Armed Guards Protect 500 Tonnes of PPE Secured from China for Police, Healthcare & NZDF. Video / Supplied
Fonterra is sticking with its earnings guidance, despite the Covid-19 pandemic and is on track for with its debt reduction plans, chief executive Miles Hurrell says.
The co-op in March said it expected earnings per share of 15 to 25 cents for the full year.
"We have not changed ourearnings guidance for the business and I think it boils down to the flexibility that we brought into the business," he said in a video conference call.
At its interim result, Fonterra said it planned to achieve a gross margin in excess of $3 billion, reduce debt so it is no more than 3.75 times its earnings and ensure capital expenditure is no more than $500 million.
Its total group normalised earnings for the first six months of the 2020 financial year are up $272m on last year to $584m.
The co-op's foodservice business was the stand-out performer in the first half due to higher sales to bakeries and coffee and tea houses across Greater China and Asia.
Fonterra's Greater China chief executive, Teh-Han Chow, said in the conference call that China business had turned a corner after suffering the setback of the Covid-19 lockdown.
Chow said China was on an encouraging trajectory after Wuhan went into lockdown over February.
China's economy suffered due to the outbreak, with GDP shrinking by 6.8 per cent in the first quarter of 2020 compared to a year earlier - its worst outcome on record.
Post lockdown, Chow said most of China's quick service restaurants (QSRs) were open.
"The signs are heading in the right direction," Chow said.
"The February numbers were down but March saw the sector start to recover.
"Our March numbers were good but were not back to normal," he said.
"Overall, we see China probably turning a corner."
Fonterra is on track with its earnings guidance. Photo / NZ Herald
Chow said there were reports that US restaurant chain Starbucks had reopened 95 per cent of its stores in China.
"Most of our QSR customers are probably nearly all open, but the transaction count has not really come back, so I think there is a way to go on the foodservice side.
"Both our foodservice and ingredients customers are acting cautiously and are also trying to see what is happening around the world."
Post lockdown, some interesting consumer patterns had emerged.
When conditions started to improve, there was a big pick up in "indulgence" consumption, such as cakes.
"Consumers were wanting to treat themselves by buying cakes or other treats that they may have missed while in the period of lockdown," he said.
"Maybe it's a bit of a binge, but we are seeing some unique behaviour coming out of Covid 19."
Fonterra employs 1800 people in China and Chow said none of them became infected by the virus.
As other countries in Asia progressively go into lockdown, Hurrell said there were key lessons to be taken from the China experience.
Under normal circumstances, Fonterra decides on a monthly basis how much milk is funnelled into its products. Now the Fonterra "war room" had adopted a daily tactical plan.
At the peak of the season around October-November there is little flexibility in Fonterra's manufacturing complex.
Fortunately for the co-op, the coronavirus outbreak occurred near the tail end of the season, which afforded it greater flexibility with its manufacturing.
Chow said China's bakeries were the first food businesses to show signs of life, after the lockdown.
Its foodservice was the hardest hit in February but that there had been a "pretty good recovery" in the second half of March.
"If we don't have another resurgence [of Covid-19] and if we don't have significant impact in China from the global recession, then May-June should return some sort of normality," he said.
"It's good to see the trajectory, but we are not quite there yet."
Beijing-based David Mahon, executive chairman of Mahon China Investment Management, said China was returning to work more swiftly than its people or trading partners had anticipated.
"Driven predominantly by consumption of its own manufactured goods and services, the Chinese economy will recover significantly toward the end of this year, and could be a catalyst to a global recovery," Mahon said.
"The only caveat may be China's trading partners' reduced abilities to supply it with components and raw materials, or another outbreak of Covid-19 in the autumn."
