stable underlying earnings from our Ingredients
business, improving gross margins in Foodservice and reducing our operating expenses.
“Our Foodservice business has definitely been our stand-out performer in the first half as we’ve grown our
sales to bakeries and coffee and tea houses across Greater China and Asia.
“We continue to reduce our debt. We completed the sale of DFE Pharma and foodspring® in the first half
of the year with cash proceeds of $624 million and this has helped reduce net debt by 22% or $1.6 billion,
compared to this time last year.
“Our strategy and the importance we place on financial discipline means we are continuously reviewing
our asset portfolio. We’ve completed strategic reviews on China Farms and DPA Brazil, and sales
processes for both assets are well under way.
“Through these sale processes and strategic reviews, we have gained additional information and further
insights and, as a result, we have revised down the valuation of China Farms and DPA Brazil by a total of
$134 million.
“We have also reduced the value of our China Farming joint venture by $65 million and we continue to
look for opportunities to improve the ongoing performance of the business.
“Our teams continue to carefully manage costs and we’ve reduced our operating expenditure by $140
million on the same period last year. At the same time, we are not cutting costs in areas that are aligned
to our strategy and will deliver additional long-term value from our farmer owners’ milk.
“While lifting our financial performance, we’ve also kept sustainability and communities at our heart. Some
examples include:
• Contributing around $11.1 billion to the New Zealand economy through the milk price, with farmers
spending nearly half of this in their local communities
• Working with another 1,000 farms this year through The Co-operative Difference to put in place
Farm Environment Plans and getting ready to give individualised greenhouse gas emissions
reports to all supplying farms at the end of the year
• Making the decision to stop using coal at our Te Awamutu site next season and, by doing so
reducing our total coal usage by 10%
• Supporting farmers and communities impacted by floods in the South Island and delivering water
to help towns in drought affected North Island.
“It gives me great pride to lead a team who genuinely care and recognise the importance of out farmers
and local communities.”
Dividend
Despite the strong earnings performance so far this year, the Board has decided not to declare an interim
dividend.
Chairman John Monaghan says “after considering the current uncertainty of the impact COVID-19 could
have on earnings in the second half of the year, the Board has elected to not pay an interim dividend. At
the end of the financial year the Board will reassess the Co-op’s financial position and review the decision
to pay a dividend.”
Fonterra Co-operative Group
Confidential to Fonterra Co-operative Group Page 3
Outlook for the second half
In talking about the second half of the financial year, Mr Hurrell reaffirms the forecast Farmgate Milk Price
range of $7.00-$7.60 per kgMS and forecast normalised earnings guidance of 15-25 cents per share.
“Our underlying earnings are tracking well at the half year, but there is no doubt that we have a number of
risks that are outside our control in the second half – in particular, the potential impact of COVID-19 on
global demand, geo-political risks in key markets such as Hong Kong and Chile, and ongoing dry weather
conditions here in New Zealand which could impact collections and potentially input costs. As a result, we
have held our forecast earnings range at 15-25 cents per share.
“As I said a few weeks ago, we have already contracted a high percentage of this year’s milk supply. But
our teams know we have to keep our foot on the pedal and navigate very carefully through the challenges
we’ll face in the second half.”
Non-GAAP financial information
Fonterra uses several non-GAAP measures when discussing financial performance. These measures include normalised segment earnings,
normalised EBIT, EBIT, normalised earnings per share, normalisation adjustments and payout. This reporting period Fonterra has introduced
Total group earnings before tax and Total group normalised earnings before interest and tax non-GAAP performance measures that present the
combined financial performance of the group’s continuing and discontinued operations.
These are non-GAAP financial measures and are not defined by NZ IFRS. Management believes that these measures provide useful information
as they provide valuable insight on the underlying performance of the business. They are used internally to evaluate the underlying perf ormanc e
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. These non-GAAP measures are not subject to audit unless they are included in Fonterra’s annual financial
statements.
Definitions of the non-GAAP measures used by Fonterra, and reconciliations of the NZ IFRS measures to the non-GAAP measures can be found
on pages16 and pages 70 to 71 of Fonterra’s Interim Report 2020 that is available on Fonterra’s website.
ENDS
For further information contact:
Fonterra Communications
24-hour media line
Phone: +64 21 507 072
---
FOR THE SIX MONTHS
ENDED 31 JANUARY 2020
Interim
Report
2020
04060810
CONTENTS
Letter from our ChairmanLetter from our CEOGood TogetherHealthy People
Fonterra uses several non-GAAP measures when discussing financial performance.
These measures include normalised segment earnings, normalised EBIT, EBIT, normalisation adjustments and payout. These are non-GAAP financial measures and are not defined by NZ IFRS. Management believes that these measures provide useful information as they provide valuable insight on the underlying performance of the business. They are 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. These non-GAAP measures are not subject to audit unless they are included in Fonterra’s annual financial statements.Please refer to page 70 for the reconciliation of the NZ IFRS measures to the non-GAAP measures and page 72 for definitions of the non-GAAP measures used by Fonterra.
1214
Group Financial
Metrics
Page 14
Group Overview
Page 16
Ingredients
Page 20
Foodservice
Page 24
Consumer
Page 28
China Farms
Page 32
Historical Financial
Summary
Page 34
4073
Healthy EnvironmentHealthy BusinessInterim Financial ResultsDirectory
LETTER FROM THE CHAIRMAN
Good
progress,
We are making good progress on the Board’s 2020
priorities: delivering the Milk Price, a return to respectable
earnings, the continued implementation of our strategy,
and governance succession and development. We are
on-track with projects reviewing potential improvements
to the way we pay for our farmers’ milk, and our
capital structure.
We have more work to do. However, in the context of the
significant cultural and organisational change within our
Co-op and the strong forecast Farmgate Milk Price range,
we are pleased with our progress over the first half of the
financial year.
A return to respectable earnings
With a historically high Farmgate Milk Price forecast
of $7.00 - $7.60 per kgMS, it is encouraging to report
a $272 million year-on-year increase in Total Group
Normalised Earnings Before Interest and Tax (EBIT)
of $584 million.
That number has been delivered by a combination of solid
earnings and cost control across the units and products
that are at the heart of our new strategy – ingredients,
foodservice and consumer.
We have continued to reduce debt. Improved profits and
funds from divestments, including the now completed
sale of DFE Pharma, have helped to reduce net debt by
$1.6 billion from a year ago. We are confident in achieving
our full year targets for both operating expenses and
capital expenditure.
Dividend
We changed our Dividend Policy guidelines last year
to better reflect the annual performance and financial
strength of our Co-op.
Under the new guidelines we expect the dividend payment
to be 40-60% of reported Net Profit After Tax, excluding
any abnormal gains, from what was previously 65-75%
of adjusted Net Profit After Tax over a period of time. An
interim dividend will not be more than 40% of the forecast
total dividend and no more than net earnings at half-year.
We are satisfied with our earnings and performance over
the first half of the financial year. However, after considering
the current uncertainty of the impact COVID-19 could have
on earnings in the second half of the year, the Board has
elected to not pay an interim dividend.
We do not take COVID-19 lightly. It is now a global pandemic.
At the end of the financial year the Board will reassess
the Co-op’s financial position and review the decision
to pay a dividend.
Improvements to the way we pay for our
farmers’ milk
We regularly review the way we pay for milk to ensure we
are paying the highest sustainable returns in an increasingly
competitive market. Offering a competitive pricing model is
essential to retain milk supply.
Led by our Co-operative Relations Committee, the Board
is looking at improvements to the way we pay for our
farmers’ milk in-line with our new strategy. Specifically,
the Advance Rate and how we might get more money to
our farmers earlier in the season, the Capacity Adjustment,
and the potential for incentive payments linked to our
Co-operative Difference programme. We plan to make a
number of announcements in this area before the start
of the 2020/21 season.
Capital structure
Throughout the introduction of our new strategy there
has been a small team from the Board and Management
considering our future capital structure requirements.
We are continuing to assess those requirements and,
if changes are needed, what our alternative options are.
It’s important that our capital structure best supports the
delivery of our new strategy and, most importantly, protects
the long-term financial sustainability of our Co-op.
These discussions are critical to the future of our Co-op and
for that reason, we won’t put a timeline on the process.
Once a direction has been determined, we will discuss this
with the Shareholders’ Council and then farmers.
with more work to do
FONTERRA INTERIM REPORT 2020
04
Governance succession and development
In November, Donna Smit and Andy Macfarlane started
their second terms as Farmer Directors after being
successfully re-elected by their farming peers.
That same month, Independent Director Simon Israel
retired from the Board after six years. Internationally
respected Directors of Simon’s calibre aren’t easy to come
by and we are grateful for the significant contribution he
made to our Co-op.
Good progress is being made on securing a suitable
replacement for Simon.
In March, I confirmed that I would retire from the Board
at this year’s Annual Meeting in November.
After 11 years as a Director, and having seen through the
introduction of our new strategy, operating model, and
with our debt reduction efforts well progressed, the timing
is right for me and for the Co-op.
The Board is committed to a planned Chair succession that
provides Miles and his senior management team with the
governance stability and confidence they need to maintain
the Co-op’s momentum. Our current plan is to announce a
Chair-elect by no later than August this year. This will give
transparency of leadership prior to this year’s Director
elections and allow for an appropriate period of handover
before I retire from the Board.
Outlook for the financial year
Our farmers have faced difficult on-farm conditions
across most of the country and we expect those to
continue into the second half of the year. Prolonged dry
conditions for most of the North Island have already
impacted our milk collections and may limit the amount
of winter feed available. As a result, we have revised our
forecast milk collections for the 2020 season down to
1,515 million kgMS.
We have already contracted a high percentage of that
2020 milk supply and this is helping us manage the impact
of COVID-19. The outbreak had an immediate impact on the
GlobalDairyTrade prices of the products that determine our
Milk Price. At this point, we remain confident that the final
price will be within our range of $7.00-$7.60 per kgMS.
Our underlying earnings are tracking well at the half year.
However, given the potential significant risks that could
arise from the spread of COVID-19 and other geo-political
risks in key markets such as Hong Kong and Latin America
in the second half of the financial year, we have held our
forecast earnings range at 15-25 cents per share.
We will continue to share regular updates if the outbreak
or other events materially change this outlook.
John Monaghan
Chairman
FONTERRA INTERIM REPORT 2019
Forecast Farmgate Milk Price range
for 2019/20 season
$
7. 0 0 -
$
7. 6 0
per
kgMS
Share price
$
4.01
1
New Zealand milk collection
for the 2019/20 season
1,515
million
kgMS
Interim dividend
0
No interim
dividend
6.4%
2
1 Fonterra Co-operative Group Limited share price as at 31 January 2020.
2 For the period 1 August 2019 to 31 January 2020.
FONTERRA INTERIM REPORT 2020
05
LETTER FROM THE CEO
Resetting
the business
There’s a fair amount to reflect on in this interim results
update. Over the last six months, we have introduced a new
strategy and a new customer-led operating model. We’ve
right-sized and reorganised our business so it fits with our
more targeted strategy and I’m pleased to see improved
financial performance.
We’re now a very different Co-op to this time last year – we’re
prioritising New Zealand milk and staying focused on what
we know we’re good at and what makes a difference to our
farmer owners, unit holders, employees and communities.
I shared four priorities for the 2020 financial year as part of
our new strategy announcement: hit our financial targets;
reduce our environmental footprint; build a great team; and
support regional New Zealand.
By achieving these, we will take strides towards our long-term
goals of Healthy People, Healthy Environment and Healthy
Business and I want to update you on the progress we’ve
made so far this year.
Hit our financial targets
Our Total Group Normalised Earnings Before Interest and
Tax (EBIT) have increased by $272 million to $584 million,
compared to the same period last year. We’ve done
this through driving stable underlying earnings from
our Ingredients business, improving gross margins in
Foodservice and reducing our operating expenses.
We continue the focus on reducing our debt and are targeting
our debt to be no more than 3.75 times our earnings by
the end of the year, and we’re on track to achieve this.
We completed the sale of DFE Pharma and foodspring
®
in the first half of the year with cash proceeds of $624 million,
which helped increase our free cash flow by $1.2 billion
and reduce net debt by $1.6 billion or 22%, compared to
this time last year. We have also achieved a total gain on
sale from these asset sales of $469 million.
Our strategy and focus on financial discipline have us
continuously reviewing our asset portfolio. We’ve completed
strategic reviews on China Farms and DPA Brazil and sales
processes for both assets are well under way. Through these
sales processes and strategic reviews, we have gained
additional information and further insights and, as a result,
we have revised down the valuation of China Farms and
DPA Brazil by a total of $134 million.
We have also reduced the value of our China Farming
joint venture by $65 million and we continue to look
for opportunities to improve the ongoing performance
of the business.
We’re carefully managing our costs and have reduced our
operating expenditure by $140 million on the same period
last year, and our capital expenditure is on-track to be no
more than $500 million for the year. At the same time,
we are not cutting costs in areas that are aligned to our
strategy and will deliver additional long-term value from
our farmer owners’ milk.
Reduce our environmental footprint
We care about the environment and recognise the
significance of the risks that climate change presents
to communities, food systems and economic growth.
We take our responsibility to play a role in mitigating these
risks seriously and that’s why we’ve put sustainability at the
heart of our strategy.
The Co-operative Difference has now been in place since
June 2019. It’s our way of bringing together what our farmers
need to know today, and what they need to prepare for
in the future to be sustainable and resilient. The Co-operative
Difference has helped a further 427 farms put in place a
tailored Farm Environment Plan (FEP) so far this year, which
means 28% of supplying farms now have an FEP. It’s also
enabling all our farmer owners to have a farm-specific
greenhouse gas emissions report by the end of the year,
providing the necessary information to assist farmers to
make more informed decisions.
We’ve set aside capital investment to reduce our water usage
at our manufacturing sites and help achieve our 2020 target
of reducing manufacturing energy intensity (that’s energy per
tonne of production) by 20%. But the big sustainability news
from the first half is our announcement that our Te Awamutu
site will be coal free next season. By switching from coal
to wood pellets, we will reduce our carbon emissions by
the equivalent of taking around 32,000 cars off the road
and reduce our total coal usage by 10%.
and improving performance
FONTERRA INTERIM REPORT 2020
06
Build a great team
We now have a customer-led operating model up and running
with three in-market businesses: Asia Pacific; Greater China;
and Africa, Middle East, Europe, North Asia, Americas. We’ve
made this change because our future is no longer about
growing milk collections and sales volumes. Instead it is about
prioritising New Zealand’s unique milk and growing the value of
that milk, which means we need to understand our customers
in ways that we haven’t in the past. We need to be making sure
our farmer owners’ milk is going to the customers who value
New Zealand milk, innovation, sustainability and efficiency.
Our teams also need to be 100% clear about what is
expected of them so they can achieve great outcomes
for our Co-op. To help with this we have introduced ‘Good
Together’ – two simple words that bring together our purpose,
values and strategy.
Good Together prompts us to ask two important questions:
How are we contributing to our purpose, living our values
and delivering on our strategy and how are we achieving
more through great team work? By all of us being clear on our
answers, we can be confident that we’re focused on the right
things and we’re building the culture we’ve always wanted.
Support regional New Zealand
With a forecast Farmgate Milk Price range of $7.00 - $7.60
per kgMS, we’re on track to contribute over $11.1 billion to
the New Zealand economy. Farmers spend nearly half of
every dollar they earn for their milk in their local communities,
so the strong milk price is good for farmers and their local
businesses and communities.
But let’s not ignore the fact that it’s been pretty tough on
farm for a lot of farmers this season. There have been floods
in Canterbury, Otago and Southland, and very dry conditions
across much of the rest of the country. It’s in times like these
we need to support each other, and we’ve been doing our
best to help farmers impacted by this challenging weather.
Our tankers have also been delivering water to rural towns
in need. It gives me pride to lead people who genuinely care
and want to help in their communities.
Looking ahead
We remain confident in our forecast Farmgate Milk Price
range of $7.00-$7.60 per kgMS and underlying forecast
earnings guidance of 15-25 cents per share. We’re building
momentum and I’m really pleased to see our teams
continuing to step up and work together as we reset the Co-op.
However, there is no doubt that we have a number of risks
in the second half – in particular, the potential impact of
COVID-19 on global demand, geo-political risks in key
markets such as Hong Kong and Chile, and ongoing dry
weather conditions here in New Zealand which could
impact collections and potentially input costs.
We have already contracted a high percentage of this year’s
milk supply, but our teams know that we have to keep our
foot on the pedal and navigate very carefully through the
challenges we’ll face in the second half.
Miles Hurrell
Chief Executive Officer
FONTERRA INTERIM REPORT 2019
Total Group Normalised Earnings
Before Interest and Tax
$
584 m
Normalised Net Profit After Tax
From $312m
From $72m
Net Debt reduced by
$
293m
$
1.6b
Customer-led operating
model in place
Supporting each other
through floods and drought
Our Te Awamutu site will
be coal free next season
07
FONTERRA INTERIM REPORT 0404
OUR PURPOSE, VALUES AND STRATEGY
Our Co-operative,
Empowering people
To create goodness
for generations.
You, me, us together
Tātou, tātou
OUR PURPOSE
Good
Together
These two simple words bring
together our purpose, values
and strategy, which are the
foundation of our Co-operative.
They describe who we are
and what we do. They give
us the lens through which all
our behaviours, decisions and
choices need to be made.
We are good people,
doing good things.
Good Together
FONTERRA INTERIM REPORT 2020
08
Do what’s right
We act with care, empathy and respect,
and we hold ourselves and others to
high standards.
Challenge boundaries
We are progressive, open-minded and always
eager to uncover new ways of working
to benefit everyone in our Co-op.
Co-operative spirit
We pitch in and work as one connected
team to create goodness together.
Make it happen
We deliver on our commitments and live
all our values in everything we do.
Our strategy is about:
• Prioritising New Zealand milk
• Being globally competitive in Core Dairy
(base and advanced ingredients)
• Growing our sales of Sports and Active, Medical
and Aging and Paediatric ingredients
• Developing new Foodservice markets
• Only making consumer products
where we have a right to win
• Differentiating ourselves through
innovation, sustainability and efficiency
• Using milk components and non-dairy
ingredients sourced from around the world
• Collaborating more based on
intellectual property and skills
• Divesting non-core businesses
• Reducing debt
OUR VALUESOUR STRATEGY
FONTERRA INTERIM REPORT 2020
09
Healthy
People
We’re working together to care
for people and make a positive
impact on society
$
11.1
billion
We’re on track to contribute around $11.1 billion to
the New Zealand economy through our Farmgate
Milk Price. With farmers spending nearly half of
every dollar they earn for their milk in their local
communities, this helps support local businesses
and rural communities.
Farmers and employees
making a difference
We are so proud of the farmers and employees
who are being recognised for their expertise and
contribution to regional New Zealand. Like dairy
farmer Tony Wilding and scientist Dr Harvey Indyk
who were both made Officers of the New Zealand
Order of Merit in the 2020 New Year honours list.
Inia Te Wiata, a mechanical maintenance
apprentice at our Hautapu site, was awarded
the 2019 Stuart Tolhurst Memorial Award – the
industry award that recognises high-performing
engineering apprentices.
Farmer Tony Wilding,
made an Officer of the New Zealand Order of Merit.
Fonterra mechanical maintenance apprentice Inia Te Wiata,
recognised as national high-performing engineering apprentice.
Fonterra chemist Dr Harvey Indyk,
made an Officer of the New Zealand Order of Merit.
Photo Credit: Stuff/Waikato Times
FONTERRA INTERIM REPORT 2020
10
less sugar
Healthier products
We’ve reduced the amount of added sugar by 40%
in Fresh ‘n Fruity yoghurt and 30% in our Anchor
CalciYum. It gets us closer to our target of having
100% of our everyday and advanced products meet
our independently-endorsed nutritional guidelines.
A helping hand
Being a Co-op means we’re there for one another.
That’s why we helped out farmers during the
floods in the South Island and the dry weather
across the North Island. It’s also why we helped
out our local communities by delivering water
to those towns in need.
10 years of providing valuable nutrition
to Kiwi kids through KickStart Breakfast.
10
years
40%30%
FONTERRA INTERIM REPORT 2020
11
Healthy
Environment
Supporting our farmers underpins everything we do. In person,
in digital, in partnership.
1
Well defined Terms of Supply to protect the Co-operative here and now.
2
Recognition for farmers who are moving beyond the Terms of Supply.
3
All on-farm activities aligned across five focus areas.
4
Clear guidance on future direction based on emerging customer
and community trends.
5
The Co-operative
Difference
Implemented at the start of the season,
The Co-operative Difference makes it
easier for farmers to know what is
expected today and in the future,
as well as recognising those who are
taking steps to produce high-quality
milk in a more sustainable way. Our
on-farm support is a critical part of
The Co-operative Difference.
C
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Our Core
Terms of supply
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100% by 2025
Our team of 28 Sustainable Dairying
Advisors have worked with another 427
farms to develop Farm Environment Plans
(FEPs), and we are on track with our target
of 1,000 this year and for all farms to have
one by 2025.
An FEP includes a GPS tracked digital
farm map, photos of critical locations,
opportunities for improvement, practical
actions to address risks and timelines to
complete work.
Working together to achieve
a healthy environment for
farming and society
Zero waste to landfill
Knowing exactly where we are at is
key to improving. Since July 2019,
when we announced our new targets
of zero waste to landfill and 100%
recyclable, reusable or compostable
packaging by 2025, we have completed
an audit and found that approximately
60% of our packaging is in practice
recyclable. We can now develop a
plan to meet our targets.
FONTERRA INTERIM REPORT 2020
12
Farm-specific greenhouse gas
emissions reports
In a New Zealand first, we are on track to deliver farm-
specific greenhouse gas emissions reports for all our
farmer owners at the end of the year. More than 90%
of participants in a pilot study said the reports improved
their understanding of biological greenhouse gases.
Equivalent
of 32,000
cars removed
We announced that switching
from coal to wood pellets at
our Te Awamutu site in Waikato
next season will reduce our total
coal use by 10% and our carbon
emissions by the equivalent of
taking around 32,000 cars off
the road.
Reduce energy use
We’re working hard to reduce
our New Zealand manufacturing
energy intensity (energy per tonne
of production) by 20% this year
from a 2003 financial year base line.
To help with this, over the last six
months the team at our Whareroa
site in Taranaki have reduced their
energy intensity by 4.6% compared
to last season. That’s equivalent to
the annual energy used by 3,100 homes.
One-third of the
global average
but we know we
can do better
While a new study published in the
Journal of Dairy Science shows the
carbon footprint of our milk supply
is the lowest in the world (about
one-third of the global average),
we know that more is needed, and
methane is our biggest challenge.
That’s why we are working with
Massachusetts Institute of Technology
in the US and companies like DSM
in the Netherlands to investigate
combining methane inhibitors with
pasture-based farming.
Plant for Good
We launched Plant for Good,
a partnership between Farm
Source and Wildlands that
reduces the cost of planting
natives on-farm and guarantees
a survival rate of at least 90%
for the first 24 months. Planting
around waterways helps improve
water quality.
90 %
survival rate
of planted natives
FONTERRA INTERIM REPORT 2020
13
HEALTHY BUSINESS
Group
Financial
Metrics
These charts have been
selected to represent
the financial metrics for
Fonterra, to provide an
historical summary of
our performance.
Note: FY19 performance is restated for the change in timing of recognising
revenue from sales to a distributor in our Greater China Foodservice
business. Refer to the Basis of Preparation section in the FY20 Interim
Report for further detail.
1 Does not add to total due to inter-group eliminations.
2 From 2017 onwards, the basis for including China Farms was changed,
and the net impact was to reduce overall sales volumes.
,
,
,
,
kgMS (millions)
Milk Collection
,
Milk Collection
kgMS (millions)
,
,
,
,
,
(millions)
Normalised Revenue
Normalised Revenue
$ (millions)
,
,
,
,
,
(millions)
Normalised Gross Margin
Normalised Gross Margin
$ (millions)
IngredientsConsumer and Foodservice
Sales Volume (’s MT)
,
,
,
,
,
8
8
,
,
8
, ,
,
Normalised Sales Volume (‘000s MT)
1,2,3
Ingredients Consumer and Foodservice
14
FONTERRA INTERIM REPORT 0404
,
,
,
,
(millions)
Normalised OPEX
,
Normalised OPEX
$ (millions)
(millions)
Normalised EBIT
Normalised EBIT
$ (millions)
(millions)
Normalised NPAT
Normalised NPAT
4
$ (millions)
( )
(millions)
Reported NPAT
Reported NPAT
4
$ (millions)
(millions)
Free Cash Flow
( )
( )
()
Free Cash Flow
8
$ (millions)
.
.
.
.
.
Gearing
Gearing
6,7
%
Working Capital Days
Working Capital Days
(millions)
CAPEX
CAPEX
5
$ (millions)
3 FY19 and FY20 Ingredients, Consumer and Foodservice segment volumes
are reported on a Continuing Operations basis. They exclude China Farms
and DPA Brazil, which are classified as Discontinued Operations. Refer
to Note 2 to the Financial Statements in the FY20 Interim Report for
further detail.
4 Includes non-controlling interests.
5 Capital expenditure comprises purchases of property (less specific disposals
where there is an obligation to repurchase), plant and equipment and
intangible assets, and net purchases of livestock.
6 Gearing ratio is economic net interest bearing debt divided by total
capital. Total capital is equity excluding the hedge reserves, plus economic
net interest bearing debt. It excludes the borrowings attributable to
Discontinued Operations.
7 DPA Brazil business and China Farms meet the requirements as ‘disposal
groups’ held for sale. As a result of the classification as ‘Held for sale’,
the assets of each business and their associated liabilities have been
recognised in the Statement of Financial Position as ‘Held for sale’.
8 Free cash flow is the total of net cash flows from operating activities
and net cash flows from investing activities.
FONTERRA INTERIM REPORT 2020
15
HEALTHY BUSINESS
Group
Overview
Our Total Group Earnings Before Interest and Tax (EBIT)
1
were $806 million for the first six months of the 2020
financial year, an increase of $494 million compared to the
same period last year. This included a net positive $222
million from one-off items relating to the asset portfolio
review and from other normalisations.
Our Total Group normalised EBIT was $584 million, an
increase of $272 million compared to the same period last
year. This excludes the one-off items in order to give a better
comparative view of underlying earnings. We achieved this
through stable underlying earnings from Ingredients and a
significant improvement in both Foodservice and Consumer.
Foodservice’s normalised EBIT was up $86 million to $147
million, and Consumer’s normalised EBIT was up $49 million
to $116 million.
We have maintained our focus on strong financial discipline.
We have reduced our Total Group operating expenses by
11% or $140 million, and remain on-track for capital
expenditure to be no more than $500 million for the year.
We are continuing to make good progress implementing
our portfolio review. In the first half of the 2020 financial
year we completed the sale of DFE Pharma and foodspring
®
and received cash proceeds of $624 million. These
divestments, combined with improved business
performance, have contributed to our free cash flow
13
improving by $1.2 billion and net debt reducing by 22%
or $1.6 billion. The divestments have also resulted in a
gain on sale of $469 million.
As part of our strategy and focus on financial discipline,
we continuously review our asset portfolio. Sales processes
for China Farms and DPA Brazil are well underway. Based on
the additional information and further insights we have
gained through the sales process and strategic reviews for
China Farms and DPA Brazil, we have reduced the valuation
of these two assets and the China Farming joint venture by
a total of $199 million.
31 JANUARY 2019
2
31 JANUARY 2020
Normalised Basis
3
NZD Million
Continuing
Operations
4
Discontinued
Operations
5
Total Group
6
Continuing
Operations
4
Discontinued
Operations
5
Total Group
6
Volume (‘000 MT)1,9711042,0751,9281092,037
Revenue9,4283179,74510,07135210,423
Cost of goods sold(7,980)(276)(8,256)(8,483)(272)(8,755)
Gross margin1,448411,4891,588801,668
Gross margin %
7
15.4%12.9%15.3%15.8%22.7%16.0%
Operating expenses(1,164)(68)(1,232)(1,023)(69)(1,092)
Other income
8
51455(4)128
Normalised EBIT335(23)31256123584
Normalisations–––356(134)222
Reported EBIT335(23)312917(111)806
Reconciliation to Total Group EBIT
Our financial performance has improved – earnings have
increased, cashflow has improved and leverage has reduced.
Our reported Net Profit After Tax was $501 million,
up $429 million over the comparable period last year.
FONTERRA INTERIM REPORT 2020
16
1 This includes Continuing Operations and Discontinued Operations.
The basis of determining Discontinued Operations is set out in the Basis
of Preparation in the Interim Report. The combination of Continuing and
Discontinued Operations is set out in the Reconciliation to Total Group
EBIT table.
2 FY19 performance is restated for the change in timing of recognising
revenue from sales to a distributor in our Greater China Foodservice
business. Refer to the Basis of Preparation section in the FY20 Interim
Report for further detail.
3 Refer to Note 2 of the Notes to the Financial Statements in the FY20
Interim Report.
4 Continuing Operations are presented in the Income Statement and in
Note 1 in the Interim Report.
5 The basis of determining Discontinued Operations is set out in the Basis
of Preparation and presented in Note 2 in the FY20 Interim Report.
6 Represents Continuing and Discontinued Operations to reflect total
Fonterra performance.
7 Percentages as shown in tables may not align to the calculation based
on numbers in the tables due to rounding.
8 Includes other operating income, net foreign exchange gain/(loss)
and share of equity accounted investees.
9 Includes amounts attributable to non-controlling interests.
10 Defined in Non-GAPP measures in Financial Statements of FY20 Interim
Report as ‘Total normalised earnings’.
11 Normalised earnings per share attributable to equity holders of the Parent.
12 Gearing ratio is economic net interest bearing debt divided by total
capital. Total capital is equity excluding the hedge reserves, plus
economic net interest bearing debt. It excludes the borrowings
attributed to Discontinued Operations.
13 Refer to Cash Flow Statement for detail on Operating cash flow. Free cash
flow is the total of net cash flows from operating activities and net cash
flows from investing activities.
14 Capital expenditure comprises purchases of property (less specific
disposals where there is an obligation to repurchase), plant and equipment
and intangible assets, and net purchases of livestock.
SIX MONTHS ENDED
31 JAN 201931 JAN 2020
CHANGE
7
Reported net profit
after tax
9
72501
Normalised net profit
after tax
9,10
72293
Reported earnings
per share (cents)
11
0.040.32663%
Normalised earnings
per share (cents)
11
0.040.18315%
Gearing ratio
12
52.7%46.9%
Free cash flow
(NZD Million)
13
(782)369147%
Capital expenditure
(NZD Million)
14
(316)(112)65%
Normalised Net Profit After Tax
Total Group Normalised EBIT
$
293m
$
584 m
Net Debt reduced by
Free Cash Flow increased by
$
1.2b
$
1.6b
87%
307%
Group Performance
Our reported Net Profit After Tax (NPAT) was $501 million,
up $429 million over the comparable period last year. After
adjusting for minority interests, this represents an earnings
per share of 32 cents. Our normalised NPAT was $293
million, an increase of $221 million over the same period
last year and, after adjusting for minority interests, this
represents normalised earnings of 18 cents per share.
Despite the improved earnings performance in the first half,
we face a number of uncertainties in the second half. As a
result, it is appropriate that any dividend decisions are made
with a complete picture of our full year earnings
performance and debt position.
17
FONTERRA INTERIM REPORT 2020
HEALTHY BUSINESS
Group Overview CONTINUED
Our Total Group sales volumes were down 2% to 2.04
million MT. This was mainly due to lower milk collections
in Australia impacting sales volumes in our Ingredients
business. Milk collections were also marginally down in
New Zealand, but sales volumes from New Zealand sourced
milk were up due to the product mix we produced and a
faster sales rate, reflecting stronger demand.
Our Total Group sales revenue increased by 7% or $678
million to $10.4 billion, mainly due to improved pricing
and the product mix we sold.
Our Total Group normalised gross margin percentage
increased from 15.3% last year to 16.0%, predominantly
due to a significant improvement in our Greater China
Foodservice business’ margins, which reflected a recovery
in butter margins and sales volumes.
We have reviewed and changed when we recognise revenue
arising from sales to our distributor in our Greater China
Foodservice business. Previously, we accounted for the
revenue arising from sales at the point that inventory
physically transferred to the distributor. Given we retain
control of the inventory until it is transferred to our
customers, we are now recognising revenue from a sale
at the point inventory is transferred to our customers.
This does not change the profitability of the sales, but does
change the time of the year that the revenue and profit is
included in our financial statements. We see this impacting
our half year financial statements. Using our previous
method, Greater China Foodservice’s gross margin
percentage was 17.5% and 17.6% for FY19 and FY20
respectively, compared to 10.3% and 16.4% respectively
under the new approach.
Our Total Group normalised gross margin increased by 12%
or $179 million to $1,668 million, mainly due to improved
gross margins in our Foodservice and Ingredients
businesses. Our Foodservice normalised gross margins
increased by $90 million to $260 million, mainly due to a
recovery in butter sales in Greater China, and growing sales
into bakery and beverage channels across both Greater
China and Asia. Ingredients’ normalised gross margin
increased by $17 million due to improved gross margins in
Australia Ingredients, as well as a small increase in the gross
margin of New Zealand Ingredients.
The businesses classified as Discontinued Operations,
China Farms and DPA Brazil, had a total normalised gross
margin improvement of $39 million.
Our normalised gross margin for our Consumer business
was down $31 million to $499 million, predominantly due
to the sale of Tip Top and our Venezuelan business during
the 2019 financial year. When we adjust for these
divestments and take them out of our 2019 financial
performance for comparative purposes, our Consumer
gross margin decline reduced to $2 million. While our Asia
Consumer business’ gross margin grew, total Consumer was
offset by the ongoing disruption to sales from the
civil unrest in Hong Kong and Chile.
Our Consumer business significantly reduced operating
expenses, which were down $91 million on the same period
last year. These reduced costs have more than offset the
decline in gross margin and helped increase normalised
EBIT by $49 million.
Our Total Group operating expenses have reduced by
$140 million. We have achieved this through the $91 million
reduction in Consumer’s operating expenses, a further
$13 million reduction in Ingredients’ operating expenses,
and a $38 million reduction in our unallocated costs held
at Group.
As a result of our stable performance in Ingredients,
increased gross margins in Foodservice, and reduced costs
in the Consumer business, we have increased our Total
Group normalised EBIT by $272 million to $584 million
on the same period last year.
The proposed divestments of China Farms and DPA Brazil
have impacted how the financial statements are presented.
Specifically, these businesses are shown separately as
FONTERRA INTERIM REPORT 2020
18
Discontinued Operations. This is because the sales
processes for these businesses are at the point that they
meet the accounting requirements to be classified as ‘Held
for sale’, on the basis that a sale over the next 12 months
is considered highly probable. Furthermore, because both
businesses are considered to be major businesses in one
of our segments and/or geographical regions, they are
classified as ‘Discontinued Operations’. As a result, our
financial statements and the segment note within our
financial statements exclude these businesses, and
therefore reflect the Group’s Continuing Operations only.
To provide a complete view of our performance during the
first six months of the 2020 financial year, the group figures
presented in this Group Overview section are inclusive of
both Continuing and Discontinued Operations. The
business segments in the following pages reflect only the
continuing businesses. However, to provide a complete
view we have included detail in our Latin America
Consumer section on the performance of our DPA Brazil
joint venture, and we have continued to provide the China
Farms’ performance on page 32.
We are continuing our focus on strong financial discipline.
In the first half this resulted in improved cash flows and
lower leverage. Our free cash flow, being the cash flow
that is available to pay interest and dividends and to reduce
debt, increased by $1,151 million to $369 million. We achieved
this significant increase through improved earnings, lower
working capital requirements, lower capital expenditure,
the sale proceeds from divesting DFE Pharma and
foodspring
®
, and reducing our Beingmate shareholding.
Our capital expenditure of $112 million in the first half
of this year was lower than the same period last year.
We are on-track for our capital expenditure to be no
more than $500 million for the year, with seasonally
higher spend occurring in the second half year.
As at 31 January 2020, our economic net interest bearing
debt was $5.8 billion, down $1.6 billon on the same period
last year, and we have improved our gearing to 46.9%.
This measure of debt included the capitalised amount of
operating leases following changes to accounting policies,
which increased our debt by $581 million relative to the
beginning of the financial year. However, this was partially
offset by the transfer from borrowings to general liabilities
of $336 million of net debt for DPA Brazil and China Farms,
as a result of being classified as ‘Held for sale’ and a
‘Discontinued Operation’. We decreased our net finance
costs from the prior year due to our lower average debt
and our tax expense increased by $102 million due to
higher taxable profits.
Total Group Normalised
Gross Margin
Total Group Normalised
Operating Expenses
1,668 m
1,092 m
$
$
112m
$
Capital Expenditure
$140m
12%
65%
19
FONTERRA INTERIM REPORT 2020
HEALTHY BUSINESS
Our Ingredients’ sales volumes declined by 1% to
1.53 million MT and this was mainly due to the decline
in Australia Ingredients’ milk collections. We increased
our sales volumes from New Zealand sourced milk through
a better product mix and a faster sales rate, reflecting
stronger demand despite marginally lower milk collections
in New Zealand. This also resulted in lower levels of
inventory at the end of the first half relative to the
prior year.
Overall, our Ingredients’ normalised gross margin increased
$17 million to $813 million, due to New Zealand Ingredients
remaining steady and Australia Ingredients having an
improved first half relative to the prior year.
Our Ingredients business reduced normalised operating
expenses by 3% to $374 million. This was mainly from
improving cost efficiencies in Australia Ingredients.
Australia Ingredients increased EBIT by $25 million on
last year, reporting a first half normalised loss of $3 million.
This improved performance was offset by New Zealand
Ingredients’ normalised EBIT decreasing $40 million, partly
due to lower Other Operating Income after selling DFE
Pharma, which contributed earnings of $20 million in the
first half of the 2019 financial year. As a result of our new
operating model, our Fonterra-owned China Farms business
now sells direct to our customers instead of through our
New Zealand Ingredients business. In addition, due to the
Fonterra-owned China Farms being classified as a
Discontinued Operation, our China Farming joint venture
performance is presented in our New Zealand Ingredients’
performance. Our China Farming joint venture made a loss
of $13 million in the first six months of FY20, and as a result,
our total Ingredients’ normalised EBIT was down $23 million
to $441 million. Removing DFE Pharma from our 2019
financial performance for comparative purposes,
Ingredients business’ normalised EBIT declines $3 million.
Our New Zealand milk collection for the season to date,
June 2019 to January 2020, was 1,079 million kgMS, which
was 0.3% down on last season. Milk collections during the
peak of October were impacted by colder and wetter
conditions than usual across most regions. Despite this, our
sales volumes of New Zealand sourced milk were up slightly
due to a faster sales rate and different product mix, with
higher sales of butter and Consumer creams through our
Foodservice channels. However, sales volumes from our
New Zealand Ingredients Global Sourcing business were
down mainly due to lower milk collections in Australia.
Overall, our New Zealand Ingredients business’ sales
volumes were down 0.1% to 1.45 million MT.
Our New Zealand Ingredients’ normalised gross margin
increased 1% to $736 million.
Our New Zealand Ingredients business manufactures five
ingredient products that inform the Farmgate Milk Price
range. These are referred to as reference products, while all
other products are referred to as non-reference products.
As the five reference products drive the cost of milk used to
make non-reference products, the relative price differences
and movements of the two sets of products is an important
contributor to our EBIT performance.
Relative to the prior year, our margins per metric tonne on
reference products were steady. However, our non-
reference gross margins per metric tonne were adversely
impacted by higher sales volumes of UHT cream, a
relatively lower margin product for Ingredients, to support
our growing Foodservice sales.
Additionally, our UHT cream and cheese both had lower
margin rates relative to last year due to market pricing in
response to increased capacity and supply globally. Our
bulk liquid margins were unfavourable compared to last
year, with positive margins generated in the 2019 financial
year as a result of a declining milk cost relative to this year,
where milk costs have risen during the first half.
Ingredients
Our New Zealand Ingredients’ gross margin was in line with
last year, but normalised earnings were down following
the divestment of DFE Pharma. Australia Ingredients’
performance has improved relative to the prior year despite
ongoing challenges. However, this was offset by reduced
earnings in New Zealand Ingredients, resulting in our total
Ingredients’ normalised EBIT declining by 5% to $441 million.
FONTERRA INTERIM REPORT 2020
20
1 Refer to Note 2 of the Notes to the Financial Statements in the FY20 Interim
Report for normalisation information.
2 Figures represent Continuing Operations.
3 Percentages as shown in tables may not align to the calculation based on
numbers in the tables due to rounding.
4 Represents the net (loss) from the external sale of milk produced by China
Farms and sold to the Ingredients business in China at an internal raw milk
price. China Farms is classified as a Discontinued Operation.
SIX MONTHS ENDED
Normalised
(NZD Million)
1,2
31 JAN 201931 JAN 2020CHANGE
3
Volume (’000 MT)1,5471,533(1)%
Sales revenue7,8518,5769%
Gross margin 7968132%
• New Zealand Ingredients7287361%
– Reference products3453450%
– Non-reference
products324296(9)%
– Other gross margin599561%
• Australia Ingredients621228%
• Other gross margin62 56(9)%
EBIT464441(5)%
Discontinued
Operations EBIT
4
(3)–
Ingredients Performance
New Zealand Ingredients gross margin
($ per MT)
Reference products
($ per MT)3733740%
Non-reference products
($ per MT)915762(17)%
Normalised Sales Revenue
Normalised Gross Margin
8,576 m
813m
9%
2%
$
$
21
FONTERRA INTERIM REPORT 2020
HEALTHY BUSINESS
Ingredients CONTINUED
We were able to offset the tightening margins on our
non-reference products with favourable phasing of logistic
costs, higher margins within our Global Sourcing business
and improved manufacturing performance.
Our New Zealand Ingredient business’ operating expenses
were in line with last year.
Adjusting for the divestment of DFE Pharma, our
New Zealand Ingredients’ normalised EBIT decreased
$20 million to $428 million. This was mainly due to now
having to account for the China Farming joint venture in
New Zealand Ingredients. The China Farming joint venture
reported a loss of $4 million in the first half of the 2019
financial year and a loss of $13 million this year due to
ongoing animal management costs.
Australia Ingredients’ sales volumes declined 24% to
134,000 MT predominantly as a result of reduced milk
supply. Milk collections continue to be impacted by
challenging on-farm conditions, retirements and a highly
competitive milk supply market which has seen us lose milk
supply primarily to milk brokers. Our third-party collections
are also down due to our decision to focus on a value-add
product mix. Our Australian milk collections declined 16%
to 69.7 million kgMS. Fortunately, no Fonterra Australia
suppliers have been impacted directly by the bushfires
in Australia.
Relative to the prior year, the Australian dollar has declined
against the US dollar, which is favourable for our US dollar
denominated sales. Coupled with improved product pricing,
it has offset the increased milk price in Australia. We
increased our Australia Ingredients’ gross margin through
reduced costs as a result of closing the Dennington site,
better utilisation of our Stanhope site, and allocating more
milk to higher-returning cheddar and mozzarella products,
rather than the lower-returning liquid and whole milk
powder products.
1 Figures represent Fonterra sourced New Zealand milk only.
2 Excludes bulk liquid milk. Bulk liquid milk for the six months to 31 January
2020 was 37,000 MT (six months to 31 January 2019: 34,000 MT).
SIX MONTHS ENDED
31 JAN 201931 JAN 2020CHANGE
Production Volume (’000 MT)
Reference products1,3461,311(3)%
Non-reference products4855085%
Sales Volume (’000 MT)
Reference products924921(0)%
Non-reference products35438910%
Revenue Per MT (NZD)
Reference products4,6585,167(21)%
Non-reference products5,2945,6887%
New Zealand Ingredients
Revenue and Volume
1,2
Despite the ongoing challenges in Australia, our Ingredients
business has reduced its half year loss by $25 million to a
loss of $3 million, through continued focus on managing
mix, price realisation and cost leadership.
In December 2019, we purchased Fundación Isabel Aninat’s
13.6% shareholding in Prolesur for $29.3 million, which took
our ownership of Prolesur to 99.9%. Like Soprole, Prolesur’s
recent performance has been impacted by challenging
market conditions. The acquisition of the Fundación
shareholding has enabled us to integrate our two Chilean
businesses to generate operating efficiencies across the
supply chain from milk collection, processing, and
administration. It also allows us greater flexibility as we
focus on realising the best value for our Co-operative from
our businesses in Chile in line with our new strategy.
FONTERRA INTERIM REPORT 2020
22
New Zealand Normalised
Gross Margin
$
736 m
Australia Normalised
Gross Margin
$
21m
1%
228%
23
FONTERRA INTERIM REPORT 0404
HEALTHY BUSINESS
Our Foodservice business performance in the
first half improved significantly compared to the
previous year with continued growth in our bakery
and beverage house channels in Greater China and
Asia. Earnings from our Oceania and Latin America
Foodservice businesses were stable.
Overall, our Foodservice sales volumes increased 15% to
262,000 MT partly due to the slow start in Greater China
in the 2019 financial year. However, we also increased our
sales volumes in the first half of the 2020 financial year as
a result of strong demand for our products from bakery and
beverage house customers in Greater China and Asia. Our
improved butter sales volumes and margins combined with
growth in higher margin products contributed to a
significant increase in gross margin, relative to the previous
year. Our gross margin percentage improved from 12.7% to
17.2% and normalised gross margin increased $90 million
to $260 million. Our operating expenses were flat and
normalised EBIT was up $86 million to $147 million.
Oceania
Our Oceania Foodservice sales volumes decreased 6% to
45,000 MT, predominantly due to reduced sales volumes of
low margin bulk product following industry consolidation in
New Zealand and lower butter sales in Australia. Australia
increased gross margins through a focused revenue growth
strategy, but this was offset by the lower sales volumes in
New Zealand. However, overall Oceania Foodservice gross
margin was stable at $47 million.
New Zealand’s operating efficiencies more than offset its
reduced gross margin. Overall Oceania Foodservice EBIT
grew $4 million to $17 million.
Foodservice
Foodservice Performance
1 Refer to Note 2 of the Notes to the Financial Statements in the FY20 Interim
Report for normalisation information.
2 Figures represent Continuing Operations.
3 Summing of individual numbers from the regional and divisional
breakdown may not add up to the totals in each category due to rounding.
4 FY19 performance is restated for the change in timing of recognising
revenue from sales to a distributor in our Greater China Foodservice
business. Refer to the Basis of Preparation section in the FY20 Interim
Report for further detail.
5 Percentages as shown in tables may not align to the calculation based
on numbers in the tables due to rounding.
SIX MONTHS ENDED
Normalised
(NZD Million)
1,2,3
31 JAN 2019
4
31 JAN 2020CHANGE
5
Volume (’000 MT)22826215%
Sales revenue1,3411,51713%
Gross margin 170260 53%
Gross margin (%)12.7%17.2%
EBIT61147141%
Discontinued
Operations EBIT–––
FONTERRA INTERIM REPORT 2020
24
Oceania EBIT
Asia EBIT
$
17m
$
27 m
31%
230%
Asia
Our sales volumes in Asia Foodservice increased 13% to
51,000 MT. The largest contributor to the volume growth
was the Philippines, which won a number of new customers
in their bakery and beverage channels.
Our gross margin increased $20 million to $55 million due
to improved performance in the majority of our Foodservice
businesses across Asia, with the Indonesia and the
Philippines businesses the largest contributors. Indonesia
has continued to grow its gross margin with a focus on high
margin products and revenue growth management. The
Philippines improved gross margin mainly through growing
volumes as a result of winning new customers in the bakery
and beverage channels. The improved performance across
the majority of Asia resulted in the gross margin percentage
increasing from 12.1% to 16.3%.
Operating expenses in Asia increased marginally due to
increased logistic costs in the Philippines and a stronger
local currency in Indonesia, which impacted in-market costs.
Our Asia Foodservice EBIT increased $19 million to
$27 million due to the growth in gross margin and
keeping costs relatively flat.
25
FONTERRA INTERIM REPORT 0404
HEALTHY BUSINESS
Foodservice CONTINUED
Greater China
In Greater China, our Foodservice sales volumes increased
25% on last year to 149,000 MT. The strong increase was
partly due to the first half of the prior year being impacted
by high in-market inventory in Mainland China.
Furthermore, within Mainland China, additional volume
growth has come from strong market demand for our
Anchor Food Professionals™ UHT milk and Anchor Food
Professionals™ UHT whipping cream. We have driven this
demand through continuing to develop new product
applications across an increasing range of Western and
Chinese cuisines, and we have also expanded into new
cities. We are now in 350 cities compared to 285 cities
we were in at this point last year.
Our gross margin increased $68 million to $142 million,
predominantly due to increased sales volumes and lower
input costs. Gross margin percentage increased significantly
from 10.3% to 16.4%, due to a recovery in butter margins
as well as selling more higher gross margin products, such
as Anchor Food Professionals™ UHT milk and Anchor
Food Professionals™ UHT culinary cream.
Our operating expenses in Greater China increased
marginally due to the ongoing expansion into new cities,
and we increased our normalised EBIT by $63 million to
$100 million.
Latin America
Our Foodservice business in Latin America is relatively
small with $3 million normalised EBIT in the first half of this
year, which was in line with last year. Soprole is the largest
contributor to our Latin America Foodservice business with
dairy desserts being the main category. The profitability of
this business has been impacted by the civil unrest relating
to the increased cost of living, privatisation, and inequality.
The civil unrest escalated to vandalism of city infrastructure,
including supermarkets, and impacted sales.
SALES VOLUME (‘000 MT)NORMALISED EBIT ($M)
SIX MONTHS ENDED31 JAN 2019
1
31 JAN 2020CHANGE
2
31 JAN 2019
1
31 JAN 2020CHANGE
2
Foodservice
3
22826215%61147141%
Oceania4845(6)%131731%
Asia455113%827230%
Greater China
1
11914925%37100169%
Latin America161710%33(2)%
Foodservice Regional Performance
1 FY19 performance is restated for the change in timing of recognising
revenue from sales to a distributor in our Greater China Foodservice
business. Refer to the Basis of Preparation section in the FY20 Interim
Report for further detail.
2 Percentages as shown in tables may not align to the calculation based
on numbers in the tables due to rounding.
3 Summing of individual numbers from the regional and divisional
breakdown may not add up to the totals in each category due to rounding.
4 Includes net other operating income, net foreign exchange gains/losses
and share of profit/loss of equity accounted investees.
SIX MONTHS ENDED
NZD Million31 JAN 2019
1
31 JAN 2020
Normalised EBIT prior year7361
Volume2626
Price 11(31)
Cost of goods sold(69)95
Operating expenses and other
4
20(4)
Normalised EBIT61147
Foodservice Normalised EBIT:
key performance drivers
FONTERRA INTERIM REPORT 2020
26
Greater China Gross Margin
Greater China EBIT
$
142m
$
100m
91%
169%
27
FONTERRA INTERIM REPORT 0404
Overall, Consumer sales volumes were down 6% on last
year to 551,000 MT. This was mainly due to challenging
trading conditions in Hong Kong and Chile as a result of
the civil unrest, and the fact our figures for the first
half of 2019 included Tip Top and our Venezuelan business
which we have since sold. Removing the Tip Top and
Venezuelan sales volume in FY19 for comparative purposes,
reduces the year-on-year total consumer sales volume
decline to 3%.
Soprole, our Chilean business, maintained its gross margin
relative to the first half of last year despite the civil unrest
in Chile. We were not able to do this in Hong Kong, which
offset the gross margin increase in Asia. Total Consumer
gross margin was 6% down on last year to $499 million.
For comparative purposes, when we removed the Tip Top
and Venezuelan gross margins from our 2019 financial
performance, the Consumer gross margin increased by
1% year on year and the adjusted normalised gross
margin percentage was stable at 24.0%.
Our normalised operating expenses across all regions were
down a total of $91 million to $377 million. Once again for
comparative purposes, removing the Tip Top and
Venezuelan operating expenses from our 2019 financial
performance sees Consumer’s reduction in operating
expenses go from $91 million to $61 million.
Our total Consumer normalised EBIT increased 73% to
$116 million, due to the gross margin growth in Asia as
well as the reduced operating expenses across all regions.
Adjusting for Tip Top and the Venezuelan business, our
Consumer EBIT improved 76%.
Oceania
Our Oceania Consumer sales volume increased 1% to
258,000 MT after adjusting the 2019 financial year for
the sale of Tip Top. Our Australia business had a small
improvement in sales volumes predominantly due to
demand growth across our cheese brands. Our New
Zealand Consumer business has chosen to operate a
leaner product mix focusing on higher margin products.
On a comparable basis this resulted in no change to its
sales volumes. Not adjusting for the sale of Tip Top, our
sales volume declined 8,000 MT, or 3%.
Our Australian Consumer business improved its gross
margin due to a focused revenue growth strategy in all
categories, particularly in chilled spreads, where Western
Star continues to lead the market in both volume and value
share. Australia’s improved performance was offset by our
New Zealand Consumer business as it adjusts to a leaner
business model focusing on our core brands and working
with our customers to execute a more profitable range.
After adjusting for the sale of Tip Top, our Oceania Consumer
normalised gross margin decreased $1 million to $141 million.
Not adjusting for Tip Top, our normalised gross margin
decreased $30 million.
Rationalising our operations within our New Zealand
business, as part of managing a leaner product mix,
resulted in operating expenses in our Oceania Consumer
business decreasing.
Oceania Consumer normalised EBIT increased $19 million
to $34 million after adjusting for Tip Top. The improved
performance reflects growth in Australia gross margin as
well as reduced operating expenses in New Zealand. Not
adjusting the 2019 financial year for the sale of Tip Top, our
Oceania Consumer normalised EBIT increased $14 million.
Asia
We improved our gross margin in Sri Lanka and reduced
operating expenses across the majority of the Asia
Consumer business. This resulted in our Asia Consumer
normalised EBIT increasing $21 million to $56 million.
Asia Consumer sales volumes decreased 6% to 98,000 MT,
predominantly due to the timing of shipments to Sri Lanka
and lower sales of consumer powders into East Africa.
Gross margin in Sri Lanka increased due to a recovery in
pricing but was partially offset by lower gross margin in
Indonesia and Malaysia due to lower sales volume of
Anmum™ and Anlene™. Overall Asia Consumer gross
margin increased $9 million to $175 million.
HEALTHY BUSINESS
Consumer
All regions within our Consumer business
improved EBIT during the first half of the 2020
financial year relative to the same period last
year, except for Greater China where challenges
in Hong Kong offset earnings growth in Mainland
China and Taiwan.
FONTERRA INTERIM REPORT 2020
28
Oceania EBIT
Asia EBIT
$
34m
$
56m
69%
58%
1 Refer to Note 2 of the Notes to the Financial Statements in the FY20 Interim
Report for normalisation information.
2 Figures represent Continuing Operations.
3 Summing of individual numbers from the regional and divisional breakdown
may not add up to the totals in each category due to rounding.
4 Percentages as shown in tables may not align to the calculation based
on numbers in the tables due to rounding.
5 Represents DPA Brazil net profit/(loss). DPA Brazil is classified as a
Discontinued Operation.
The majority of business units within our Asia Consumer
business reduced operating expenses, in particular
Malaysia, due to the timing of planned product launches.
Greater China
Our Greater China Consumer performance continues
to be impacted by the challenging trading conditions in
Hong Kong. Sales volumes declined 9% to 41,000 MT,
partly due to the challenges in Hong Kong but also due to
lower sales in Mainland China as we changed distribution
models in some channels to align with our new strategy.
Our gross margin decreased $14 million to $63 million.
The majority of the decline is due to reduced sales of
our high margin Anlene™ and Anmum™ products in
Hong Kong.
SIX MONTHS ENDED
Normalised basis
(NZD Million)
1,2,3
31 JAN 201931 JAN 2020CHANGE
4
Volume (’000 MT)585551(6)%
Sales revenue2,1552,080(3)%
Gross margin 530499(6)%
Gross margin (%)24.6%24.0%
EBIT6711673%
Discontinued
Operations EBIT
5
(5)14–
Consumer Performance
29
FONTERRA INTERIM REPORT 2020
HEALTHY BUSINESS
SALES VOLUME (‘000 MT)NORMALISED EBIT ($M)
SIX MONTHS ENDED31 JAN 201931 JAN 2020CHANGE
1
31 JAN 201931 JAN 2020CHANGE
1
Consumer
2,3
585551(6)%6711673%
Oceania267258(3)%203469%
Asia10498(6)%355658%
Greater China4541(9)%135(62)%
Latin America
4
169154(9)%(1)223,494%
Consumer Performance
Consumer CONTINUED
Operating expenses reduced mainly due to the lower sales
volume in Mainland China and Hong Kong.
The disruption to the retail sector in Hong Kong has
meant our Hong Kong Consumer business made a loss in
the first half of the year. This loss was partially offset by the
improved performance in Mainland China and reduced
operating costs and volume growth in Taiwan, where
there has been increased demand for our Fernleaf brand.
Overall, our Greater China normalised EBIT declined
$8 million to $5 million.
Latin America
Our Latin America Consumer performance continues to
be impacted by the challenging trading conditions in Chile.
In the last quarter of the 2019 financial year, Soprole, our
Consumer business in Chile, showed signs of recovery from
a ‘buy local’ marketing campaign, which impacted the sales
and earnings of a number of foreign-owned companies.
However, civil unrest and vandalism of supermarkets during
the first half of this financial year has impacted Soprole’s
dessert, yoghurt and mature cheese sales volumes. Overall,
Latin America sales volume compared to the prior year
decreased 15,000 MT to 154,000 MT. Our sales volumes
last year include those from our Venezuelan business, which
we have since sold. Removing the Venezuelan volumes
from our 2019 financial performance for comparative
purposes, the year-on-year decline is 9,000 MT.
Our Latin America Consumer gross margin increased
$4 million to $120 million mainly due to Soprole having
lower milk input costs.
In the 2019 financial year, Soprole made a $15 million
payment to Prolesur, our Ingredients business in Chile.
This related to a prior year one-off milk cost. At a group
level this one-off payment between the two business units
had minimal impact. This payment did not reoccur in this
year, which was the main reason for reduced operating
expenses in our Latin America Consumer business
this year.
Latin America Consumer normalised EBIT increased
$23 million to $22 million, predominantly due to the
reduced operating expenses in Soprole. Adjusting 2019
financial performance for the Venezuelan business
reduces the year-on-year increase to $17 million.
The sale process for DPA Brazil, our Consumer joint
venture in Brazil, is well underway, and it has advanced
to the point that the business meets the requirements
to be classified as ‘Held for sale’ in our financial statements.
Furthermore, it meets the definition of a Discontinued
Operation because it is a separate major geographical
area of operation. As a result, the segment note within our
financial statements has been prepared excluding our Brazil
joint venture business.
In the first half of this year, the DPA Brazil business has had
increased sales volumes off the back of the local economy
improving and increasing its market share in both value and
volume. DPA Brazil’s market share value increased 1% to
17.5%. Its gross margin also increased, predominantly due
to the volume growth but also through an improved pricing
strategy. We also saw a small improvement in DPA Brazil’s
operating expenses, and combined with the improved sales
performance, DPA Brazil increased its normalised EBIT by
$19 million to $14 million.
1 Percentages as shown in tables may not align to the calculation based on
numbers in the tables due to rounding.
2 Summing of individual numbers from the regional and divisional
breakdown may not add up to the totals in each category due to rounding.
3 Figures represent Continuing Operations.
4 Excludes DPA Brazil performance. DPA Brazil is classified as a Discontinued
Operation.
FONTERRA INTERIM REPORT 2020
30
1 Figures represent Continuing Operations and excludes DPA Brazil
performance. DPA Brazil is classified as a Discontinued Operation.
2 Includes net other operating income, net foreign exchange gains/losses
and share of profit/loss of equity accounted investees.
SIX MONTHS ENDED
(NZD Million)31 JAN 201931 JAN 2020
Normalised EBIT prior year12767
Volume6(30)
Price 6047
Cost of goods sold(89)(47)
Operating expenses and other
2
(37)79
Normalised EBIT67116
Consumer Normalised EBIT:
key performance drivers
1
Despite the improved performance, Brazil continues to
remain a challenging market to operate in. In the 2019
financial year, we wrote down the value of the business by
$149 million and the divestment process has resulted in a
further impairment of $71 million before tax. The Brazil
business is a joint venture and the loss is shared with our
joint venture partner. Therefore, at the level of net profit
attributable to Fonterra equity holders, the impact of the
impairment is $31 million.
Latin America Gross Margin
Latin America EBIT
$
120m
$
22m
4%
up from
$(1)m
31
FONTERRA INTERIM REPORT 2020
HEALTHY BUSINESS
China
Farms
SIX MONTHS ENDED
31 JAN 201931 JAN 2020CHANGE
1
Volume (‘000 MT)91015%
Sales revenue11013523%
Normalised gross margin(13)11187%
Normalised EBIT(18)9150%
China Farms Financial Performance
End-to-End China Farms Normalised EBIT
SIX MONTHS ENDED
31 JAN 201931 JAN 2020
China Farms
Fonterra-owned(18)9
New Zealand Ingredients
2
(4)(16)
Consumer and Foodservice 13
Total(21)(4)
1 Percentages as shown in tables may not align to the calculation based
on numbers in the tables due to rounding.
2 Includes our China Farming joint venture and associated management fees.
The sale process for China Farms is well underway and
it has advanced to the point that the business meets the
requirement to be classified as ‘Held for sale’ in our
financial statements. The divestment of the China Farms
business also meets the definition of a Discontinued
Operation because it is a separate line of business and
a major geographical area of operation. As a result, the
China Farms segment note in our financial statements
is no longer presented.
To provide a complete view of our performance during
the first six months of the 2020 financial year, we have
continued to report China Farms’ performance in
this section.
Our sales volumes increased 15% to 10,000 MT due
to last year’s volumes being impacted by continuous
rainstorms and flooding in Yutian. Improved feed
management and increased productivity per cow has
also helped increase sales volumes.
China Farms’ gross margin improved $24 million from a
loss of $13 million to a profit of $11 million. This was driven
by strong seasonal market demand and a focus on
customer portfolio optimisation, enabling us to achieve
higher external milk prices. In the first six months of the
2020 financial year, 72% of our milk volumes sold for more
than RMB 4, versus 51% in the comparable period last year.
China Farms’ EBIT increased $27 million from a loss of
$18 million to a profit of $9 million, predominantly due to
the improved gross margin and a small improvement in
operating expenses.
The China Farming joint venture is part of our Continuing
Operations and is now reported in the Ingredients segment.
It reported a loss of $13 million, predominantly due to
ongoing animal management costs, compared to a loss
of $4 million for the same period last year.
FONTERRA INTERIM REPORT 2020
32
FONTERRA INTERIM REPORT 2020
33
Commodity Prices
JAN 2016JAN 2017JAN 2018JAN 2019JAN 2020
Weighted Average Commodity Prices ($ USD per MT FOB)
Whole Milk Powder
1
2,0642,5803,0872,8453,166
Skim Milk Powder
1
1,7582,1352,0002,0502,640
Butter
1
2,7313,4345,8794,4604,302
Cheese
2
3,0883,5543,8973,5223,883
Group Overview
3,4,5
JAN 2016JAN 2017JAN 2018JAN 2019JAN 2020
Income
Volume (000s MT)2,3242,1312,0032,0752,037
Normalised sales revenue ($ million)8,8389,2329,8369,74510,423
Normalised EBITDA ($ million)
6
951896733596907
Normalised EBIT ($ million)
7
665607458312584
Normalised NPAT ($ million)
8
36738424268283
Reported earnings per share0.250.26(0.22)0.040.32
Normalised earnings per share0.230.240.150.040.18
Revenue Margin Analysis
EBITDA
9
10.8%9.7%7. 4%6.1%8.7%
EBIT
10
7. 5%6.6%4.7%3.2%5.6%
NPAT
11
4.2%4.2%2.5%0.7%2.7%
Cash Flow ($ million)
Operating cash flow
12
924(167)(292)(612)(124)
Free cash flow
12
346(417)(690)(782)369
Net working capital
13
4,6234,8385,3565,3966,196
Capital Measures
Equity excluding hedge reserve ($ million)7,1377,0056,6246,6076,506
Economic net interest-bearing debt ($ million)
14
6,9086,1157,0607,3525,757
Gearing ratio
15
49.2%46.6%51.6%52.7%46.9%
Capital expenditure ($ million)
16
453244346316112
HEALTHY BUSINESS
Historical Financial
Summary
FONTERRA INTERIM REPORT 2020
34
Ingredients
3,4,17
JAN 2017JAN 2018JAN 2019JAN 2020
Sales Volume (000 MT)
18
Reference Products973900924921
Non-reference Products338277354389
Revenue ($/MT)
18
Reference Products3,8734,7834,6585,167
Non-reference Products5,2015,7265,2945,688
Gross Margin ($/MT)
Reference Products253413373374
–Margin6.5%8.6%8.0%7. 2%
Non-reference Products1,1781,309915762
–Margin22.6%22.9%17.3%13.4%
Ingredients
Volume (000s MT)
19
1,5431,4411,5471,533
Normalised sales revenue ($ million)7,2197,9037,8518,576
Normalised gross margin ($ million)792871796813
Normalised gross margin %
20
11.0%11.0%10.1%9. 5%
Normalised earnings ($ million)510558464441
Normalised earnings margin %
21
7.1%7.1%5.9%5.1%
Divisional Breakdown – Ingredients
3,4,22
JAN 2017JAN 2018JAN 2019JAN 2020
New Zealand Ingredients
17
Volume (000s MT)
19
1,4651,3421,4491,447
Revenue ($ million)6,6077,0066,9737,785
Normalised gross margin ($ million)730766728736
Normalised gross margin %
20
11.0%10.9%10.4%9. 5%
Fonterra Ingredients Australia
Volume (000s MT)
19
155148175134
Revenue ($ million)727855919774
Normalised gross margin ($ million)2750621
Normalised gross margin %
20
3.7%5.9%0.7%2.7%
Other and Eliminations
Volume (000s MT)
19
(77)(49)(77)(48)
Revenue ($ million)(115)42(41)17
Normalised gross margin ($ million)35556256
FONTERRA INTERIM REPORT 2020
35
Historical Group Summary CONTINUED
HEALTHY BUSINESS
Regional Breakdown – Consumer and Foodservice
3,4,22,23
JAN 2017JAN 2018JAN 2019JAN 2020
Oceania
Volume (000s MT)
19
335309315303
Revenue ($ million)9881,0871,1081,046
Normalised gross margin ($ million)243208218188
Normalised gross margin %
20
24.6%19.2%19.6%
18.0%
Normalised earnings ($ million)58153251
Normalised earnings margin %
21
5.9%1.4%2.9%
4.9%
Asia
Volume (000s MT)
19
156145149149
Revenue ($ million)933905933981
Normalised gross margin ($ million)288211200229
Normalised gross margin %
20
30.9%23.3%21.5%23.4%
Normalised earnings ($ million)124564482
Normalised earnings margin %
21
13.3%6.2%4.7%8.4%
Greater China
5
Volume (000s MT)
19
112129164190
Revenue ($ million)5677319221,056
Normalised gross margin ($ million)
198182152205
Normalised gross margin %
20
34.9%24.9%16.5%19.4%
Normalised earnings ($ million)969250105
Normalised earnings margin %
21
16.9%12.6%5.4%9.9%
Latin America
24
Volume (000s MT)
19
305294185171
Revenue ($ million)751750534514
Normalised gross margin ($ million)234220131137
Normalised gross margin %
20
31.1%23.6%24.5%26.6%
Normalised earnings ($ million)3530225
Normalised earnings margin %
21
4.7%4.0%0.4%4.9%
Total Consumer and Foodservice
5,24
Volume (000s MT)
19
908877813813
Revenue ($ million)3,2393,4733,4973,597
Normalised gross margin ($ million)963821701759
Normalised gross margin %
20
29.7%23.9%20.0%21.1%
Normalised earnings ($ million)313193128263
Normalised earnings margin %
21
9.7%5.6%3.7%7. 3%
FONTERRA INTERIM REPORT 2020
36
Regional Breakdown – Foodservice
3,4,22,23
JAN 2017JAN 2018JAN 2019JAN 2020
Oceania
Volume (000s MT)
19
51494845
Revenue ($ million)220255262247
Normalised gross margin ($ million)44414747
Normalised gross margin %
20
20.1%16.1%17.8%
19.1%
Asia
Volume (000s MT)
19
45494551
Revenue ($ million)252318287335
Normalised gross margin ($ million)61403555
Normalised gross margin %
20
24.4%12.6%12.1%16.3%
Greater China
5
Volume (000s MT)
19
8489119149
Revenue ($ million)446548723867
Normalised gross margin ($ million)
13710874142
Normalised gross margin %
20
30.8%19.7%10.3%16.4%
Latin America
Volume (000s MT)
19
16141617
Revenue ($ million)59576967
Normalised gross margin ($ million)18131516
Normalised gross margin %
20
30.1%22.8%21.4%24.1%
Total Foodservice
5
Volume (000s MT)
19
197201228262
Revenue ($ million)9761,1781,3411,517
Normalised gross margin ($ million)261202170260
Normalised gross margin %
20
26.7%17.1%12.7%17.2%
FONTERRA INTERIM REPORT 2020
37
Historical Group Summary CONTINUED
HEALTHY BUSINESS
Regional Breakdown – Consumer
3,4,22,23
JAN 2017JAN 2018JAN 2019JAN 2020
Oceania
Volume (000s MT)
19
285260267258
Revenue ($ million)768832846799
Gross margin ($ million)199168171141
Gross margin %
20
25.9%20.1%20.2%
17.7%
Asia
Volume (000s MT)
19
1119610498
Revenue ($ million)682587646646
Gross margin ($ million)227171166175
Gross margin %
20
33.3%29.1%25.7%27.1%
Greater China
Volume (000s MT)
19
28404541
Revenue ($ million)121183199190
Gross margin ($ million)60747763
Gross margin %
20
50.1%40.6%38.7%33.4%
Latin America
24
Volume (000s MT)
19
288280169154
Revenue ($ million)693693465446
Gross margin ($ million)216207116120
Gross margin %
20
31.2%29.8%25.0%27.0%
Total Consumer
24
Volume (000s MT)
19
712676585551
Revenue ($ million)2,2632,2952,1552,080
Gross margin ($ million)702619530499
Gross margin %
20
31.0%27.0%24.6%24.0%
Discontinued Operations
25
JAN 2017JAN 2018JAN 2019JAN 2020
China Farms
Volume (000s MT)
19
1310910
Revenue ($ million)122123110135
Gross margin ($ million)
(6)(8)(13)11
Gross margin %
20
(5.3)%(6.1)%(11.8)%8.4%
Normalised earnings ($ million)
(24)(12)(18)9
DPA Brazil
1
Volume (000s MT)
19
98969599
Revenue ($ million)233222207217
Gross margin ($ million)
66665469
Gross margin %
20
28.1%29.4%26.2%31.7%
Normalised earnings ($ million)
(16)(7)(5)14
FONTERRA INTERIM REPORT 2020
38
Notes to the Historical Financial Summary
1 Source: Fonterra Farmgate Milk Price Statement representing the
weighted-average United States Dollar contract prices of Reference
Commodity Products.
2 Source: Oceania Export Series, Agricultural Marketing Service,
US Department of Agriculture.
3 Percentages as shown in table may not align to the calculation of percentages
based on numbers in the table due to rounding of reported figures.
4 Includes normalisation adjustments.
5 FY19 performance is restated for the change in timing of recognising
revenue from sales to a distributor in our Greater China Foodservice
business. Refer to the Basis of Preparation section in the FY20 Interim
Report for further detail.
6 Normalised EBITDA is calculated as profit for the period before net finance
costs, tax, depreciation and amortisation, adjusted for normalisations.
7 Represents earnings before unallocated finance income, finance costs and tax.
8 Normalised NPAT attributable to equity holders of the Parent.
9 Normalised EBITDA divided by normalised sales revenue.
10 Normalised EBIT divided by normalised sales revenue.
11 Normalised NPAT divided by normalised sales revenue.
12 Refer to Cash Flow Statement for detail on Operating cash flow.
Free cash flow is the total of net cash flows from operating activities
and net cash flows from investing activities.
13 Net working capital is calculated as total trade and other receivables
plus inventories, less trade and other payables. It excludes amounts
owing to suppliers and employee entitlements. Previously shown on
an inclusive basis.
14 Economic net interest-bearing debt reflects total borrowings less cash
and cash equivalents and non-current interest-bearing advances, adjusted
for derivatives used to manage changes in hedged risks.
15 Gearing ratio is economic net interest-bearing debt divided by total
capital. Total capital is equity excluding the hedge reserves, plus economic
net interest-bearing debt. It excludes the borrowings attributed to
Discontinued Operations.
16 Capital expenditure comprises purchases of property (less specific
disposals where there is an obligation to repurchase), plant and
equipment and intangible assets, and net purchases of livestock.
17 Ingredients’ performance is restated to include China Farming joint
venture. FY19 has been restated to provide year-on-year comparative.
China Farms business unit is classified as a Discontinued Operation,
financials relating to sales of milk from China Farms have been removed
from the Ingredients’ segment for FY19.
18 Figures exclude bulk liquid milk. The bulk liquid milk volume for the
six months ended 31 January 2020 was 37,000 MT of kgMS equivalent
(six months to 31 January 2019 was 34,000 MT of kgMS equivalent).
19 Includes sales to other strategic platforms.
20 Normalised gross margin divided by normalised sales revenue.
21 Normalised earnings divided by normalised sales revenue.
22 Summing of individual numbers from the regional and divisional
breakdown may not add up to the totals in each category due to rounding.
23 Regions include a share of Consumer and Foodservice overhead
allocations, the total impact of which is $44 million.
24 FY20 Latin America Consumer performance represents Continuing
Operations and excludes DPA Brazil performance. DPA Brazil is classified
as a Discontinued Operation. FY19 has been restated to provide a
year-on-year comparative.
25 China Farms and DPA Brazil intend to be sold and the sales processes
have advanced to the point that the businesses meet the accounting
requirements to be classified as ‘Held for sale’. Furthermore, because
both businesses are considered to be major businesses in a segment
and/or geographical region, they are classified as Discontinued Operations.
As a result, the financial accounts and the segment within our accounts
exclude these businesses and therefore reflect the Group’s Continuing
Operations only.
FONTERRA INTERIM REPORT 2020
39
Interim
Financial Results
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
Contents
Directors’ Statement41
Income Statement42
Statement of Comprehensive Income43
Statement of Financial Position44
Statement of Changes in Equity45
Cash Flow Statement46
Basis of Preparation47
Notes to the Financial Statements50
Independent Review Report69
FONTERRA INTERIM REPORT 2020
40
Directors’ Statement
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
The Directors of Fonterra Co-operative Group Limited (Fonterra) present to Shareholders the financial statements for Fonterra and its
subsidiaries (together the Group) and the Group’s interest in its equity accounted investments for the six months ended 31 January 2020.
The Directors present financial statements for the six months, which fairly present the financial position of the Group and its financial
performance and cash flows for that period.
The Directors consider the financial statements of the Group have been prepared using accounting policies which have been consistently
applied and supported by reasonable judgements and estimates, and that all relevant financial reporting and accounting standards have
been followed.
The Directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of
the financial position of the Group and facilitate compliance of the financial statements with the Financial Markets Conduct Act 2013.
The Directors consider that they have taken adequate steps to safeguard the assets of the Group, and to prevent and detect fraud
and other irregularities.
The Directors hereby approve and authorise for issue the financial statements for the six months ended 31 January 2020.
For and on behalf of the Board:
JOHN MONAGHAN BRUCE HASSALL
Chairman Director
17 March 2020 17 March 2020
FONTERRA INTERIM REPORT 2020
41
GROUP $ MILLION
SIX MONTHS ENDEDYEAR ENDED
NOTES
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
1
31 JUL 2019
1
Continuing Operations
Revenue from sale of goods310,0719,42819,255
Cost of goods sold4(8,483)(7,980)(16,349)
Impact of Strategy Review19–(32)
Gross profit1,6071,4482,874
Other operating income274274
Selling and marketing expenses(270)(300)(543)
Distribution expenses(247)(267)(514)
Administrative expenses(389)(427)(748)
Other operating expenses(177)(170)(367)
Net foreign exchange losses(29)(11)–
Share of (loss)/profit of equity accounted investees(9)2025
Impact of Strategy Review:
–Gain on sale of investment in DFE Pharma2a)401––
–Gain on sale of investment in Goodminton2b)68––
–Falcon China Farms joint venture impairment2f)(65)––
–New Zealand consumer and foodservice business
and Tip Top disposal
––(237)
–Disposal of Venezuelan operations––(134)
–Other impact of strategic review––(80)
Profit before net finance costs and tax917335350
Finance income6715
Finance costs(167)(201)(407)
Net finance costs(161)(194)(392)
Profit/(loss) before tax756141(42)
Tax expense(147)(45)(80)
Profit/(loss) after tax from continuing operations60996(122)
Discontinued Operations
Loss after tax from discontinued operations2e)(108)(24)(488)
Profit/(loss) after tax50172(610)
Profit/(loss) after tax is attributable to:
Equity holders of the Co-operative52168(562)
Non-controlling interests(20)4(48)
Profit/(loss) after tax50172(610)
GROUP $
SIX MONTHS ENDEDYEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
1
31 JUL 2019
1
Earnings per share:
Basic and diluted earnings/(loss) per share from continuing operations0.370.05(0.09)
Basic and diluted loss per share from discontinued operations(0.05)(0.01)(0.26)
Basic and diluted earnings/(loss) per share0.320.04(0.35)
1 Income statements for the six months ended 31 January 2019 and 12 months ended 31 July 2019 include re-presentations and restatements.
Please see the ‘Basis of preparation’ section and note 14 of these interim financial statements for further details.
Income Statement
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
FONTERRA INTERIM REPORT 2020
42
GROUP $ MILLION
SIX MONTHS ENDEDYEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
1
31 JUL 2019
1
Profit/(loss) after tax50172(610)
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges and other costs of hedging, net of tax38204(1)
Net investment hedges and translation of foreign operations, net of tax(11)(58)(12)
Hyperinflation gains/(losses) attributable to equity holders–14(10)
Foreign currency translation reserve losses transferred to the income statement6–193
Hyperinflation reserve gains transferred to the income statement––(12)
Other reserve movements(33)2–
Total items that may be reclassified subsequently to profit or loss–162158
Items that will not be reclassified subsequently to profit or loss:
Net fair value losses on investments in shares––(1)
Foreign currency translation (loss)/gain attributable to non-controlling interests(1)(1)1
Hyperinflation movements attributable to non-controlling interests–9–
Non-controlling interest other reserve movements(16)––
Total items that will not be reclassified subsequently to profit or loss(17)8–
Total other comprehensive (expense)/income recognised directly in equity(17)170158
Total comprehensive income/(expense)484242(452)
Total comprehensive income/(expense) is attributable to:
Equity holders of the Co-operative 520230(420)
Non-controlling interests(36)12(32)
Total comprehensive income/(expense)484242(452)
Total comprehensive income/(expense) arises from:
Continuing operations61326628
Discontinued operations(129)(24)(480)
Total comprehensive income/(expense)484242(452)
1 The statement of comprehensive income for the six months ended 31 January 2019 and 12 months ended 31 July 2019 include re-presentations
and restatements. Please see the ‘Basis of preparation’ section and note 14 of these interim financial statements for further details.
Statement of Comprehensive Income
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FONTERRA INTERIM REPORT 2020
43
GROUP $ MILLION
AS AT
NOTES
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
1
31 JUL 2019
1
ASSETS
Current assets
Cash and cash equivalents460348550
Trade and other receivables 2,0572,1901,871
Inventories5,8525,2693,165
Tax receivable414745
Derivative financial instruments 8316248
Assets of disposal groups held for sale2e)1,175–229
Other current assets 64117116
Total current assets9,7328,1336,024
Non-current assets
Property, plant and equipment95,8906,9176,512
Right-of-use assets13571––
Equity accounted investments 143633202
Livestock7278295
Intangible assets2,3073,1892,597
Deferred tax assets491518605
Derivative financial instruments535261440
Other non-current assets 467372604
Total non-current assets10,41112,16811,255
Total assets20,14320,30117,279
LIABILITIES
Current liabilities
Bank overdraft525734
Borrowings81,0326181,175
Trade and other payables 1,9532,3172,107
Owing to suppliers3,5172,7341,534
Tax payable635961
Derivative financial instruments189103215
Provisions511663
Liabilities of disposal groups held for sale2e)716––
Other current liabilities527771
Total current liabilities
7,6255,9815,260
Non-current liabilities
Borrowings85,6357,1365,361
Derivative financial instruments 468471537
Provisions63104117
Deferred tax liabilities19999
Other non-current liabilities425657
Total non-current liabilities
6,2277,7766,171
Total liabilities
13,85213,75711,431
Net assets
6,2916,5445,848
EQUITY
Subscribed equity5,8875,8875,887
Retained earnings789977327
Foreign currency translation reserve7(188)(422)(183)
Hedge reserves7(215)(63)(268)
Other reserves(2)428
Total equity attributable to equity holders of the Co-operative
6,2716,4215,771
Non-controlling interests
2012377
Total equity
6,2916,5445,848
1 The statement of financial position as at 31 January 2019 and as at 31 July 2019 include a restatement. Please see the ‘Basis of preparation’ section
and note 14 for further details.
Statement of Financial Position
AS AT 31 JANUARY 2020
FINANCIAL SUMMARY
FONTERRA INTERIM REPORT 2020
44
Statement of Changes in Equity
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
ATTRIBUTABLE TO EQUITY HOLDERS OF THE CO-OPERATIVE
GROUP $ MILLION
SUBSCRIBED
EQUITY
RETAINED
EARNINGS
FOREIGN
CURRENCY
TRANSLATION
RESERVE
HEDGE
RESERVES
OTHER
RESERVESTOTAL
NON-
CONTROLLING
INTERESTS
TOTAL
EQUITY
As at 1 August 2019 (restated)5,887327(183)(268)85,771775,848
NZ IFRS 16 transition adjustment (Note 13)–(20)–––(20)–(20)
As at 1 August 2019 adjusted (restated)5,887307(183)(268)85,751775,828
Profit after tax–521–––521(20)501
Transfer between reserves–(15)–15––––
Other comprehensive (expense)/income–(24)(5)38(10)(1)(16)(17)
Total comprehensive (expense)/income–482(5)53(10)520(36)484
Transactions with equity holders in their capacity as equity holders:
Dividend paid to non-controlling interests––––––(21)(21)
As at 31 January 2020 (unaudited)5,887789(188)(215)(2)6,271206,291
As at 1 August 20185,887934(364)(267)296,2191306,349
Prior period restatement
1
–(28)–––(28)–(28)
As at 1 August 2018 adjusted (restated)5,887906(364)(267)296,1911306,321
Profit after tax (restated)
1
–68–––68472
Other comprehensive income/(expense)–3(58)204131628170
Total comprehensive income/(expense)
(restated)–71(58)2041323012242
Transactions with equity holders in their capacity as equity holders:
Acquisition of subsidiaries––––––11
Dividend paid to non-controlling interests––––––(20)(20)
As at 31 January 2019 (unaudited, restated)5,887977(422)(63)426,4211236,544
As at 1 August 20185,887934(364)(267)296,2191306,349
Prior period restatement
1
–(28)–––(28)–(28)
As at 1 August 2018 adjusted (restated)5,887906(364)(267)296,1911306,321
Loss after tax (restated)
1
–(562)–––(562)(48)(610)
Other comprehensive (expense)/income–(17)181(1)(21)14216158
Total comprehensive (expense)/income
(restated)–(579)181(1)(21)(420)(32)(452)
Transactions with equity holders in their capacity as equity holders:
Equity instruments issued––––––11
Dividend paid to non-controlling interests––––––(22)(22)
As at 31 July 2019 (restated)5,887327(183)(268)85,771775,848
1 For details on the impact of prior period restatements refer to ‘Basis of preparation’ section and note 14 of these interim financial statements.
FONTERRA INTERIM REPORT 2020
45
Cash Flow Statement
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
GROUP $ MILLION
SIX MONTHS ENDEDYEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
1
31 JUL 2019
1
Cash flows from operating activities
2
Profit/(loss) before net finance costs and tax806312(17)
Adjustments for:
–Foreign exchange gains(32)(11)(29)
–Depreciation and amortisation323284561
–Gain on sale of investment in DFE Pharma(401)––
–Gain on sale of investment in Goodminton(68)––
–Falcon China Farms joint venture impairment65––
–China Farms impairment63–203
–New Zealand consumer and foodservice business and Tip Top disposal––214
–Brazil consumer and foodservice business impairments (before tax)71–149
–Disposal of Venezuelan operations––134
–Other 46(46)42
672271,274
(Increase)/decrease in working capital:
Inventories(2,749)(1,931)
126
Trade and other receivables(267)
(9)
341
Amounts owing to suppliers1,982978(222)
Payables and accruals82
(94)
(211)
Other movements
(10)
(61)(112)
Total(962)(1,117)(78)
Cash generated from operations(89)(578)1,179
Taxes paid(35)(34)(56)
Net cash flows from operating activities(124)(612)1,123
Cash flows from investing activities
2
Cash was provided from:
–Proceeds from sale of businesses624–396
–Proceeds from disposal of property, plant and equipment13132
–Proceeds from sale of livestock131828
–Proceeds from sale of investments4687
–Co-operative support loan repayments–177177
–Other cash inflows–225
Cash was applied to:
–Acquisition of non-controlling interests(29)––
–Acquisition of property, plant and equipment(113)(320)(541)
–Acquisition of livestock (including rearing costs)(20)(20)(37)
–Acquisition of intangible assets(20)(38)(82)
–Acquisition of investments––(10)
–Advances to and investments in equity accounted investees(9)(2)(6)
–Other cash outflows–(26)(17)
Net cash flows from investing activities493(170)(28)
Cash flows from financing activities
2
Cash was provided from:
–Proceeds from borrowings1,3732,9053,746
–Interest received7714
–Other cash inflows1––
Cash was applied to:
–Interest paid(205)(212)(427)
–Repayment of borrowings(1,595)(1,874)(4,149)
–Dividends paid to non-controlling interests(21)(20)(22)
–Other cash outflows–(1)(12)
Net cash flows from financing activities(440)805(850)
Net (decrease)/increase in cash(71)23245
Opening cash 516285285
Effect of exchange rate changes(19)(17)(14)
Closing cash426291516
Reconciliation of closing cash balances to the statement of financial position:
Cash and cash equivalents460348550
Bank overdraft(52)(57)(34)
Cash balances transferred to held for sale18––
Closing cash426291516
1 Income statements for the six months ended 31 January 2019 and 12 months ended 31 July 2019 include re-presentations and restatements. Please see
the ‘Basis of preparation’ section and note 14 of these interim financial statements for further details. The adjustments had no impact on net cash flows.
2 The Cash flow statement presents total Group cash flows including continuing and discontinued operations.
FINANCIAL SUMMARY
FONTERRA INTERIM REPORT 2020
46
a) General information
Fonterra Co-operative Group Limited (Fonterra, the Company or the Co-operative) is a co-operative company incorporated
and domiciled in New Zealand. Fonterra is registered under the Companies Act 1993 and the Co-operative Companies Act 1996,
and is an FMC Reporting Entity under the Financial Markets Conduct Act 2013. Fonterra is also required to comply with the
Dairy Industry Restructuring Act 2001.
These interim financial statements, as at and for the six months ended 31 January 2020, comprise Fonterra and its subsidiaries
(together referred to as the Group) and the Group’s interest in its equity accounted investees after adjustments to align to the
accounting policies of the Group.
The Group operates predominantly in the international dairy industry. The Group is primarily involved in the collection,
manufacture and sale of milk and milk-derived products and in fast-moving consumer goods and foodservice businesses.
b) Basis of preparation
These interim financial statements have been prepared in accordance with International Accounting Standard 34: Interim Financial
Reporting and New Zealand Equivalents to International Accounting Standard 34: Interim Financial Reporting. They have also been
prepared in accordance with Generally Accepted Accounting Practice (GAAP) applicable to for-profit entities. These interim financial
statements are unaudited and should be read in conjunction with the financial statements for the year ended 31 July 2019.
The Group’s operations are seasonal due to the profile of milk production in New Zealand. Milk production, and therefore the Group’s
milk collections and production volumes are higher in the New Zealand Spring (October and November). Consequently, the amount
owing to suppliers, inventory balances and borrowings are higher at the 31 January interim reporting dates compared to the 31 July
year-end reporting dates. This reflects the higher cash outflows required to support the business operations in the first six months
of the financial year. Additional comparative information has been presented in these interim financial statements to allow for the
seasonality of the Group’s operations.
These interim financial statements are presented in New Zealand dollars ($ or NZD), which is Fonterra’s functional currency,
and rounded to the nearest million, except where otherwise stated.
Comparative period income statements and retained earnings for the periods, six months ended 31 January 2019 and 12 months
ended 31 July 2019 have been re-presented and restated.
Re-presented
Re-presentations have been made to reflect the classification of China Farms and the Brazil consumer and foodservice businesses
as discontinued operations.
In these interim financial statements the China Farms and Brazil consumer and foodservice businesses are classified as held for sale
and presented as discontinued operations. This has the following impact on the presentation of these interim financial statements:
–Discontinued operations are presented in a single line item in the statement of financial performance in both the current and
comparative reporting periods.
–In the statement of financial position, assets of disposal groups held for sale are presented in a single line item within current
assets, and liabilities of disposal groups held for sale are presented in a single line item within current liabilities. The presentation
of statement of financial position reported in the comparative reporting periods is unchanged.
–The statement of changes in equity and cash flow statement have not been adjusted to separately present discontinued operations.
Restatements
Fonterra adopted NZ IFRS 15 from 1 August 2018. On adoption of NZ IFRS 15, the Group had determined that it was the principal
in relation to certain performance obligations for freight and insurance services provided on specific international sales. During
the current reporting period, this conclusion was reconsidered and it was determined that the Group was an agent rather than
the principal. This resulted in an adjustment to revenue to record the net agency fees for arranging certain freight and insurance
services, rather than the gross revenue. This change does not impact gross margin or earnings. The adjustment to the Group’s
revenue and cost of sales is shown in note 14 (Agent Adjustment).
The Group has also reviewed its other major revenue recognition policies. This review identified that for a specific contract in China,
the Group had determined that Fonterra ceased to control the goods when the goods were transferred to the distributor. During the
current reporting period this conclusion was reconsidered and it was determined that the distributor was acting as an agent (for the
purposes of NZ IFRS 15) for Fonterra and control of the goods did not pass until the inventory reached the customer. This now results
in the deferral of revenue until the point in time that the control was transferred to the customer, rather than on transfer to the
distributor. The impact of this change gave rise to an adjustment to the Group’s opening balance sheet and profit or loss as shown
in note 14 (Control Transfer).
The preparation of interim financial statements requires management to make judgements, estimates, and assumptions that affect
the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may
differ from these estimates. In preparing these interim financial statements, the significant judgements made by management in
applying the Group’s accounting policies and key sources of estimation uncertainty include those applied to the financial statements
for the year ended 31 July 2019. In addition, for the period ended 31 January 2020 the following significant judgements were made
by management.
Basis of Preparation
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FONTERRA INTERIM REPORT 6464
47
Forecast Farmgate Milk Price
The Farmgate Milk Price is the average price paid by Fonterra in a season, which is the 12 months ending 31 May, for each kilogram
of milk solids (kgMS) supplied by farmer shareholders under Fonterra’s standard terms of supply. The Farmgate Milk Price for a season
is finalised after the end of that milk season. Global dairy commodity prices that inform the Farmgate Milk Price revenue are the most
significant driver of the level of each season’s Farmgate Milk Price.
Within the forecast Farmgate Milk Price, the majority of the milk sourced up until 31 January 2020 is contracted for sale at hedged
NZD/USD exchange rates. This means that the Farmgate Milk Price revenue that would be earned from the milk sourced during
the six months ended 31 January 2020 is largely known.
The full season forecast Farmgate Milk Price remains uncertain. This is because the Farmgate Milk Price revenue that will be earned
from milk supplied during the remainder of the milk season ending 31 May 2020 is impacted by future global dairy commodity prices.
Future global dairy commodity prices in USD are uncertain as they are influenced by global supply and demand dynamics, and their
conversion to NZD is uncertain because the conversion of these USD selling prices to NZD depends on the NZD/USD exchange
rate and associated hedging.
Assets held for sale and discontinued operations (Note 2)
A number of the Group’s investments have been included in the Group-wide strategy review. As the strategic reviews of the individual
investments progress, management must apply judgement to determine whether the criterion for the investment to be classified
as held for sale is met, and if so (or the investment has been sold), whether the investment meets the definition of a discontinued
operation. The outcome of these assessments may result in a change in measurement and presentation of the net assets of the
investment, and a change in the presentation of its financial performance.
An investment meets the criteria to be classified as held for sale if it is available for immediate sale in its present condition and its sale
is highly probable. Judgement is required to determine if the sale of an investment is highly probable in the context of the strategic
review and the progress of any potential sale process. An investment that meets the criterion to be classified as held for sale (or has
been sold) is a discontinued operation if it represents, or is part of a single co-ordinated plan to dispose of, a separate major line of
business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.
c) Accounting policies
The same accounting policies are followed in these interim financial statements as were applied in the Group’s financial statements
for the year ended 31 July 2019 with the exception of the impact of adopting NZ IFRS 16 Leases and NZ IFRIC 23 Uncertainty over
Income Tax Treatments.
Impact of adopting NZ IFRS 16 Leases
Transition to NZ IFRS 16
Fonterra adopted NZ IFRS 16 on 1 August 2019. NZ IFRS 16 requires a lease liability reflecting future lease payments, and a ‘right-of-use
asset’, to be recognised for most lease contracts where Fonterra is a lessee. This includes many of the leases previously classified as
operating leases for which no asset or liability was reflected on the statement of financial position under previous accounting rules.
The adoption of NZ IFRS 16 does not have a significant impact on the Group’s net profit after tax. However, there is an increase
in profit before net finance costs and tax, because a portion of the lease costs that were previously reported in cost of goods sold
or operating expenses are now recorded as finance costs. Following adoption of NZ IFRS 16, the presentation of lease payments
in the cash flow statement changed from operating activities to financing activities except for short term and low value leases
which are included within operating activities.
On transition to NZ IFRS 16 at 1 August 2019, the Group recognised a right-of-use asset of $621 million and a lease liability
of $652 million. The lease liability is recognised within Borrowings in the Statement of Financial Position.
The impact of transition to NZ IFRS 16 Leases is disclosed in Note 13.
Impact of adopting NZ IFRIC 23 Uncertainty over Income Tax Treatments
NZ IFRIC 23 clarifies how to recognise and measure tax balances when there is uncertainty over income tax treatments. For Fonterra
uncertain tax positions predominantly relate to judgements regarding transfer pricing.
Fonterra adopted NZ IFRIC 23 from 1 August 2019 and has applied the interpretation retrospectively. In applying the interpretation
there was no impact on the measurement of tax balances. However the presentation of the provision for taxes on the balance sheet
changed from Provisions to Tax payable. The impact of this change is to reclassify the tax provision of $24 million from Provisions to
Tax payable as at 31 July 2019 (31 January 2019: $24 million).
Accounting standards issued but not yet effective
There are no new or amended standards that are issued but not yet effective that are expected to have a material impact on the Group.
Basis of Preparation CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
FONTERRA INTERIM REPORT 2020
48
Basis of Preparation CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
Coronavirus outbreak
The existence of novel coronavirus (COVID-19) was confirmed in mainland China in December 2019. The outbreak was declared
a “Public Health Emergency of International Concern” by the World Health Organisation in January 2020. Since then, the outbreak
has spread globally, causing disruption to businesses and economic activity.
Fonterra has a dedicated team in place to manage the impact of COVID-19. Since 31 January 2020, there was a slow-down
in processing of containers at ports and we have managed our supply chain to avoid congestion. Currently, the Group’s exports
continue to be cleared by customs and quarantine officials. Some of the Group‘s global foodservice customers are being adversely
impacted due to people movement restrictions and a slow-down in tourism. We are continuing to watch the impact of COVID-19
on global demand.
Fonterra considers this outbreak to be a non-adjusting post balance sheet event. The impact of this outbreak on the macroeconomic
forecasts will be incorporated into the Group’s estimates of credit loss provisions and impairment assessments for the financial year
ending 31 July 2020.
FONTERRA INTERIM REPORT 2020
49
FINANCIAL SUMMARY
PERFORMANCE
1 SEGMENT REPORTING
a) Operating segments
Operating segments reflect the way financial information is regularly reviewed by the Fonterra Management Team (FMT). The measure
of profit or loss used by the FMT to evaluate the underlying performance of operating segments is normalised segment earnings before
net finance costs and tax.
In September 2019, Fonterra announced a new strategy which included an updated operating model. Fonterra’s financial reporting
systems are being aligned to the updated operating model. Once those system changes are complete, the financial information
provided to the FMT will be updated to reflect the updated operating model. The segment information will be aligned to the financial
information provided to the FMT. As at 31 January 2020 the FMT continues to receive financial information on the basis which is set
out in the note below.
The strategic reviews of the Group’s China Farms and Brazilian consumer and foodservice businesses have advanced such that both
businesses meet the requirements to be classified as held for sale at 31 January 2020 and are considered to be discontinued operations.
As a result, the segment note has been restated to exclude these businesses and therefore reflect the Group’s continuing operations
only. Further details of the discontinued operations can be found in Note 2e).
The Group’s investment in the Falcon China Farms joint venture (Falcon China Farms JV) has previously been included within
the ‘China Farms’ segment. The Falcon China Farms JV is considered separately from the ‘China Farms’ but is not considered
a ‘discontinued operation’. The investment and the share of equity accounted losses it has generated have been included in the
Ingredients segment on the basis that its customers are most closely aligned with other Ingredients customers. Comparative
information in the segment note has been restated to reflect this change.
Transactions between segments are based on estimated market prices.
Unallocated costs represent corporate costs including Corporate Affairs and Group services.
REPORTABLE SEGMENTDESCRIPTION
Ingredients Represents the collection, processing and distribution of the ingredients business in New Zealand,
global sales and marketing of New Zealand and non-New Zealand ingredients products,
Fonterra Farm Source™ stores, the Falcon China Farms JV and the Australian and South American
ingredients businesses.
Consumer and foodservice
–OceaniaRepresents the fast-moving consumer goods (FMCG) and foodservice businesses in New Zealand
and Australia (including export to the Pacific Islands).
–AsiaRepresents FMCG and foodservice businesses in Asia (excluding Greater China), Africa and the
Middle East.
–Greater ChinaRepresents FMCG and foodservice businesses in Greater China.
–Latin AmericaRepresents FMCG and foodservice businesses in Chile and the Caribbean.
Notes to the Financial Statements
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FONTERRA INTERIM REPORT 2020
50
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
a) Operating segments CONTINUED
GROUP $ MILLION
31 JANUARY 2020 (UNAUDITED)
INGREDIENTSCONSUMER AND FOODSERVICE
UNALLOCATED
COSTS AND
ELIMINATIONSTOTAL
OCEANIAASIA
GREATER
CHINA
LATIN
AMERICATOTAL
Continuing Operations
Normalised segment income statement
External revenue6,5939519601,0545133,478–10,071
Inter-segment revenue1,983952121119(2,102)–
Revenue from sale of goods8,5761,0469811,0565143,597(2,102)10,071
Cost of goods sold
(7,763)(858)(752)(851)(377)(2,838)2,118(8,483)
Segment gross profit813188229205137759161,588
Operating expenses(374)(138)(143)(101)(108)(490)(159)(1,023)
Net other operating income221110113(1)34
Net foreign exchange losses(9)–(4)(9)(6)(19)(1)(29)
Share of (loss)/profit of equity accounted investees(11)–(1)–1–2(9)
Normalised segment earnings
before net finance costs and tax441518210525263(143)561
Normalisation adjustments:
Disposal of investment in DFE Pharma
427––––––427
Disposal of investment in Goodminton62–––––668
Falcon China Farms JV impairment(65)––––––(65)
Other costs(27)––(7)–(7)(11)(45)
Beingmate–––(29)–(29)–(29)
Segment earnings before net finance costs and tax83851826925227(148)917
Finance income6
Finance costs(167)
Profit before tax756
Tax expense(147)
Profit after tax from continuing operations609
Loss after tax from discontinued operations(108)
Profit after tax501
Other segment information:
Volume
1
(metric tonnes, thousand)1,533303149190171813(418)1,928
Depreciation and amortisation ($ million)(230)(19)(8)(4)(16)(47)(32)(309)
Capital expenditure
2
($ million)765––6111299
Equity accounted investments ($ million)121–––121210143
The total segment gross profit shown above is different to the reported gross profit as a result of certain normalisation adjustments
recognised in revenue and cost of goods sold.
Reconciliation of reported to segment gross profit for the six months ended 31 January 2020:
GROUP $ MILLIONFOR THE SIX MONTHS ENDED 31 JANUARY 2020
Segment gross profit1,588
Normalisation adjustments
–DFE Pharma dividend received26
–Other impact of strategy review(7)
Reported gross profit1,607
1 Includes sales to other strategic platforms. Total column represents total external sales.
2 Capital expenditure comprises purchases of property, plant and equipment and intangible assets.
FONTERRA INTERIM REPORT 2020
51
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
a) Operating segments CONTINUED
GROUP $ MILLION
31 JANUARY 2019 (UNAUDITED)
1
INGREDIENTSCONSUMER AND FOODSERVICE
UNALLOCATED
COSTS AND
ELIMINATIONSTOTAL
OCEANIAASIA
GREATER
CHINA
LATIN
AMERICATOTAL
Continuing Operations
Normalised segment income statement
External revenue6,0311,0339129205323,397–9,428
Inter-segment revenue1,820752122100(1,920)–
Revenue from sale of goods7,8511,1089339225343,497(1,920)9,428
Cost of goods sold(7,055)(890)(733)(770)(403)(2,796)1,871(7,980)
Segment gross profit796218200152131701(49)1,448
Operating expenses(387)(190)(153)(107)(130)(580)(197)(1,164)
Net other operating income37425314(9)42
Net foreign exchange gains/(losses)2–(5)–(4)(9)(4)(11)
Share of profit of equity accounted investees16–––22220
Normalised segment earnings
before net finance costs and tax4643244502128(257)335
Finance income7
Finance costs(201)
Profit before tax141
Tax expense(45)
Profit after tax from continuing operations96
Loss after tax from discontinued operations(24)
Profit after tax72
Other segment information:
Volume
2
(metric tonnes, thousand)1,547315149164185813(389)1,971
Depreciation and amortisation ($ million)(205)(14)(6)(1)(11)(32)(29)(266)
Capital expenditure
3
($ million)251223–73219302
Equity accounted investments ($ million)399––2141022410633
1 The segmented income statement for the six months ended 31 January 2019 includes restatements. Please see the ‘Basis of preparation’ section
and note 14 of these interim financial statements for further details.
2 Includes sales to other strategic platforms. Total column represents total external sales.
3 Capital expenditure comprises purchases of property (less specific disposals where there is an obligation to repurchase), plant and equipment and intangible assets.
FONTERRA INTERIM REPORT 2020
52
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
a) Operating segments CONTINUED
GROUP $ MILLION
31 JULY 2019
1
INGREDIENTSCONSUMER AND FOODSERVICE
UNALLOCATED
COSTS AND
ELIMINATIONSTOTAL
OCEANIAASIA
GREATER
CHINA
LATIN
AMERICATOTAL
Continuing Operations
Normalised segment income statement
External revenue12,5841,9891,8141,7851,0836,671–19,255
Inter-segment revenue3,7071704825225(3,932)–
Revenue from sale of goods16,2912,1591,8621,7871,0886,896(3,932)19,255
Cost of goods sold(14,845)(1,737)(1,411)(1,445)(805)(5,398)3,894(16,349)
Segment gross profit1,4464224513422831,498(38)2,906
Operating expenses(735)(333)(284)(190)(242)(1,049)(388)(2,172)
Net other operating income67314412(5)74
Net foreign exchange gains/(losses)16–(8)(2)(1)(11)(5)–
Share of profit/(loss) of equity accounted investees23–(2)(1)41125
Normalised segment earnings
before net finance costs and tax8179215815348451(435)833
Normalisation adjustments:
New Zealand consumer and foodservice business–(204)–––(204)–(204)
Disposal of Tip Top–(25)–––(25)(15)(40)
Disposal of Venezuelan operations(22)–––(112)(112)–(134)
Australia strategic reset(68)––––––(68)
Other strategic reset costs
(6)(2)––(5)(7)(12)(25)
Beingmate–––(12)–(12)–(12)
Segment earnings before net finance costs and tax721(139)158141(69)91(462)350
Finance income15
Finance costs(407)
Loss before tax(42)
Tax expense(80)
Loss after tax from continuing operations(122)
Loss after tax from discontinued operations(488)
Loss after tax(610)
Other segment information:
Volume
2
(metric tonnes, thousand)3,1496272973133651,602(813)3,938
Depreciation and amortisation ($ million)
(408)(27)(12)(2)(23)(64)(54)(526)
Capital expenditure
3
44643101177149566
Equity accounted investments181–––12129202
The total segment gross profit shown above is different to the reported gross profit as a result of certain normalisation adjustments
recognised in cost of goods sold.
Reconciliation of reported to segment gross profit for the year ended 31 July 2019:
GROUP $ MILLIONFOR THE YEAR ENDED 31 JULY 2019
Segment gross profit2,906
Normalisation adjustments
–Australian strategic reset(23)
–New Zealand consumer and foodservice business strategic review impact(7)
–Other strategic reset costs(2)
Reported gross profit2,874
1 The segmented income statement for the 12 months ended 31 July 2019 includes restatements. Please see the ‘Basis of preparation’ section
and note 14 of these interim financial statements for further details.
2 Includes sales to other strategic platforms. Total column represents total external sales.
3 Capital expenditure comprises purchases of property, plant and equipment and intangible assets.
FONTERRA INTERIM REPORT 2020
53
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
b) Geographical revenue
GROUP $ MILLION
CHINA
REST
OF ASIAAUSTRALIA
NEW
ZEALAND
UNITED
STATESEUROPE
LATIN
AMERICA
REST OF
WORLDTOTAL
Geographical segment external revenue:
Six months ended 31 January 2020 (unaudited)2,8432,8638578103775068021,01310,071
Six months ended 31 January 2019
(unaudited)2,3292,6818778463763858441,0909,428
Year ended 31 July 20194,3525,5901,7761,6769318511,7152,36419,255
Revenue is allocated to geographical segments on the basis of the destination of the goods sold.
c) Non-current assets
GROUP $ MILLION
INGREDIENTS OCEANIAASIA
GREATER
CHINA
LATIN
AMERICA
TOTAL
GROUP
NEW
ZEALAND
REST OF
WORLD
NEW
ZEALANDAUSTRALIA
Geographical segment non-current assets:
As at 31 January 2020 (unaudited)5,7383318411,0148612513499,385
As at 31 January 2019 (unaudited)5,5224971,3301,0348171,1141,07511,389
As at 31 July 20195,4673057561,00784094489110,210
GROUP $ MILLION
AS AT
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Reconciliation of geographical segment’s non-current assets to total non-current assets:
Geographical segment non-current assets 9,38511,38910,210
Deferred tax assets491518605
Derivative financial instruments 535261440
Total non-current assets10,41112,16811,255
FONTERRA INTERIM REPORT 2020
54
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
2 STRATEGY REVIEW UPDATE
During the year ended 31 July 2019 Fonterra announced and began the implementation of a Group-wide strategy review. This note
explains the accounting impact of the strategy review on the financial statements for the six months ended 31 January 2020.
Since 31 July 2019 progress of the strategy review includes completion of the sales processes relating to the Group’s investments
in Goodminton AG (Goodminton) and DMV Fonterra Excipients GmbH & Co.KG (DFE Pharma). The strategic reviews of the China
Farms and Brazil consumer and foodservice businesses have advanced such that the investments meet the requirements to be
classified as held for sale at 31 January 2020. Both the China Farms and Brazil consumer and foodservice businesses are considered
to be discontinued operations.
Challenges with the operational performance of the Falcon China Farms JV have led to reassessing the carrying value of the
investment as we continue to look for opportunities to improve the ongoing performance of the business.
The Group’s investment in Beingmate continues to be held for trading with an active sales process in place.
The Group’s financial statements for the year ended 31 July 2019 included note disclosures supporting the significant items
and estimates and judgements applied to them. That comparative information has not been included in these interim financial
statements. For further details of those items please refer to the Group’s financial statements for the year ended 31 July 2019.
Key components of the strategy review and their impact on the Group’s net profit after tax as presented in the Group’s Income
Statement for the six months ended 31 January 2020.
GROUP $ MILLION
DFE PHARMA
SALE (NOTE 2A)
GOODMINTON
INVESTMENT
SALE (NOTE 2B)
BEINGMATE
(NOTE 2D)
CHINA FARMS
(NOTE 2E)
BRAZIL
CONSUMER &
FOODSERVICE
(NOTE 2E)
FALCON CHINA
FARMS JV
IMPAIRMENT
(NOTE 2F)TOTAL
Revenue26–––––26
Gross profit26–––––26
Other40168(29)––(65)375
Total net profit/(loss) before tax42768(29)––(65)401
Loss after tax from
discontinued operations–––(63)(61)–(124)
Profit/(loss) after tax42768(29)(63)(61)(65)277
Non-controlling interests––––(30)–(30)
Profit/(loss) attributable
to shareholders42768(29)(63)(31)(65)307
a) Disposal of DMV Fonterra Excipients GmbH & Co.KG (DFE Pharma)
On 23 January 2020 Fonterra completed the sale of its 50 per cent share of DFE Pharma. As at 31 July 2019, this investment
was classified as held for sale.
The transaction resulted in a gain on sale of $401 million. The gain on sale includes a debit balance of $16 million relating to
DFE Pharma that was recycled from the foreign currency translation reserve and recognised as part of the net gain on sale.
Sale proceeds were received of $620 million (€356 million) which was made up of cash of $527 million (€301 million) and an
interest-bearing loan of $93 million (€55 million). The sale and purchase agreement also contains earnout clauses in relation
to earnings before interest, tax, depreciation and amortisation of DFE Pharma for the 2020 financial year, and specifies
completion adjustments, which are not included in the sales price of $620 million.
The gain on sale is shown below:
$ MILLION
Sales proceeds received527
Interest-bearing loan93
Total sale proceeds received620
Net assets disposed of(193)
FCTR recycled as part of the net gain
(16)
Transaction costs(10)
Gain on sale401
DFE Pharma is presented in the Ingredients reportable segment.
In addition to the gain on sale of $401 million, Fonterra received $26 million of dividends from DFE Pharma in the period
FONTERRA INTERIM REPORT 2020
55
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
from 1 August 2019 to 31 January 2020 which have been recognised as revenue.
b) Disposal of Goodminton AG (Goodminton)
On 3 September 2019 Fonterra completed the sale of Goodminton. As at 31 July 2019, this investment was classified as held for sale.
The transaction resulted in a gain on sale of $68 million. The gain on sale includes a credit balance of $6 million relating to Goodminton
that was recycled from the foreign currency translation reserve and recognised as part of the net gain on sale. Goodminton is
presented in the Ingredients reportable segment.
c) New Zealand consumer and foodservice business
During the year ended 31 July 2019, an impairment charge of $185 million was recognised in relation to the New Zealand consumer
and foodservice business. This means that as at 31 July 2019 the carrying amount of the New Zealand consumer and foodservice
business was equivalent to its recoverable amount. Therefore, adverse changes to the key assumptions used in determining the
recoverable amount may result in a further impairment.
The assessment completed for the year ended 31 July 2019 was based on a value-in-use model using a five-year forecast period,
with significant value attributed to performance improvement in the later years.
As at 31 January 2020, the business has been assessed for indicators of impairment. The business performance for the six months
ended 31 January 2020 is, in aggregate, ahead of the year one assumptions used in the assessment of recoverable amount. As at
31 January 2020, there is no indication that these longer-term assumptions will not be attained, therefore there are no impairment
indicators as at 31 January 2020.
d) Beingmate Baby & Child Food Co., Ltd (Beingmate)
Fonterra’s investment in Beingmate continues to be classified as “Held for Trading” in accordance with NZ IFRS 9 with movements
in fair value recognised in profit or loss.
During the six months ended 31 January 2020 Fonterra has been actively selling the shares held in Beingmate. The details of those
sales are summarised in the table below.
% SHARESPRICE $RMB$M NZD
As at 31 July 2019 18.825.54234
Sales for the period3.715.20 – 6.8046
As at 31 January 202015.114.93170
The normalisation adjustment of $29 million relating to Beingmate includes realised and unrealised fair value and foreign
exchange movements.
FONTERRA INTERIM REPORT 2020
56
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
e) Discontinued operations
China Farms
As at 31 July 2019, the recoverable amount of the China Farm assets was equivalent to the carrying amount, which meant that any
adverse change in the supporting assumptions would result in an impairment.
Progress has been made on the strategic review of the China Farms business. A sales process is underway which has advanced to
the point that the business meets the requirements to be classified as held for sale as at 31 January 2020. The divestment of the China
Farms business also meets the definition of a discontinued operation because it is a separate line of business and a major geographical
area of operation. The Group expects to complete the sale within one year of the reporting date.
As a result of the classification of the business as held for sale, the net assets of the business are measured at the lower of carrying
value or fair value less cost to sell. The fair value of the China Farms business has been assessed based on information received
through the sales process. The fair value was lower than the carrying value of the net assets of the business, which has resulted
in an impairment of $63 million.
The China Farms business was previously presented as a separate reportable segment.
The foreign currency translation reserve balance attributable to the China Farms business will be recycled to profit or loss upon
completion of the sale. At 31 January 2020 this amount is a credit balance of $27 million.
Brazil consumer and foodservice business update
As at 31 July 2019, the recoverable amount of the Brazil consumer and foodservice assets was equivalent to the carrying amount,
which meant that any adverse change in the supporting assumptions would result in an impairment.
Progress has been made on the strategic review of the Brazil consumer and foodservice business. A sales process is underway
which has advanced to the point that the business meets the requirements to be classified as held for sale as at 31 January 2020.
The divestment of the Brazil consumer and foodservice business also meets the definition of a discontinued operation because it
is a separate major geographical area of operation. The Group expects to complete the sale within one year of the reporting date.
As a result of the classification of the business as held for sale, the net assets of the business are measured at the lower of carrying
value or fair value less cost to sell. The fair value of the Brazil consumer and foodservice business has been assessed based on
information received through the sales process. The fair value was lower than the carrying value of the net assets of the business,
which has resulted in an impairment of $61 million (after tax), of which Fonterra’s 51% share is $31 million.
The Brazil consumer and foodservice business was previously presented in the Latin America reportable segment.
The foreign currency translation reserve balance attributable to the Brazil consumer and foodservice business will be recycled
to profit or loss upon completion of the sale. At 31 January 2020 this amount is a debit balance of $68 million.
FONTERRA INTERIM REPORT 2020
57
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
e) Discontinued operations CONTINUED
Financial performance of the discontinued operations
The summarised financial performance of the China Farms and Brazil consumer and foodservice businesses are shown in the table below.
$ MILLION
SIX MONTHS ENDEDYEAR ENDED
DISCONTINUED OPERATIONS
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Revenue from sale of goods352317665
Cost of goods sold(272)(276)(563)
China Farms impairment(63)–(203)
Gross profit/(loss)1741(101)
Net expenses and other items(57)(64)(123)
Brazil consumer and foodservice impairment(71)–(143)
Loss before interest and tax(111)(23)(367)
Net finance costs(12)(11)(26)
Loss before tax(123)(34)(393)
Tax credit/(expense)1510(95)
Loss after tax from discontinued operations(108)(24)(488)
Non-controlling interests31568
Loss after tax attributable to equity holders(77)(19)(420)
Basic and diluted impact on earnings per share from discontinued operations(0.05)(0.01)(0.26)
Movement in exchange differences on translation of discontinued operations3–8
Other reserve movements(24)––
Other comprehensive expense from discontinued operations(129)(24)(480)
Net cash inflow/(outflow) from operating activities11(16)(6)
Net cash inflow/(outflow) from investing activities(11)(16)(34)
Net cash inflow/(outflow) from financing activities(5)(12)(48)
Net decrease in cash generated by the discontinued operations(5)(44)(88)
FONTERRA INTERIM REPORT 2020
58
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
e) Discontinued operations CONTINUED
Assets and liabilities held for sale
The assets and liabilities of the China Farms and Brazil consumer and foodservice businesses are summarised below.
$ MILLION
ASSETS AND LIABILITIES CLASSIFIED AS HELD FOR SALEAS AT 31 JANUARY 2020
Total current assets233
Total non-current assets942
Total assets of disposal group held for sale1,175
Total current liabilities 470
Total non-current liabilities 246
Total liabilities of disposal group held for sale716
These balances include:
–$314 million of property, plant and equipment from China Farms and the Brazil consumer and foodservice business;
–$295 million of livestock relating to China Farms;
–$197 million of intangible assets related to the Brazil consumer and foodservice business;
–$119 million of other non-current assets related to the Brazil consumer and foodservice business; and
–$324 million of borrowings which are directly attributable to the Brazil consumer and foodservice business.
As at 31 July 2019, the assets held for sale amount of $229 million related to the Group’s investments in Goodminton and DFE Pharma.
These investments were sold during the six months ended 31 January 2020. No assets met the requirements to be classified as held
for sale as at 31 January 2019.
f) Falcon China Farms JV
Fonterra’s share of the loss of the Falcon China Farms JV for the six months to 31 January 2020 was a loss of $13 million. This loss,
animal management costs and challenging farm conditions provide indicators of impairment. Using a value in use model the
recoverable amount of the equity investment in the Falcon China Farms JV, after considering the value of the loan receivable,
was $5 million, resulting in an impairment of $65 million. The Group is committed to providing future funding to the Falcon China
Farms JV of up to US30 million (31 January 2019: US40 million, 31 July 2019: US40 million).
The Group recognises the following balances in relation to the China Farming JV:
$ MILLION
AS AT
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Equity accounted investment 57969
Loan receivable (included within Other non-current assets) 545760
FONTERRA INTERIM REPORT 2020
59
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
3 REVENUE FROM SALE OF GOODS
Revenue from the Ingredients business is disaggregated in the table below. Revenue earned by the consumer and foodservice
businesses is disaggregated by geographical segment as disclosed in Note 1a) Operating segments.
GROUP $ MILLION
SIX MONTHS ENDEDYEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Reference products
1
4,7594,3048,833
Non-reference products
2
2,2131,8744,202
Other
3
8137951,615
Global Ingredients and Operations7,7856,97314,650
Fonterra Ingredients Australia7749191,760
Other Ingredients revenue397419754
Intra-segment eliminations(380)(460)(873)
Total Ingredients revenue
4
8,5767,85116,291
Total Consumer and Foodservice revenue
4
3,5973,4976,896
Less: inter-segment revenue(2,102)(1,920)(3,932)
Total segment external revenue10,0719,42819,255
Add: DFE Pharma dividend received and strategic review normalisation adjustments22––
Revenue from sale of goods10,0939,42819,255
1 Revenue from all sales of the five ingredient products that inform the Farmgate Milk Price, and that are manufactured using New Zealand-sourced milk.
Currently these five products are whole milk powder, skim milk powder, butter milk powder, butter and anhydrous milk fat (otherwise known as
‘reference products’).
2 Revenue from the sale of all ingredient products, except reference products, that are manufactured using New Zealand-sourced milk.
3 Primarily consists of Global Sourcing revenue, which is revenue from the sale of ingredient products manufactured using non-New Zealand-sourced milk.
4 Includes inter-segment sales.
4 COST OF GOODS SOLD
GROUP $ MILLION
SIX MONTHS ENDED YEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Opening inventory3,1652,9172,917
Cost of milk:
–New Zealand sourced7,7116,3769,748
–Non-New Zealand sourced587599966
Other costs
1
2,8753,3575,915
Closing inventory(5,852)(5,269)(3,165)
Total cost of goods sold8,4867,98016,381
Normalisation adjustments(3)–(32)
Normalised cost of goods sold (continuing operations)8,4837,98016,349
1 Other costs include those costs directly incurred to bring inventory to its final point of sale location, and additional ancillary costs invoiced to the customer.
FONTERRA INTERIM REPORT 2020
60
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
DEBT AND EQUITY
5 SUBSCRIBED EQUITY INSTRUMENTS
Co-operative shares, including shares held within the Group
Co-operative shares may only be held by a shareholder supplying milk to the Company (farmer shareholder), by former farmer
shareholders for up to three seasons after cessation of milk supply, or by Fonterra Farmer Custodian Limited (the Custodian).
Voting rights in the Company are dependent on milk supply supported by Co-operative shares, these rights are also attached
to vouchers when backed by milk supply (subject to limits).
At 31 January 2020 there were 1,612,097,000 Co-operative shares on issue (31 January 2019: 1,611,992,000 shares, 31 July 2019:
1,611,992,000 shares).
During the six months ended 31 January 2020, the Company issued 105,000 shares under the Farm Source Rewards scheme
(31 January 2019: 69,000 shares, 31 July 2019: 69,000 shares).
The rights attaching to Co-operative shares are set out in Fonterra’s Constitution, available in the ‘About/Governance
and Management’ section of Fonterra’s website.
Units in the Fonterra Shareholders’ Fund
The Custodian holds legal title of Co-operative shares of which the Economic Rights have been sold to the Fund on trust for the benefit
of the Fund. At 31 January 2020 100,187,385 Co-operative shares (31 January 2019: 110,573,858; 31 July 2019: 102,934,582) were legally
owned by the Custodian, on trust for the benefit of the Fund.
During the six months ended 31 January 2020, the Company issued 4,411,000 units (31 January 2019: 14,923,000 units, 31 July 2019:
17,769,000 units) and surrendered 7,158,000 units (31 January 2019: 15,773,000 units, 31 July 2019: 26,258,000 units).
The rights attaching to units are set out in the Fonterra Shareholders’ Fund 2019 Annual Report, available in the ‘Investors/Fonterra
Shareholders’ Fund’ section of Fonterra’s website.
6 DIVIDENDS PAID
No dividend was paid during the six months ended 31 January 2020 (31 January 2019: nil; 31 July 2019: nil).
7 EQUITY RESERVES
a) Hedge reserves
The hedge reserves predominately relate to cash flow hedges, which are used as part of the Group’s risk management strategy to
manage variability in cash flows due to changes in foreign currency and interest rates.
The Group uses cash flow hedges to manage its foreign currency exposure on forecast foreign currency sales transactions and
borrowings denominated in foreign currencies.
A cash flow hedge provides certainty of cash flows. Gains or losses relating to the difference between the hedge rate and the current
market rate are recognised in the hedge reserve. They are transferred to profit or loss when the forecast transaction occurs.
The foreign currency forward contracts, foreign currency options and interest rate swaps used to hedge the forecast cash flows are
recognised on the balance sheet as Derivative financial instruments.
b) Foreign currency translation reserve (‘FCTR’)
The foreign currency translation reserve primarily relates to the translation of Fonterra’s net investments in overseas businesses
from their local currency to New Zealand dollars.
Foreign currency gains/losses on the translation of the overseas business are deferred in the foreign currency translation reserve.
The accumulated amount attributed to an overseas business is transferred to profit or loss, as part of the gain or loss in sale, when
the overseas business is sold.
Movements in the foreign currency translation reserve relate to changes in foreign currency exchange rates from the beginning
of the period to the end of the period, and changes in the net assets of the overseas businesses.
FONTERRA INTERIM REPORT 2020
61
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
8 BORROWINGS
Economic net interest-bearing debt
Economic net interest-bearing debt reflects the effect of debt hedging in place at balance date. During the six months ended 31 January
2020, there were no issuances or redemption of listed debt securities.
GROUP $ MILLION
AS AT
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Net interest-bearing debt position
Total borrowings6,6677,7546,536
Cash and cash equivalents(460)(348)(550)
Interest-bearing advances(230)(171)(142)
Bank overdraft525734
Net interest-bearing debt6,0297,2925,878
Value of derivatives used to manage changes in hedged risks
on debt instruments(272)60(148)
Economic net interest-bearing debt5,7577,3525,730
Total borrowings in the table above are represented by:
GROUP $ MILLION
AS AT
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Commercial paper169354259
Bank loans1681,947619
Lease liabilities
1
6177271
Capital notes
2
353535
NZX-listed bonds600600600
Medium-term notes5,0784,7464,952
Total borrowings
3
6,6677,7546,536
Included within the statement of financial position as follows:
Total current borrowings1,0326181,175
Total non-current borrowings5,6357,1365,361
Total borrowings
4
6,6677,7546,536
1 From 1 August 2019 this amount includes all leases resulting from the adoption of NZ IFRS 16. For details on the impact of the change in the lease accounting
refer to Note 13 Impact of transition to NZ IFRS 16 Leases.
2 Capital notes are unsecured subordinated borrowings.
3 All borrowings other than lease liabilities and capital notes are unsecured and unsubordinated.
4 The 31 January 2020 balance excludes $354 million of borrowings directly attributable to the China Farms and Brazil consumer and foodservice businesses.
These borrowings are presented in Liabilities of disposal groups held for sale (refer Note 2e). The comparative balances as at 31 January 2019 and 31 July 2019
have not been restated. The borrowings directly attributable to the China Farms and Brazil consumer and foodservice businesses at those reporting dates
FONTERRA INTERIM REPORT 2020
62
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
were $339 million as at 31 January 2019 and $339 million as at 31 July 2019.
LONG-TERM ASSETS
9 PROPERTY, PLANT AND EQUIPMENT
GROUP $ MILLION
SIX MONTHS ENDEDYEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Additions90366583
Disposals(8)(10)(146)
Transfer to assets held for sale(314)––
Capital commitments818948
OTHER
10 CONTINGENT LIABILITIES, PROVISIONS AND COMMITMENTS
Contingent liabilities
In the normal course of business, Fonterra, its subsidiaries and equity accounted investees, are exposed to claims and legal proceedings
that may in some cases result in costs to the Group.
In January 2014, Danone initiated legal proceedings against Fonterra in the High Court of New Zealand and separate Singapore
arbitration proceedings against Fonterra in relation to Fonterra’s Whey Protein Concentrate 80 (WPC80) precautionary recall in
August 2013. In December 2017, the Singapore arbitration panel issued its award ( judgement), finding in favour of Danone. It is
unclear whether Danone will continue to pursue the New Zealand High Court proceedings that were stayed pending the decision
in the Singapore arbitration.
There are no additional claims or legal proceedings in respect of this matter that require provision or disclosure in these
financial statements.
The Group has no contingent liabilities as at 31 January 2020 (31 January 2019: nil; 31 July 2019: nil).
FONTERRA INTERIM REPORT 2020
63
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
11 FAIR VALUE
Fair value hierarchy
The fair value hierarchy described below is used to provide an indication of the level of estimation or judgement required in
determining fair value:
–Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
–Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
–Level 3: Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).
The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the
change occurred.
The following table shows the fair value hierarchy for assets and liabilities measured at fair value on the statement of financial position:
GROUP $ MILLION
LEVEL 1LEVEL 2LEVEL 3
AS ATAS ATAS AT
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED31 JUL 2019
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED31 JUL 2019
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Derivative assets
–Commodity derivatives252114141
–––
–Foreign exchange derivatives–––7818640
–––
–Interest rate derivatives¹–––514212433
–––
Derivative liabilities
–Commodity derivatives(9)(8)(9)(2)(6)(4)
–––
–Foreign exchange derivatives–––(185)(90)(200)
–––
–Interest rate derivatives¹–––(461)(470)(539)
–––
Investment in Beingmate
2
––234170––
–––
Investments in shares1168171615
121416
Fair value
2719247132(148)(254)
121416
1 Includes cross-currency interest rate swaps.
2 As at 31 January 2020, the valuation of the investment in Beingmate has transferred from Level 1 to Level 2 because there was no market price available on
31 January 2020 as the Shenzhen Stock Exchange was on a trading halt from 23 January 2020 to 3 February 2020. The fair value of the investments has been
calculated using the opening price on 3 February 2020.
The following table shows the fair value hierarchy for each class of financial asset and liability where the carrying value in the
statement of financial position differs from the fair value:
GROUP $ MILLION
FAIR VALUE
CARRYING VALUE AS ATLEVEL 1 AS ATLEVEL 2 AS AT
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED31 JUL 2019
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED31 JUL 2019
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Financial assets
Long-term advances230171142–––
244172150
Financial liabilities
Borrowings
–NZX-listed bonds(600)(600)(600)
(624)
(619)(627)
–––
–Capital notes(35)(35)(35)
(34)
(32)(35)
–––
–Bank loans(168)(1,947)(619)–––
(168)(1,948)(620)
–Medium-term notes(5,078)(4,746)(4,952)–––
(5,317)(4,960)(5,208)
–Finance leases¹–(72)(71)–––
–(78)(75)
1 From 1 August 2019 finance leases are included in the lease liabilities balance. This presentation change is a result of the adoption of NZ IFRS 16.
For details on the impact of the change in lease accounting refer to Note 13 Impact of transition to NZ IFRS 16 Leases.
FONTERRA INTERIM REPORT 2020
64
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
12 NET TANGIBLE ASSETS PER SECURITY
GROUP
AS AT
31 JAN 2020
UNAUDITED
31 JAN 2019
UNAUDITED
31 JUL 2019
Net tangible assets per security¹
$ per listed debt security on issue5.674.774.63
$ per equity instrument on issue2.472.082.02
Listed debt securities on issue (million)703703703
Equity instruments on issue (million)1,6121,6121,612
1 Net tangible assets represents total assets (including right-of-use assets) less total liabilities less intangible assets.
FONTERRA INTERIM REPORT 2020
65
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
13 IMPACT OF TRANSITION TO NZ IFRS 16 LEASES
Accounting policies effective from 1 August 2019
Right-of-use assets are initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses,
and adjusted for certain remeasurements of the lease liability.
Lease liabilities are recognised at the commencement date of the lease as the present value of the lease payments over the lease term.
The lease payments include the exercise price of a purchase option where the Group is reasonably certain to exercise the option, and
payments of penalties for terminating a lease where the lease term reflects the Group exercising the option to terminate.
The lease payments are discounted using the incremental borrowing rate at the lease commencement date if the interest rate implicit
in the lease is not readily determinable. As the Group operates a centralised Treasury function and has significant lines of credit
available, the incremental borrowing rate used is based on the jurisdiction and weighted average lease term.
Once a lease has commenced, the Group will only reassess the lease term on the occurrence of a significant event or change in
circumstance that is within its control and affects its ability to exercise, or not exercise, an option not previously included in the
lease term.
The impact of adopting NZ IFRS 16 is summarised below:
GROUP $ MILLION
Closing lease commitment for the year ended 31 July 2019513
Operating lease payments not brought on balance sheet:
–Exempt leases (short term leases and leases of low-value assets) (40)
–Arrangements that are not leases(50)
Additional lease payments brought on-balance sheet244
Effect of discounting lease payments(86)
Finance lease liabilities transferred71
Opening lease liability 1 August 2019652
At transition, the Group has elected to utilise the modified retrospective approach for existing leases. This method resulted in an
adjustment to the opening balance of retained earnings as at 1 August 2019 of $20 million. Prior year comparative information has
not been restated.
The weighted-average incremental borrowing rate used to measure lease liabilities at transition was 3.56%.
For leases previously classified as operating leases, lease liabilities were measured at the present value of the remaining lease
payments, discounted at the incremental borrowing rate as at 1 August 2019. Right-of-use assets are measured at either:
–Their carrying amount as if NZ IFRS 16 had been applied since the commencement date, discounted using the incremental
borrowing rate at 1 August 2019; or
–An amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.
The Group used the following practical expedients when applying NZ IFRS 16 to leases previously classified as operating leases:
–Applied the exemption not to recognise right-of-use assets and liabilities for low value leases and leases with less than 12 months
of lease term remaining at 1 August 2019.
–Elected to apply a single discount rate to a portfolio of leases where they had similar characteristics.
–Excluded initial direct costs from the measurement of the right-of-use asset at 1 August 2019.
The related lease expense for exempt leases is recognised in profit before net finance costs and tax.
A number of leases were previously classified as finance leases. The carrying value of lease assets and lease liabilities for these leases
as at 31 July 2019 was transferred to right-of-use asset and lease liability under NZ IFRS 16.
FONTERRA INTERIM REPORT 2020
66
14 RECONCILIATION OF RE-PRESENTATION FOR DISCONTINUED OPERATIONS AND PRIOR PERIOD RESTATEMENTS
The tables below reconcile the impact on key line items in the Group’s income statement and statement of financial position from
the classification of China Farms and Brazil consumer and foodservice business as discontinued businesses, and the adjustments
made for prior period restatements (Agent Adjustment and Control Transfer). See the Basis of preparation note (b) for further details.
The prior period restatements have been made because their impact is considered material to the segment note, presented in
note 1(a) of these interim financial statements.
STATEMENT OF FINANCIAL POSITION (EXTRACT)
AS AT
31 JUL 2018
(AUDITED)
INCREASE/(DECREASE)
CONTROL TRANSFER
31 JUL 2018
(RESTATED)
Trade and other receivables2,355(75)2,280
Inventories2,9173603,277
Deferred tax asset66711678
Trade and other payables(2,116)(324)(2,440)
Net assets
6,349(28)6,321
Retained earnings
934(28)906
Total equity 6,349(28)6,321
INCOME STATEMENT (EXTRACT)
SIX MONTHS
ENDED
31 JAN 2019
DISCONTINUED
OPERATIONS
SIX MONTHS
ENDED 31
JAN 2019
CONTINUING
OPERATIONS
PROFIT
INCREASE/
(DECREASE)
AGENT
ADJUSTMENT
INCREASE/
(DECREASE)
CONTROL
TRANSFER
SIX MONTHS
ENDED
31 JAN 2019
(RESTATED)
Revenue9,746(317)9,429(235)2349,428
Cost of sales(8,246)276(7,970)235(245)(7,980)
Gross profit1,500(41)1,459–(11)1,448
Expenses and other items including finance costs(1,382)75(1,307)––(1,307)
Profit/(loss) before income tax11834152–(11)141
Income tax(38)(10)(48)–3(45)
Profit/(loss) after tax from
continuing operations8024104–(8)96
Loss from discontinued operations(24)––(24)
Profit after tax80–(8)72
STATEMENT OF FINANCIAL POSITION (EXTRACT)
AS AT
31 JAN 2019
INCREASE/(DECREASE)
CONTROL TRANSFER
31 JAN 2019
(RESTATED)
Trade and other receivables2,237(47)2,190
Inventories5,0761935,269
Deferred tax asset50414518
Trade and other payables(2,121)(196)(2,317)
Net assets
6,580(36)6,544
Retained earnings
1,013(36)977
Total equity 6,580(36)6,544
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FONTERRA INTERIM REPORT 2020
67
14 RECONCILIATION OF RE-PRESENTATION FOR DISCONTINUED OPERATIONS AND PRIOR PERIOD RESTATEMENTS
CONTINUED
INCOME STATEMENT (EXTRACT)
YEAR ENDED
31 JUL 2019
(AUDITED)
DISCONTINUED
OPERATIONS
YEAR ENDED
31 JUL 2019
CONTINUING
OPERATIONS
PROFIT
INCREASE/
(DECREASE)
AGENT
ADJUSTMENT
INCREASE/
(DECREASE)
CONTROL
TRANSFER
YEAR ENDED
31 JUL 2019
(RESTATED)
Revenue20,114(665)19,449(498)30419,255
Cost of sales(17,334)766(16,568)498(311)(16,381)
Gross profit2,7801012,881–(7)2,874
Expenses and other items including finance costs(3,208)292(2,916)––(2,916)
Profit/(loss) before income tax(428)393(35)–(7)(42)
Income tax(177)95(82)–2(80)
Loss after tax from continuing operations(605)488(117)–(5)(122)
Loss from discontinued operations(488)––(488)
Loss after tax(605)–(5)(610)
STATEMENT OF FINANCIAL POSITION (EXTRACT)
AS AT 31 JUL 2019
(AUDITED)
INCREASE/(DECREASE)
CONTROL TRANSFER
31 JUL 2019
(RESTATED)
Trade and other receivables1,900(29)1,871
Inventories2,9442213,165
Deferred tax asset59213605
Trade and other payables(1,869)(238)(2,107)
Net assets
5,881(33)5,848
Retained earnings
360(33)327
Total equity 5,881(33)5,848
Notes to the Financial Statements CONTINUED
FOR THE SIX MONTHS ENDED 31 JANUARY 2020
FINANCIAL SUMMARY
FONTERRA INTERIM REPORT 2020
68
Independent Review Report
TO THE SHAREHOLDERS OF FONTERRA CO-OPERATIVE GROUP LIMITED
REPORT ON THE INTERIM FINANCIAL STATEMENTS
CONCLUSION
We have completed a review of the accompanying interim financial statements of Fonterra Co-operative Group Limited
(the ‘Company’) and its controlled entities (the ‘Group’) which comprise:
–the statement of financial position as at 31 January 2020;
–the income statement, statements of other comprehensive income and changes in equity, and the cash flow statement for the
6 month period then ended; and
–notes, including a summary of significant accounting policies and other explanatory information.
Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements on pages 42 to 68
do not present fairly, in all material respects, the Group’s financial position as at 31 January 2020 and its financial performance
and cash flows for the 6 month period ended on that date in accordance with NZ IAS 34 Interim Financial Reporting (NZ IAS 34)
and IAS 34 Interim Financial Reporting (IAS 34).
BASIS FOR CONCLUSION
A review of interim financial statements in accordance with NZ SRE 2410 Review of Financial Statements Performed by the Independent
Auditor of the Entity (“NZ SRE 2410”) is a limited assurance engagement. The auditor performs procedures, consisting of making enquiries,
primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
As the auditor of Fonterra Co-operative Group Limited, NZ SRE 2410 requires that we comply with the ethical requirements relevant
to the audit of the annual financial statements.
Other than in our capacity as auditor we have no relationship with, or interests in, the Group.
OTHER MATTER
The financial statements of the Group for the year ended 31 July 2019 were audited by another auditor who expressed an unmodified
opinion on those statements on 25 September 2019. The previous auditor issued their unmodified audit opinion before the restatements
described in the basis of preparation of the 31 January 2020 interim financial statements were made.
USE OF THIS INDEPENDENT REVIEW REPORT
This report is made solely to the shareholders as a body. Our review work has been undertaken so that we might state to the
shareholders those matters we are required to state to them in the Independent Review Report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the shareholders as a body for our review work,
this report, or any of the opinions we have formed.
RESPONSIBILITIES OF THE DIRECTORS FOR THE INTERIM FINANCIAL STATEMENTS
The Directors, on behalf of the Company, are responsible for:
–the preparation and fair presentation of the interim financial statements in accordance with NZ IAS 34 and IAS 34;
–implementing necessary internal control to enable the preparation of interim financial statements that are fairly presented
and free from material misstatement, whether due to fraud or error; and
–assessing the ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless they either intend to liquidate or to cease operations or have no realistic
alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE REVIEW OF THE INTERIM FINANCIAL STATEMENTS
Our responsibility is to express a conclusion on the interim financial statements based on our review. We conducted our review in
accordance with NZ SRE 2410. NZ SRE 2410 requires us to conclude whether anything has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all material respects, in accordance with NZ IAS 34 and IAS 34.
The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International
Standards on Auditing (New Zealand). Accordingly, we do not express an audit opinion on these interim financial statements.
This description forms part of our Independent Review Report.
KPMG
Auckland
17 March 2020
FONTERRA INTERIM REPORT 2020
69
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 on page 72. 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.
Reconciliations for the NZ IFRS measures to certain non-GAAP measures referred to by Fonterra are detailed below.
Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised EBITDA
GROUP $ MILLION
SIX MONTHS ENDEDYEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
1
UNAUDITED31 JUL 2019
1
Profit/(loss) for the period50172(610)
Add: Depreciation 274234458
Add: Amortisation4950103
Add: Net finance costs173205418
Add: Taxation expense13235175
Total EBITDA1,129596544
Less: Disposal of investment in DFE Pharma(427)––
Less: Disposal of investment in Goodminton(68)––
Add: Falcon China Farms JV impairment65––
Add: New Zealand consumer and foodservice business––204
Add: Disposal of Tip Top––40
Add: China Farms impairment63–203
Add: Brazil consumer and foodservice business impairments71–149
Add: Disposal of Venezuelan operations––134
Add: Australia strategic reset––68
Add: Other strategic reset costs45–19
Add: Beingmate29–12
Total normalisation adjustments(222)–829
Normalised EBITDA9075961,373
Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised EBIT
GROUP $ MILLION
SIX MONTHS ENDEDYEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
1
UNAUDITED31 JUL 2019
1
Profit/(loss) for the period 50172(610)
Add: Net finance costs173205418
Add: Taxation expense13235175
Total EBIT806312(17)
Add: Normalisation adjustments (as detailed above)(222)–829
Total normalised EBIT584312812
1 Income statements for the six months ended 31 January 2019 and 12 months ended 31 July 2019 include re-presentations and restatements.
Please see the ‘Basis of preparation’ section and note 14 of the interim financial statements for further details.
FINANCIAL SUMMARY
Non-GAAP Measures
FONTERRA INTERIM REPORT 2020
70
Non-GAAP Measures CONTINUED
Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised earnings per share
GROUP $ MILLION
SIX MONTHS ENDEDYEAR ENDED
31 JAN 2020
UNAUDITED
31 JAN 2019
1
UNAUDITED31 JUL 2019
1
Profit/(loss) for the period 50172(610)
(Less)/Add: Normalisation adjustments (as detailed above)(222)–829
Add: Tax on normalisation adjustments14–56
Total normalised earnings29372275
Add/(Less): Share attributable to non-controlling interests20(4)48
Less: Normalisation adjustments to non-controlling interests(30)–(59)
Net normalised earnings attributable to equity holders of the Parent28368264
Weighted average number of shares (thousands of shares)1,612,0551,611,9691,611,980
Normalised earnings per share ($)0.180.040.16
1 Income statements for the six months ended 31 January 2019 and 12 months ended 31 July 2019 include re-presentations and restatements.
Please see the ‘Basis of preparation’ section and note 14 of the interim financial statements for further details.
FONTERRA INTERIM REPORT 2020
71
Glossary
FINANCIAL SUMMARY
NON-GAAP MEASURES
Fonterra refers to non-GAAP financial measures throughout the Interim Report, and these measures are not prepared in accordance
with NZ IFRS. The definitions below explain how Fonterra calculates the non-GAAP measures referred to throughout the Interim Report.
EBITmeans earnings before interest and tax and is calculated as profit for the period before net
finance costs and tax.
EBITDAmeans earnings before interest, tax, depreciation and amortisation and is calculated as profit
for the period before net finance costs, tax, depreciation and amortisation.
Economic net interest-bearing debtmeans net interest-bearing debt including lease liabilities and the effect of debt hedging.
Farmgate Milk Pricemeans the base price that Fonterra pays for milk supplied to it in New Zealand for a season.
The season refers to the 12-month milk season of 1 June to 31 May.
Gearing ratiois calculated as economic net interest-bearing debt divided by total capital. Total capital is
equity excluding the hedge reserves, plus economic net interest-bearing debt.
Net Tangible Assets per Securityis calculated as net tangible assets divided by the sum of the weighted average number of
equity instrument and listed debt securities on issue. Net tangible assets are total assets
(including right-of-use assets) less total liabilities less intangible assets.
Normalisation adjustmentsmeans transactions that are unusual by nature and size. Excluding these transactions can assist
users with forming a view of the underlying performance of the business. Unusual transactions
by nature are the result of specific events or circumstances that are outside the control of the
business, or relate to major acquisitions, disposals or divestments, or are not expected to occur
frequently. It also includes fair value movements if they are non-cash and have no impact on
profit over time. Unusual transactions by size are those that are unusually large in a particular
accounting period.
Normalised EBITmeans profit for the period before net finance costs and tax, and after normalisation adjustments.
Normalised earnings per share (EPS)means normalised profit after tax attributable to equity holders divided by the weighted
average number of shares for the period.
Normalised profit after taxmeans net profit after tax after normalisation adjustments, and the interest and tax impacts of
those normalisation adjustments.
Normalised segment earningsmeans segmental profit for the period before net finance costs and tax, and after normalisation
adjustments.
Pay-outmeans the total cash payment to farmer shareholders. It is the sum of the Farmgate Milk Price
(kg/MS) and the dividend per share. Both of these components have established policies and
procedures in place on how they are determined.
Retentionsmeans net profit after tax attributable to farmer shareholders divided by the number of shares
at 31 May, less dividend per share.
Return on capitalis calculated as normalised EBIT less equity accounted investees’ earnings divided by capital
employed. Capital employed is calculated as the average for the period of: net assets excluding
net interest-bearing debt, deferred tax balances and brands, goodwill and equity accounted
investments.
Segment earningsmeans segmental profit for the period before net finance costs and tax.
Working capitalis calculated as current trade receivables plus inventories, less current trade payables and
accruals. It excludes amounts owing to suppliers and employee entitlements.
Working capital daysis calculated as average period to date working capital divided by external revenue, multiplied
by the number of days in the period.
FONTERRA INTERIM REPORT 2020
72
FONTERRA BOARD OF DIRECTORS
John Monaghan
Clinton Dines
Brent Goldsack
Leonie Guiney
Bruce Hassall
Andrew Macfarlane
Peter McBride
John Nicholls
Donna Smit
Scott St John
FONTERRA MANAGEMENT TEAM
Miles Hurrell
Marc Rivers
Judith Swales
Kelvin Wickham
Mike Cronin
Teh-han Chow
Fraser Whineray (commencing April 2020)
REGISTERED OFFICE
Fonterra Co-operative Group Limited
Private Bag 92032
Auckland 1142
New Zealand
109 Fanshawe Street
Auckland Central 1010
New Zealand
Phone +64 9 374 9000
Fax +64 9 374 9001
AUDITORS
KPMG
18 Viaduct Harbour Avenue
Auckland 1010
New Zealand
FARMER SHAREHOLDER AND SUPPLIER SERVICES
Freephone 0800 65 65 68
FONTERRA SHARES AND FSF UNITS REGISTRY
Computershare Investor Services Limited
Private Bag 92119
Auckland 1142 New Zealand
Level 2, 159 Hurstmere Road
Takapuna
Auckland 0622
New Zealand
CAPITAL NOTES REGISTRY
Link Market Services Limited
PO Box 91976
Auckland 1142
New Zealand
Level 11, Deloitte Centre
80 Queen Street
Auckland Central 1010
New Zealand
INVESTOR RELATIONS ENQUIRIES
Phone +64 9 374 9000
investor.relations@fonterra.com
www.fonterra.com
Directory
DIRECTORY
FONTERRA INTERIM REPORT 2020
73
---
Confidential to Fonterra Co-operative Group
Fonterra
Interim Results
18 MARCH 2020
Important information
Disclaimer
Thispresentationmaycontainforward-lookingstatementsandprojections. Therecanbenocertaintyofoutcomein
relationtothematterstowhichtheforward-lookingstatementsandprojectionsrelate.Theseforward-looking
statementsandprojectionsinvolveknownandunknownrisks,uncertainties,assumptionsandotherimportantfactors
thatcouldcausetheactualoutcomestobemateriallydifferentfromtheeventsorresultsexpressedorimpliedbysuch
statementsandprojections. Thoserisks,uncertainties,assumptionsandotherimportantfactorsarenotallwithinthe
controlofFonterraCo-operativeGroupLimited(Fonterra)anditssubsidiaries(theFonterraGroup)andcannotbe
predictedbytheFonterraGroup.
Whileallreasonablecarehasbeentakeninthepreparationofthispresentation,noneofFonterraoranyofits
respectivesubsidiaries,affiliatesandassociatedcompanies(oranyoftheirrespectiveofficers,employeesoragents)
(RelevantPersons)makesanyrepresentation,assuranceorguaranteeastotheaccuracyorcompletenessofany
informationinthispresentationorlikelihoodoffulfilmentofanyforward-lookingstatementorprojectionorany
outcomesexpressedorimpliedinanyforward-lookingstatementorprojection.Theforward-lookingstatementsand
projectionsin thisreportreflectviewsheldonlyat thedateofthispresentation.
Statementsaboutpastperformancearenotnecessarilyindicativeof futureperformance.
ExceptasrequiredbyapplicablelaworanyapplicableListingRules,theRelevantPersonsdisclaimanyobligationor
undertakingto updateanyinformationin thispresentation.
Thispresentationdoesnotconstituteinvestmentadvice,oraninducement,recommendationoroffertobuyorsellany
securitiesin FonterraortheFonterraShareholders’Fund.
2
Improved financial performance
$7.00–$7.60
FARMGATE
MILK PRICE
per kgMS
from $312m
NORMALISED
EBIT
2,3
$584
million
$5.8
NET DEBT¹
from $7.4b
billion
from $312m
TOTAL GROUP
EBIT
2
$806
million
• Strong milk price range
• Increased earnings
• Reduced operating expenses
• Completed divestments from the portfolio review
• Improved free cash flow and reduced debt
• Maintained forecast underlying earnings guidance
• No interim dividend as continue to repay debt
1.Economic net interest-bearing debt reflects total borrowings less cash and cash equivalents and non-current
interest-bearing advances adjusted for derivatives used to manage changes in hedged risks, and bank overdraft. It
excludes the borrowings attributed to Discontinued Operations.
2.This includes Continuing Operations and Discontinued Operations. The basis of determining Discontinued Operations is
set out in the Basis of Preparation in the FY20 Interim Report.
3.The adjustment of $222 million to calculate normalised EBIT is set out in the Appendix and in the FY20 Interim Report
under Non-GAAP Measures.
Note:Previouslysharedfullyearkeymetrics,suchasReturnonCapital,willbeprovidedatfinancialyearend.
3
Productive first half, resetting the Co-op
4
On-track with our 2020 priorities
Build a great team
•New customer-led operating model
•Right-sized teams to fit more focused strategy
•Employees recognised for their expertise and
contribution to regional New Zealand
Support regional New Zealand
•On-track to contribute $11.1 billion to New Zealand
•Helped farmers during floods and droughts
Hit our financial targets
•On-track to meet targets
•Focused on financial discipline –updated:
•Risk Appetite Statement
•Dividend Policy and Debt Policy
Improve our environmental footprint
•Announced Te Awamutu site will be coal free
next season
•Will deliver greenhouse gas emissions reports for all
farmers at endof the year
•On-track for an additional 1,000 Farm Environment Plans
this year
(10)
16
(21)
(4)
2019202020192020
530499
67
116
2019202020192020
170260
61
147
2019202020192020
Healthy Business
From $72m
Ingredients³
,
⁴
Foodservice³Consumer³
From $9.7bn
$10.4
billion
REVENUE¹
From $1,489m
$1,668
million
GROSS
MARGIN¹
From $1,232m
$1,092
million
OPERATING
EXPENSES¹
From $312m
$584
million
EBIT¹
$293
million
NPAT¹
,
²
Improved performance with lift in all key metrics
1.This is Total Group, includes Continuing and Discontinued Operations on a normalised basis.
2.Includes amounts attributable to non-controlling interests.
3.Does not add to total group due to including inter-segment sales, and excludes Discontinued Operations.
4.Ingredients performance includes the China Farming joint venture. For the first six months of FY19 and FY20
ChinaFarming joint venture reported a loss of $(4) million and $(13) million respectively.
5.Provides end-to-end perspective, comprising China Farms, China Farming joint venture, and financials from Ingredients,
Consumer and Foods ervic e related to sales of milk from China Farms. China Farms is considered ‘Held for sale’ and
classified as a Discontinued Operation in the FY20 Interim Report.
Note: EBIT and gross margin are in NZD millions. Figures presented are for the first six months of FY20, and FY19 as
a comparative.
796813464441
2019202020192020
Gross MarginEBIT
China Farms
End-to-End⁵
Gross MarginEBITGross MarginEBITGross MarginEBIT
5
Continuously reviewing our portfolio of businesses
6
Businesses sold –DFE Pharma and foodspring™
•$624 million of cash proceeds received and $469 million gain on sale
Businesses in sale process –China Farms and DPA Brazil
•Impaired asset values to align with information from sale processes:
•China Farms, $63 million impairment
•DPA Brazil, $71 million¹ – split $31 million after-tax to Fonterra and $30 million to joint venture partner
•Classified as ‘Held for sale’ and ‘Discontinued Operations’ in financial accounts
Business performance review – China Farming Joint Venture
•Continuing to look for opportunities to improve the performance of the business
•$65 million impairment to align with China Farms’ sale process and ongoing animal management costs
Full reconciliation of impairments and other normalisations is provided in the Appendix and the Interim Report
Significant net positive impact on earnings and cash flow
1.$71 million impact to EBIT. After-tax impact is $61 million, $31 million to Fonterra and $30 million to joint venture partner
Improved cash flow and reduced leverage
$151
NET
CASH FLOW¹
million
from 52.7%
GEARING⁴
46.9%
$5.8
NET DEBT²
from $7.4b
billion
from $316m
CAPEX³
$112
million
•Net cash flow improved by $1.2 billion:
•Normalised EBIT up $272 million to $584 million
•$624 million from divestments⁵
•Favourable working capital movement of $155 million
•Lower capex and interest expense
•Net debt and gearing both down:
•Improved net cash flows
•Lower capital expenditure
•Includes adding $547 million to borrowings for
capitalised operating leases under new accounting rules⁶
•$336 million transferred from borrowings to general
liabilities related to assets classified as ‘Held for sale’
from $(1.0)b
7
1.Net Cash Flow is calculated as Free Cash Flow less net interest paid, dividends paid and other in the same period.
2.Economic net interest-bearing debt reflects total borrowings less cash and cash equivalents and non-current
interest-bearing advances adjusted for derivatives used to manage changes in hedged risks, and bank overdraft. It
excludes the borrowings attributed to Discontinued Operations.
3.Capital expenditure comprises purchases of property (less specific dispos als where there is an obligation to
repurchase), plant and equipment and intangible assets, and net purchases of livestock.
4.Gearing ratio is economic net interest-bearing debt divided by total capital. Total capital is equity excluding hedge
reserves, plus economic net interest-bearing debt. It excludes the borrowings attributed to Discontinued Operations.
5.Includes DFE Pharma and foodspring®
6.Repres ents year-on-year impact. Relative to the beginning of the financial year the impact is $581 million.
Healthy People
Working together to care for people and make a positive impact on society
8
Harvey Indyk
Officer of the
New Zealand Order of Merit
Tony Wilding
Officer of the
New Zealand Order of Merit
Inia Te Wiata
National high-performing
engineering apprentice
Farmers and
employees recognised
for their expertise and
contribution in
regional New Zealand
On-track to
contribute
$11.1 billion
to the
NZ economy
Helped out
during flooding and
dry conditions
10 years
of providing
valuable
nutrition to
kids
©Stuff/ Waikato Times
9
Healthy Environment
Working together to achieve a healthy environment for farming and society
On-farm support is a critical part
•28 Sustainable Dairy Advisors
•Another 1,000 Farm Environment Plans by
year end
•Launched Plant for Good
•Farm-specific greenhouse gas emissions
reports for all farms this year
Working
hard to reduce
our manufacturing
energy intensity
Te Awamutu
site to be
coal free
next season
In six months
Whareroa site
reduced energy use
by enough to power
3,100
homes for
a year
New study¹shows carbon footprint of our milk supply is the
lowest in the world but recognise we need to do more, so leading
research to find solutions to our methane challenge
Over 5,000 farms
have engaged with ‘Our
Next Steps’ and are on
track to earn rewards at the
end of the season
1.Study by ScienceDirect, dated January 2020
•Forecast Farmgate Milk Price range of $7.00-$7.60 per
kgMS maintained
•Reflects ongoing uncertainties:
•Global impact of COVID-19
•Ongoing drought conditions in New Zealand
and Australia
•Currently over 80% of our New Zealand milk volume
contracted for sale
•Full year underlying earnings per share range of
15-25 cents maintained
•Reflects potential significant risks in the second half:
•Global impact of COVID-19
•Ongoing drought conditions and high Milk Prices
•Difficult trading conditions in Chile and Hong Kong
•Aim to be in financial position to pay a full year dividend
$7.00
-
$7.60
per kgMS
Forecast Farmgate Milk Price
15-25
cents
per share
Forecast Normalised Earnings
Outlook for 2020
10
Appendix
0
10
20
30
40
50
60
70
80
90
JunJulAugSepOctNovDecJanFebMarAprMay
12
•Season to date collection, June – January,
was 1,079 million kgMS, down 0.3% on
lastseason
•North Island pasture growth rates
impacted by dry weather
•Lower South Island impacted by heavy
rain and flooding
•Favourable weather conditions across
Canterbury, resulting in good pasture growth
and strong milk production
•Full year forecast is down 0.5% on the
prior season
Milk collections
Season
Total Milk Solids
(kgMS)
Peak Day
Milk
2017/181,505m (down 1%)82m litres
2018/191,523m (up 1%)85m litres
2019/20F1,515m (down 0.5%)83m litres
Volume (m litres/day)
13
107357151202
129
312
Q1Q2Q3Q4
2019
2020
million20192020%
∆²
Volume³ (‘000 MT)1,5471,533(1)%
Revenue ($)7,8518,5769%
Gross Margin ($)7968132%
Gross Margin (%)10.1%9.5%
Other
⁴
552
Operating Expenses ($)(387)(374)3%
EBIT ($)464441(5)%
Discontinued EBIT(3)–
•Sales volumes down 1%, 14,000 MT, due to decline
in Australia Ingredients’ milk collections
•Ingredients gross margin increased $17 million:
•Steady New Zealand Ingredients gross margin
•Improved performance in Australia
•Australia Ingredients’ gross margin improvement:
•Savings from the closure of the Dennington site
•Better product mix and utilisation of our Stanhope site
•Operating expenses reduced $13 million
•Largest contributors to ‘Other’ decrease were divestment of DFE
Pharma and increased loss from the China Farming joint venture
•Ingredients’ EBIT from continuing operations down $23 million
Ingredients¹
1.Ingredients’ performance restated to include China
Farming joint venture. China Farms business unit is
classified as a Discontinued Operation, financials relating
to sales of milk from China Farms have been removed
from the Ingredients segment for FY19.
2.Percentages as shown in table may not align to the
calculation of percentages based on numbers in the table
due to rounding of reported figures.
3.Includes sales to other strategic platforms.
4.Includes other income, net foreign exchange gain/(loss)
and share of equity accounted investees.
5.Summing of EBIT margin figures may not add up to total
EBIT displayed in table above due to rounding.
Note: EBIT and gross margin are in NZD millions. Figures
presented are for the first six months of FY20, and FY19 as a
comparative. Numeric al or percentage changes are express ed
relative to the first six months ofFY19.
EBIT by Quarter⁵
14
Ingredients
by region
134,000MT
From 175,000 MT
2.7%
From 0.7%
(48,000)MT
From (77,000) MT
Volume²
1,447,000MT
From 1,449,000 MT
Gross Margin
9.5%
From 10.4%
New Zealand
Ingredients¹
AustraliaOther and
Eliminations
$ million
1.Ingredients’ performance restated to include China Farming joint venture. China Farms business unit is classified as
a Discontinued Operation, financial performanc e relating to sales of milk from China Farms have been removed
from the Ingredients segment for FY19.
2.Includes sales to other strategic platforms.
Note: EBIT and gross margin are in NZD millions. Figures presented are for the first quarter of FY20, and FY19 as a
comparative. Numeric al or percentage changes are express ed relative to the first quarter ofFY19.
Sum of individual numbers from the regional and divisional breakdown may not add to the totals in each category due
torounding.
Gross MarginEBITGross MarginEBITGross MarginEBIT
621
(28)
(3)
2019202020192020
728736468428
2019202020192020
62
56
24
16
2019202020192020
15
20192020
$ million$ per MT$ million$ per MT
Sales Volume (000 MT)¹
Reference924–921–
Non-Reference354–389 –
Revenue¹
Reference4,304 4,658 4,7595,167
Non-Reference1,874 5,294 2,213 5,688
Cost of Milk
Reference3,2313,4953,6823,997
Non-Reference1,0522,9731,3363,435
Gross Margin
Reference345373345374
Non-Reference324915296762
1.Excludes bulk liquid milk. Bulk liquid milk for the six months to 31 January 2020 was 37,000 MT (six months to 31 January 2019: 34,000 MT).
Note: Figures repres ent Fonterra-sourced New Zealand milk only. Reference products are products used in the calculation of the Farmgate Milk Price – W MP, SMP, BMP, Butter and AMF. Milk solids used in the products sold were 513 million
kgMS in reference and 200 million kgMS non-reference (previous comparable period 515 million kgMS reference and 178 million non-referenc e).
•Reference product gross margins per metric
tonne were stable
•Non-reference gross margins declined
due to:
•UHT cream and cheese had lower
margin rates relative to FY19 due to
market pricing and in response to
increased capacity and supply
•Increased volume of UHT cream, a
relatively lower margin product for
Ingredients, to meet increased
Foodservice sales
New Zealand Ingredients product mix
19
42
74
69
65
82
Q1Q2Q3Q4
2019
2020
Million
¹
20192020%
∆²
Volume
³
(‘000 MT)22826215%
Revenue ($)1,3411,51713%
Gross Margin ($)17026053%
Gross Margin
⁴
(%)12.7%17.2%
Other
⁵
2(1)
Operating Expenses ($)(111)(112)(1)%
EBIT ($)61147141%
Discontinued EBIT––
Foodservice
EBIT by Quarter⁶
16
1.Individual Consumer and Foodservice tables may not align
to combined Consumer and Foodservice table due
torounding.
2.Percentages as shown in table may not align to the
calculation of percentages based on numbers in the table
due to rounding of reported figures.
3.Includes sales to other strategic platforms.
4.2019 impacted by change in timing of revenue recognition
for sales to distributor in Greater China.
5.Includes other income, net foreign exchange gain/(loss)
and share of equity accounted investees.
6.Summing of quarterly EBIT figures may not add up to total
EBIT displayed in table above due torounding.
Note: EBIT is in NZD millions. Figures presented are for the
first six months of FY20, and FY19 as a comparative.
Numeric al or percentage changes are express ed relative to
the first six months ofFY19.
•2019 restated to reflect change in timing of revenue
recognition for distributor sales in Greater China.
Increases 2019 volume and revenue, and reduces gross margin
and EBIT
•Sales volume up 15% due to growth in Greater China
and Asia, but offset by decline in Oceania
•Greater China sales volume growth primarily up due to recovery
in butter sales and city expansion – now in 350 cities compared
to 285 cities at FY19 half year
•Gross margin grew from 12.7% to 17.2%, due to improved
butter margins in Greater China and Asia and growth in higher
margin products in all regions
•Gross margin up $90 million, due to volume growth and
higher margins
•Operating expenses held flat, resulting in EBIT up $86 million
17
Foodservice
by region
17000 MT
From 16,000 MT
24.1%
From 21.4%
51000 MT
From 45,000 MT
16.3%
From 12.1%
45000 MT
From 48,000 MT
19.1%
From 17.8%
Volume¹
149000 MT
From 119,000 MT
Gross Margin
16.4%
From 10.3%
Greater
China
Latin
America
AsiaOceania
$ million
Gross MarginEBITGross MarginEBITGross MarginEBIT
3555
8
27
2019202020192020
7414237100
2019202020192020
15
16
33
2019202020192020
Gross MarginEBIT
4747
13
17
2019202020192020
1.Includes sales to other strategic platforms.Note: Figures presented are for the first six months of FY20, and FY19 as a comparative. Numeric al or percentage
changes are express ed relative to the first six months performanc e ofFY19. Sum of individual numbers from the regional
and divisional breakdown may not add to the totals in each category due to rounding.
42
25
60
120
56
60
Q1Q2Q3Q4
2019
2020
Million
¹
,
²
20192020%
∆³
Volume
⁴
(‘000 MT)585551(6)%
Revenue ($)2,1552,080(3)%
Gross Margin ($)530499(6)%
Gross Margin (%)24.6%24.0%
Other
⁵
5(6)
Operating Expenses ($)(468)(377)19%
EBIT ($)6711673%
Discontinued EBIT(5)14
Consumer
EBIT by Quarter⁶
18
•Consumer EBIT increased $49 million due to:
•Asia and Latin America improving gross margins
and significant improvement in operating expenses
•Oceania gross margin reduced following the sale of
TipTop, but more than offset by lower costs
•Lower sales volume across all regions, largest
contributors were:
•Latin America – due to civil unrest in Chile
•Oceania – removal of Tip Top following divestment
•Reduced operating expenses in all regions, down $91 million
•DPA Brazil’s EBIT increased due to an improved economy and
growth in market share. DPA Brazil is classified as ‘Held for sale’
and a Discontinued Operation
1.Normalised basis and excludes Discontinued Operations.
Discontinued EBIT provided on separate line for
comparative purposes.
2.Individual Consumer and Foodservice tables may not align
to combined Consumer and Foodservice table due
torounding.
3.Percentages as shown in table may not align to the
calculation of percentages based on numbers in the table
due to rounding of reported figures.
4.Includes sales to other strategic platforms.
5.Includes other income, net foreign exchange gain/(loss)
and share of equity accounted investees.
6.Summing of quarterly EBIT figures may not add up to total
EBIT displayed in table above due torounding.
Note: EBIT is in NZD millions. Figures presented are for the
first six months of FY20, and FY19 as a comparative.
Numeric al or percentage changes are express ed relative to
the first six months ofFY19.
Consumer
by region¹
154000 MT
From 169,000 MT
27.0%
From 25.0%
98000 MT
From 104,000 MT
27.1%
From 25.7%
258000 MT
From 267,000 MT
17.7%
From 20.2%
Volume²
41000 MT
From 45,000 MT
Gross Margin
33.4%
From 38.7%
Greater
China
Latin
America
AsiaOceania
$ million
Gross MarginEBITGross MarginEBITGross MarginEBIT
166175
35
56
2019202020192020
7763
13
5
2019202020192020
116120
(1)
22
2019202020192020
Gross MarginEBIT
171141
20
34
2019202020192020
1.Normalised basis and excludes Discontinued Operations.
2.Includes sales to other strategic platforms.
Note: Figures presented are for the first six months of FY20, and FY19 as a comparative. Numeric al or percentage
changes are express ed relative to the first six months performanc e ofFY19. Sum of individual numbers from the regional
and divisional breakdown may not add to the totals in each category due to rounding.
19
61
67
133189
121
142
Q1Q2Q3Q4
2019
2020
Million
¹
20192020%
∆²
Volume³ (‘000 MT)8138130%
Revenue ($)3,4973,5973%
Gross Margin ($)7017598%
Gross Margin (%)20.0%21.1%
Other
⁴
7(6)
Operating Expenses ($)(580)(490)16%
EBIT ($)128263105%
Discontinued EBIT(5)14
Consumer and Foodservice
EBIT by Quarter⁵
20
1.Normalised basis and excludes Discontinued Operations.
Discontinued EBIT provided on separate line for
comparative purposes.
2.Percentages as shown in table may not align to the
calculation of percentages based on numbers in the table
due to rounding of reported figures.
3.Includes sales to other strategic platforms.
4.Includes other income, net foreign exchange gain/(loss)
and share of equity accounted investees.
5.Summing of quarterly EBIT figures may not add up to total
EBIT displayed in table above due torounding.
Note: EBIT is in NZD millions. Figures presented are for the
first six months of FY20, and FY19 as a comparative.
Numeric al or percentage changes are express ed relative to
the first six months ofFY19.
•Significant increase in EBIT of $135 million due to
growth in all regions
•Foodservice up $86 million
•Consumer up $49 million
•Greater China –significant growth in Mainland China
Foodservice, partially offset by challenges in Hong Kong
Consumer
•Asia – improvements in gross margin and operating expenses in
both Foodservice and Consumer, in particular strong recovery in
Sri Lanka
•Latin America – improved earnings performance based on
reduced costs in Consumer business
•Oceania – improved earnings performance based on reduced
costs in both Consumer and Foodservice
21
Consumer
and
Foodservice
by region¹
171000 MT
From 185,000 MT
26.6%
From 24.5%
149000 MT
From 149,000 MT
23.4%
From 21.5%
303000 MT
From 315,000 MT
18.0%
From 19.6%
Volume²
190000 MT
From 164,000 MT
Gross Margin
19.4%
From 16.5%
Greater
China
Latin
America
AsiaOceania
1.Normalised basis and excludes Discontinued Operations.
2.Includes sales to other strategic platforms.
Note: Figures presented are for the first six months of FY20, and FY19 as a comparative. Numeric al or percentage
changes are express ed relative to the first six months performanc e ofFY19. Sum of individual numbers from the
regional and divisional breakdown may not add to the totals in each category due to rounding.
$ million
Gross MarginEBITGross MarginEBITGross MarginEBIT
200
229
44
82
2019202020192020
152
205
50
105
2019202020192020
131
137
2
25
2019202020192020
Gross MarginEBIT
218
188
32
51
2019202020192020
22
Million20192020%
∆¹
Volume² (‘000 MT)91015%
Revenue ($)11013523%
Gross Margin ($)(13)11187%
Gross Margin (%)(11.8)%8.4%
Operating Expenses ($)(8)(8)10%
Other
³
($)36
China Farms EBIT ($)(18)9150%
End-to-End EBIT Perspective
Ingredients EBIT
⁴
($)(4)(16)
Consumer and Foodservice
EBIT
⁵
($)
13
China Farms End-to-End
⁶
($)(21)(4)81%
China Farms
1.Percentages as shown in table may not align to the
calculation of percentages based on numbers in the table
due to rounding of reported figures.
2.Includes sales to other strategic platforms.
3.Includes other income, net foreign exchange gain/(loss).
4.Includes China Farming joint venture and associated
management fees.
5.EBIT impact of milk from China Farms sold by Consumer
and Foodservice businesses.
6.Provides end-to-end perspective, comprising China Farms,
the China Farming joint venture, and financials from
Consumer and Foods ervic e related sales of milk from
China Farms.
Note: Figures presented are for the first six months of FY20,
and FY19 as a comparative. Numerical or percentage changes
are expressed relative to the first six months performance
ofFY19.
•End-to-end perspective includes both China Farms
and China Farming joint venture:
•China Farms is classified as ‘Held for sale’ and a
Discontinued Operation
•China Farming joint venture is included in Ingredients
•China Farms’ sales volumes increased 15% due to higher
productivity, feed management and recovery from flood in Yutian
•China Farms’ gross margin and EBIT increased $24 million and
$27 million respectively due to improved pricing and ongoing
cost efficiencies
•China Farming joint venture loss increased due to ongoing
animal management costs and offset improved
ChinaFarmsprofitability
Reconciliation to Total Group EBIT
Six months ended
31 January 201931 January 2020
NZD million
Continuing
Operations
¹
Discontinued
Operations
²
Total Group
³
Continuing
Operations
¹
Discontinued
Operations
²
Total Group
³
Revenue9,4283179,74510,07135210,423
Cost of Goods Sold(7,980)(276)(8,256)(8,483)(272)(8,755)
Gross Margin1,448411,4891,588801,668
Gross Margin %15.4%12.9%15.3%15.8%22.7%16.0%
Operating Expenses(1,164)(68)(1,232)(1,023)(69)(1,092)
Other Income51455(4)128
Normalised EBIT335(23)31256123584
Normalisations–––356(134)222
Reported EBIT335(23)312917(111)806
23
1.ContinuingOperationsarepresentedin theIncomeStatementandin Note1 oftheFinancialStatementsin theInterimReport.
2.ThebasisofdeterminingDiscontinuedOperationsis setoutin theBasisofPreparationandpresentedin Note2 oftheFinancialStatementsin theInterimReport.
3.TotalGroupincludesContinuingOperationsandDiscontinuedOperations.
Impairments and other normalisations
NZD million
Gain on
SaleImpairmentOther
Net Profit
Before Tax
Tax
Impact
Total
Group
Non-controlling
Interests
Attributable to
Equity Holders
Portfolio Review
DFE Pharma
401 26
427
427427
foodspring™
68686868
China Farms
(63) (63) (63) (63)
DPA Brazil
(71)(71)10(61)30(31)
China Farming JV
(65)(65)(65)(65)
Sub total
469(199)262961030630336
Beingmate
(21) (8) (29)(29)(29)
Chile
(30)(30)(30)
Other
¹
(45) (45)6(39)(39)
Total
469 (220)(27) 222 (14)208 30 238
24
1.Includescostsassociatedwithimplementingthenewoperatingmodelandotherlegalcosts.
Note:RefertoNote2 oftheFinancialStatementsin theFY20InterimReportforfurtherdetailofimpairments.
25
$ million201820192020
Ingredients
Selling and marketing
646266
Distribution
116119115
Administrative expenses
175168170
Research and development
231
Other expenses
343522
To t a l
391387374
Consumer and
Foodservice
Selling and marketing
230230193
Distribution
135148132
Administrative expenses
114122103
Research and development
563
Other expenses
837459
To t a l
567580490
Unallocated
Costs
Operating andadministration
184168129
Research and development
342930
To t a l
218197159
Total Normalised Operating Expenses
1,1761,1641,023
Discontinued Operations
²
876869
Net Normalised Operating Expenses
1,2631,2321,092
Operating expenses¹
•Total Group operating expenses reduced
$140 million:
•Ingredients down $13 million
•Consumer and Foodservice down
$90 million
•Tip Top divestment
•Phasing of promotional spend
•Unallocated costs down $38 million
•Unallocated costs breakdown provided on
the following slide
•Operating expenses relating to businesses
‘Held for sale’ were unchanged
1.Normalised basis.
2.Includes the China Farms and DPA Brazil business units which are classified as ‘Held
for sale’ in the FY20 Interim Report.
26
Unallocated costs
Illustrative Business Unit Distribution
of 2020 Interim UnallocatedCosts
¹
Unallocated Costs
²
($ million)
20192020Ingredients
Consumer and
FoodserviceNot AllocatedTotal
Research & Development29 30 2010–30
Group Finance and Support3729––2929
IT33342410–34
Farmer Services³322121––21
People & Culture10972–9
Advertising and Promotion Costs88––88
Food Safety & Quality7541–5
Property6541–5
Trade Relations and Compliance6642–6
Governance54––44
Other248––88
Total197 159842649159
1.For illustrative purposes, in this table the unallocated costs for 2020 have been shown against the business units
where the primary function of the cost item is to support the business units. The distribution is based on sales
revenue. The balanc e is retained as “Not Allocated”.
2.Normalised basis.
3.The majority of the reduction in FY20 is due to reclassification of milk testing to the Ingredients business in second
half of FY19.
Diversified
and
prudent
funding
position
Debt Capital
Markets²
1.Includes undrawn facilities and
commercialpaper.
2.Excluding commercial paper.
3.W ATM is weighted average term to
maturity.
Note: As at 31 January 2020.
0.00.81.62.4
FY20
FY21
FY22
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
0.00.81.62.4
FY20
FY21
FY22
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
$ billion
WATM³: 2.9 years
$ billion
W ATM³: 4.5years
Undrawn
Facilities
$4.4bn
95%
Drawn Facilities
$0.2bn
5%
Maturity ProfileMaturity Profile
EUR/GBP
12%
AUD DCM
12%
CNY DCM
4%
NZD DCM
13%
USD DCM
13%
Bank
Facilities
46%
Diversified
Profile¹
Prudent
Liquidity
Bank
Facilities
27
Key
financial
metrics for
FY20 half
year
.
28
1,305
1,232
1,263
1,232
1,092
20162017201820192020
Opex ($ million)
Sales Volume
(’000 MT)
Normalised
Revenue
8.8
9.2
9.8
9.7
10.4
20162017201820192020
Revenue ($ billion)
1,880
1,752
1,659
1,489
1,668
20162017201820192020
GM ($ million)
665
607
458
312
584
20162017201820192020
EBIT ($ million)
Normalised
Gross Margin
Normalised
OPEX
Normalised
EBIT
Reported EBIT
752
644
(176)
312
806
20162017201820192020
Reported EBIT ($ million)
1,624 1,543 1,441 1,547 1,533
887
908
877
813
813
2,324
2,131
2,003
2,075
2,037
20162017201820192020
Consumer and Foodservice
Ingredients
Key
financial
metrics for
FY20 half
year
1.Net profit after tax attributable to equity holders of the parent.
2.Capital expenditure comprises purchases of property (less specific dispos als where there is an obligation to repurchas e), plant and equipment and intangible assets, and net purchases of livestock.
29
49.2
46.6
51.6
52.7
46.9
20162017201820192020
Gearing (%)
453
244
346
316
112
20162017201820192020
Capex ($ million)
77
68
80
81
82
20162017201820192020
Working Capital Days
GearingFree
Cash Flow
346
(417)
(690)
(782)
369
20162017201820192020
Free Cash Flow ($ million)
Normalised
NPAT¹
Reported
NPAT¹
Capex²
Working
Capital Days
367
384
242
68
283
20162017201820192020
Normalised NPAT ($ million)
404
413
(354)
68
521
20162017201820192020
Reported NPAT ($ million)
Glossary
30
Acronyms and Definitions
AMF
Anhydrous Milk Fat
BMP
Butter Milk Powder
Base Price
Prices used by Fonterra’s sales team as referenced
against GDT prices and other relevant benchmarks.
DIRA
Dairy Industry Restructuring Act 2001 (New Zealand)
GDT
Global Dairy Trade, the online provider of the twice
monthly global auctions of dairy ingredients.
Gearing Ratio
Gearing ratio is economic net interest bearing debt
divided by total capital. Total capital is equity
excluding the hedge reserves, plus economic net
interest bearing debt.
Farmgate Milk Price
The price for milk supplied in New Zealand to
Fonterraby farmer shareholders.
Fluid and Fresh Dairy
The Fonterra grouping of skim milk, whole milk and
cream – pasteurised or UHT processed,
concentrated milk products andyoghurt.
kgMS
Kilogram of milk solids, the measure of the amount of
fat and protein in the milk supplied to Fonterra.
Non-Reference Products
All dairy products, except for Reference, produced by
the NZ Ingredients business.
Price Achievement
Revenue achieved over the base price less
incremental supply chain costs above those set out in
the Milk Pricemodel.
Reference Products
The dairy products used in the calculation of the
Farmgate Milk Price, which are currently WMP, SMP,
BMP, butter and AMF.
Regulated Return
The earnings component of Milk Price generated
from a WACC return on an assumed asset base.
Season
New Zealand: A period of 12 months to 31 May in
eachyear.
Australia: A period of 12 months to 30 June in
eachyear.
SMP
Skim Milk Powder
Stream Returns
The gross margin differential between Non-Reference
Product streams and the WMP stream (based on
baseprices).
WACC
Weighted Average Cost of Capital
WMP
Whole Milk Powder
Glossary
31
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 producers and distributors in over 140 countries. It also includes Fonterra
FarmSource™ retail stores.
Consumer
The Consumer platform comprises branded consumer products, such as powders, yoghurts, milk, butter, and cheese. Base productsare sourced from the
ingredients business and manufactured into higher-value consumer dairy products.
Foodservice
The Foodservice platform comprises a range of branded products and solutions for commercial kitchens, including bakery butter, culinary creams, and cheeses.
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.
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